Banks See Rise in Delinquent Construction Loans. Don't Panic.

A successful commercial construction project in northern New Jersey in June, 2020. Despite rising loan delinquencies around the country, banks seem to have been prepared for a slowing market.Photo: Richard Korman for ENR

June 30, 2020

Richard Korman

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Worried about a string of bank collapses from commercial construction loans gone bust? You can calm down, for now.

Individual banks that make loans for offices and stores say their portfolios were "structured to withstand a downturn" before the pandemic hit in the first quarter of 2020, according toa report from S&P Global Market Intelligence.

That's a good thing, because the total volume of delinquent construction loans on bank balance sheets in the quarter climbed to $3.67 billion, up 23.8% from the fourth quarter of 2019 and 24.6% higher on a year-over-year basis, said S&P, which had monitored large construction lenders investor reports.

Banks had already been backing away gradually from real estate construction lending, S&P reported. Construction loans represented only 3.37% of total loans and leases, down from 3.44% in the previous quarter and 3.49% a year earlier.

[For ENR’s latest coverage of the impacts of the COVID-19 pandemic, click here]

Wells Fargo & Co., the bank with the biggest construction loan portfolio, has said it expects losses but also predicts its overall portfolio to perform well, according to S&P, which adds that U.S. Bancorp. is similarly optimistic.

Bank OZK appears to face the biggest peril. S&P said it had the largest share of construction loans, 35% of its portfolio, among the top 20 lenders.

According to S&P, bank CEO George Gleason said the institution's construction loans typically have provisions in which borrowers guarantee they will complete their projects on time and on budget; it added that Bank OZK will modify loans in a "very judicious manner."

Still, Gleason acknowledged that some property sectors, such as travel and leisure, have suffered especially severe damage from the coronavirus. Office and industrial is doing well he said, but the outlook for retail is unclear.

Stephen Lieske, an attorney at California-based law firm Allen Matkins, says he considers office and industrial real estate businesses to be in good shape. He performs legal work for lenders in those sectors and notes that he has heard of banks that have sent developers who run into financial trouble "reservation of rights" letters.

Those letters are a step before a bank officially declares a borrower to be in default.

According to Lieske, "the letter says there is a problem, but the bank will nonetheless continue to fund the loan and project" and work with the borrower.

Deputy Editor Richard Korman, who has edited ENR's Risk Review newsletter since 2012, helps run ENR's business coverage, selects ENR's commentary and op-ed viewpoint submissions and oversees editorial content on ENR.com. He recently completed a fellowship on drone safety with the McGraw Center for Business Journalism at the Craig Newmark Graduate School of Journalism at CUNY. In 2015 he won the Timothy White Award from American Business Media for investigations of individual surety fraud and workplace bullying. Richard's freelance writing has appeared in the Seattle Times, the New York Times, Business Week and the websites of The Atlantic and Salon.com. He admires construction projects that finish on time and budget, pay before the earth completes its annual orbit of the sun, record zero injuries and assign risk to parties who control an activity or willingly finance the risk.