Return to search

Commercial construction lending starts to shrink

Construction loans for all property sectors contracted 5% in the first quarter, with commercial lending shrinking 1%. Defaults on construction loans for US residential and commercial developments have now hit highs not seen since 1992.

Commercial construction lending is expected to shrink significantly during 2009 marking the first major contraction in the industry since 2003.

During the first three months of this year, construction lending for all types of properties reduced by 5 percent compared to the fourth quarter of 2008, with commercial construction loans dropping by 1 percent.

Real estate data provider Foresight Analytics said this downward trend was only expected to “accelerate” in the coming quarters as investors and developers put new starts on hold, further sapping demand for financing. According to partner Matthew Anderson, it will be the “first major contraction [in commercial construction lending] since the previous cyclical low in 2003”.

Single family and multifamily construction loans were down 9 percent and 11 percent respectively during the same period.

Construction lending is more sensitive to economic conditions compared to mortgage lending and is often judged as an early indicator as to the state of the real estate market.

According to Foresight, delinquency rates on construction loans for all property types are at their highest level since 1992, rising to 14.5 percent of all loans in the first quarter of 2009 – compared to 11.4 percent in the last three months of 2008.

In 1992, defaults on construction loans stood at 16.1 percent. The single family and condo construction sectors are by far the worst hit, with delinquency rates rising to 22 percent and 32 percent respectively. Defaults on multifamily and commercial real estate construction loans have risen to 6.8 percent and 8.9 percent respectively – three times the level seen during 2001 real estate crisis.