Banks See Rise in Delinquent Construction Loans. Don't Panic.

Engineering News-Record (June 30, 2020) Worried about a string of bank collapses from commercial construction loans gone bust? You can calm down, for now. Individual banks that make loans for offices and stores say their portfolios were "structured to withstand a downturn" before the pandemic hit in the first quarter of 2020, according to a report from S&P Global Market Intelligence. That's a good thing, because the total volume of delinquent construction loans on bank balance sheets in the quarter climbed to $3.67 billion, up 23.8% from the fourth quarter of 2019 and 24.6% higher on a year-over-year basis, said S&P, which had monitored large construction lenders investor reports. Banks had already been backing away gradually from real estate construction lending, S&P reported. Construction loans represented only 3.37% of total loans and leases, down from 3.44% in the previous quarter and 3.49% a year earlier.

Stephen Lieske, an attorney at California-based law firm Allen Matkins, says he considers office and industrial real estate businesses to be in good shape. He performs legal work for lenders in those sectors and notes that he has heard of banks that have sent developers who run into financial trouble “reservation of rights” letters. Those letters are a step before a bank officially declares a borrower to be in default. According to Lieske, “the letter says there is a problem, but the bank will nonetheless to fund and loan the project” and work with the borrower. Read More (subscription required)