What delinquencies? Banks aren’t shying away from construction lending

US banks provided $380.61B in building loans in Q2

TRD NATIONAL /
Aug.August 31, 2020 05:30 PM
Bank OZK CEO George Gleason and Wells Fargo CEO Charles Scharf (Photos via Bank OZK, iStock; Getty)

Bank OZK CEO George Gleason and Wells Fargo CEO Charles Scharf (Photos via Bank OZK, iStock; Getty)

 

UPDATED, Sept. 1, 2020, 11:00 a.m.: Bankers ran for the hills when the pandemic hit, but got back to dealmaking in the second quarter.

U.S. banks provided $380.61 billion in construction loans in the second quarter, up from $369.75 billion in the first quarter, according to a report from S&P Global. Commercial lending on properties such as office or condo developments rose to $300.35 billion from $288.33 billion during the period. Meanwhile, loans originated on one- to four-family residential properties fell slightly to $80.25 billion from $81.42 billion in the first quarter.

The overall increase in construction lending comes as delinquencies on such loans remained elevated above previous years. Between March and June, U.S. banks recorded about $2.78 billion of nonresidential construction loan delinquencies and about $850 million of residential construction loan delinquencies.

Still, the figures show that lenders may now have a more positive outlook on the economy and real estate, since new projects will be delivered in a few years’ time. At the onset of the pandemic, banks said they were wary of underwriting new deals due to concerns about pricing — which was seen as an opportunity by some.

George Gleason, the chairman and CEO of Bank OZK, one of the most active condo lenders in Miami and New York City, previously said he saw that as a silver lining.

“You will have some people back out of the space permanently, which will let us have a bigger share of the pie, with less competition,” he said during the bank’s first quarter earnings call. The lender increased its nonresidential construction loans in its portfolio to $5.03 billion during the second quarter, according to S&P.

Fittingly, Bank OZK had the greatest exposure to construction lending, according to the report, with those loans accounting for 36.41 percent of the debt and leases on its books during the second quarter. That is nearly double PacWest, which had the second highest concentration of construction debt at 17.5 percent of its total loans and leases.

Overall, Wells Fargo and U.S. Bancorp issued the greatest volume of construction loans during the second quarter, originating $20.09 billion and $10.69 billion, respectively.

Construction lending is generally viewed by banking experts as risky, since a real estate project could always go bust, leaving the bank to take over and manage an unfinished development.

Construction lending on risky condo projects led to the demise of some lending institutions during the last downturn. In 2009, regulators seized Corus Bank, a major condo lender at the time. Some observers say that the industry learned has its lesson, and lenders required more equity in deals this cycle.

Banks initially sought to defer borrowers’ payments as businesses shuttered to slow the spread of coronavirus, but are now increasingly seeking to foreclose as missed payments pile up. Earlier this month, SL Green Realty moved to foreclose on a Fifth Avenue office tower owned by Joe Sitt’s Thor Equities.

In South Florida, Bank OZK is seeking to foreclose on a retail property on Miami Beach’s Lincoln Road that is owned by developer David Edelstein. Wells Fargo is also seeking to foreclose on the Southland Mall in Cutler Bay, Florida.

Correction: A previous version of the article incorrectly stated that Bank OZK originated $5.06 billion in nonresidential construction loans in the second quarter. Instead, Bank OZK increased its portfolio to $5.06 billion.


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