Banks See Rise in Delinquent Construction Loans. Don't Panic.
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.
Wells Fargo & Co., the bank with the biggest construction loan portfolio, has said it expects losses but also predicts its overall portfolio to perform well, according to S&P, which adds that U.S. Bancorp. is similarly optimistic.
Bank OZK appears to face the biggest peril. S&P said it had the largest share of construction loans, 35% of its portfolio, among the top 20 lenders.
According to S&P, bank CEO George Gleason said the institution's construction loans typically have provisions in which borrowers guarantee they will complete their projects on time and on budget; it added that Bank OZK will modify loans in a "very judicious manner."
Still, Gleason acknowledged that some property sectors, such as travel and leisure, have suffered especially severe damage from the coronavirus. Office and industrial is doing well he said, but the outlook for retail is unclear.
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 continue to fund the loan and project" and work with the borrower.