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Kim_Gatley
Kim Gatley
S
enior Vice President & Director of Research at REOC San Antonio

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Constructing Lending Grows Faster Than Traditional Loans

BankIconHere is an interesting factoid about the commercial real estate bank lending market: Currently bank lending for construction and development is growing faster than lending for completed buildings, according to a soon-to-be released independent analysis by Chandan Economics of call reports filed by banks with the Federal Deposit Insurance Corp.

This is in marked contrast with recent history, Sam Chandan, president and Chief Economist of Chandan Economics and an adjunct professor in real estate and public policy at the Wharton School of the University of Pennsylvania, tells GlobeSt.com. “Over the last year,” he says, “the balance of construction loans held by banks has grown by nearly 15%.”

That compares to a 4.1% growth of commercial loans on bank balance sheets from Q1 2014 to Q1 2015 and a 12.4% increase of multifamily loans during the same time period.

It is little secret that bank lending for commercial real estate has largely recovered from the recession. But the stepped up pace of construction lending is a new twist, and very illustrative. Even as signs mount that the current cycle is well into the latter stages and the US economy may or may not be faltering, banks continue to pursue the real estate asset class, including riskier development activity.

The ever-declining default rates have much to do with this trend.

According to Chandan Economics’ analysis of the call reports, the default rate for banks’ multifamily and commercial real estate mortgages declined to 1% during the first quarter, down 10 basis points (give or take) from 1.1% during Q4 2014 and down 60 basis points from a year earlier during Q1 2014. It is the 18th consecutive quarter that the default rate for banks’ multifamily and commercial real estate mortgages has declined, following its peak at 4.4% in Q3 2010.

In addition, the default rate for banks’ multifamily mortgages was essentially unchanged from Q4 2014 to Q1 2015, at 0.4% — the lowest default rate since 2006, before the market peaked.

For construction loans, the default rate was 1.8% in the first quarter, the lowest level since Q2 2007 and just a fraction of the 16.8% peak five years ago. In short, banks have largely cleared the bulk of legacy construction loans from their balance sheets.

Click to read entire article: Constructing Lending Grows Faster Than Traditional Loans (GlobeSt., 05-28-15)

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