- Kurt Rosene
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Construction-Loan Delinquencies on the Rise
The surge in the construction-loan delinquency rate – both residential and commercial – suggests that lenders will remain reluctant to make loans for new construction.
Developers usually finance projects through short-term construction loans. Once the project has stabilized, the developer seeks long-term debt. With the current economic downturn, developers are finding it difficult to obtain capital. This is compounded by a lack of liquidity in the mortgage market. As a result, projects are worth less than they were a year or two ago. Lenders also are more stringent in their underwriting standards, preferring highly stabilized projects with significant pre-leasing.
Short-term, the outlook is negative, as maturing loans may have problems refinancing if liquidity is non-existent.
The silver lining is that seasoned developers with strong lending relationships and leased portfolios are better positioned to develop product on an “as-needed-and-warranted” basis.