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.