Despite what some have called the Great Lockdown, most construction lenders are not throwing in the towel, at least not completely, according to a survey of 123 banks by Built Technologies on behalf of the American Bankers Association.
The poll is a snapshot of construction lending as it stood prior to the pandemic. But in interviews conducted in April and May, participants said their fundamental view of the market remains unchanged.
Although some said a period of transition “is inevitable,” they mostly “are likely to improve their construction lending business” going forward, according to the ABA report.
Only a small minority—5 percent—predicted a decline in loan volume. The rest were evenly divided between those who expected lending to grow and those who thought it would remain stable.
“Construction lending has enjoyed a strong revival since the Great Recession and the outlook remains favorable, even as banks navigate the potential challenges posed by the COVID-19 crisis,” ABA Senior Economist Rob Strand said.
Meanwhile, the latest report from the National Association of Home Builders says the volume of residential construction lending posted a “slight gain” in this year’s first quarter after declining in the fourth quarter of 2019. COVID-19 was officially declared a pandemic on March 11.
However, a later NAHB report said single-family builders and developers were seeing tighter credit conditions on loans for land acquisition, development and construction in the first quarter.
None of the surveyed builders said availability of credit for land acquisition had gotten better, compared to 26 percent who said it got worse. For land development, 5 percent said credit conditions improved, compared to 27 percent who said it got worse. For single-family construction, 6 percent reported credit conditions were better in the first quarter of 2020 than in the final quarter of 2019, while 26 percent said they got worse.
The number one reason credit conditions grew worse was that “lenders are pulling back because of coronavirus concerns.”
The NAHB takes its data from the Federal Deposit Insurance Corp., which does not break down lending for multifamily projects. “We used to do multifamily,” said researcher Rose Quint, “but (multifamily developers) didn’t respond, so we dropped them.”
The ABA study, however, provides somewhat of a breakdown. Two-thirds of the banks queried have assets of less than $1 billion, but the vast majority are involved in construction lending. Some 86 percent are in commercial real estate, and 74 percent are in multifamily residential. But 95 percent are in single-family construction, with 67 percent providing acquisition and development financing as well. Most also offer renovation loans and two-third offer builders lines-of-credit.
Prior to the pandemic, construction lending was on somewhat of a roll, according to Census Bureau figures. Total construction spending, a broad measure that includes new structures and improvements to existing ones, exceeded $1.3 trillion in 2019, roughly the same as the previous year. The bottom was in 2011, shortly after the financial crisis, when such lending dipped to just $788 million.
In the ABA survey, banks indicated an intent to boost their construction lending businesses over the next two years by, among other things, expanding training. But training wasn’t their only customer-service initiative.
About a fourth had increased the size of their loan administration teams and 22 percent had updated their marketing and education materials. Some 14 percent implemented a major technology upgrade and 13 percent had cut or simplified loan fees.
Currently, though, nearly 96 percent of the institutions’ in-house teams responsible for administering construction loans have no more than 10 employees, but 83 percent have only one to five workers on their teams. About two-thirds have construction loan portfolios of $50 million or less, and 46 percent have fewer than 50 loans on their books.
Participants also identified these factors that would lead to an expansion of their portfolios: less risky loans, 54 percent; easier compliance, 40 percent, and less time needed to manage their loans, 28 percent. At the same time, 46 percent cited staffing and 42 percent named regulatory and compliance costs as the top drivers of construction lending expense.
“While compliance costs are unlikely to diminish,” economist Strand said, “technology has the potential to help banks lower those expenses and more efficiently deliver on their fiduciary obligations.”
Strand noted that improved efficiency also can boost customer satisfaction, a goal that drives banks’ construction lending businesses. When asked to rank why they believe borrowers choose their particular institutions, respondents cited, in order: existing relationships, easy to do business with, fast draw processing, low interest rates and low administration fees.
In the spring interviews, bankers said they were carefully reviewing loans already in their pipelines as well as tweaking some of their underwriting rules. Even if they tend to hold loans in portfolio, they also were paying close attention to secondary market requirements and taking a hard look at borrowers’ track records and capacity.
On underwriting specifically, they were studying loan-to-value ratios and reserve requirements. But by and large, they voiced confidence their approaches to risk management, along with strong capital and liquidity, put them in a good place to help builders weather the pandemic.
For what it’s worth, the NAHB survey of single-family builders and developers also noted lower LTV or LTC ratios and a reduction in the amounts banks are willing to lend.
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