Commercial Construction Lending Rises in 2020 Despite Pandemic

By Will Mitchell

The Federal Deposit Insurance Corporation Statistics on Depository Institutions confirms that construction lending commitments have increased $78.2 billion, an increase of 11.21% from the September 2019 rate of $698 billion. Contrary to speculation about a pullback on development and real estate due to the pandemic, construction has continued to grow throughout the year.

Commercial construction lending grew 14.1% from September 2019 with 46% of financial institutions reporting a year of over year increase in construction lending. This is in juxtaposition to residential construction lending that reported only a 1.41% increase from Q3 2019. Most notable is that construction lending in Q3 2020 increased at an even higher rate than Q4 2019. This growth in Q3 represents loans that were not in process when the pandemic started and at minimum were only at a letter of intent. Therein, the fact that these loans proceeded with full knowledge of the current climate indicates that even in the current crisis lenders see commercial real estate as an attractive risk premium.

As a whole, real estate lending increased by 6.3% from Q3 2019. However, the bulk of that increase was in Q4 2019 (~2.9%). The subsequent quarters Q1 2020, Q2 2020, and Q3 2020, real estate lending grew only around 1%. This confirms that real estate as an asset class is still attractive to financial institutions in the fact that the investment did not decline, but the slow growth shows a general retrenchment of focus. As a result of construction lending growth outpacing the growth in real estate lending, construction lending now represents a great share of real estate lending (~7.5%) than it did a year ago (~7.2%).

This data supports the sentiment in the market that “stabilized assets”, those already constructed, no longer represent a significantly lower risk premium to construction lending than in more normal times. As such, financial institutions have leaned into commercial construction lending over the twelve-month period ending in Q3 2020 with over 400 financial institutions doubling their commercial construction lending exposure during this time.

A review of the data on an individual institution basis highlights the attractiveness of commercial real estate (not 1-4-unit residential) in juxtaposition to 1-4 unit residential. While 45.9% of financial institutions increased their construction lending exposure, 54.2% of institutions increased their commercial construction lending. The difference reflects the number of financial institutions that pulled back on 1-4-unit residential construction lending. Despite the sentiment in the market that home sales have been exceedingly hot, the data confirms financial institutions as a whole have preferred commercial construction lending over this time period.

While leasing markets continue to be saturated with subleases and housing continues to be abated by eviction moratoriums and rent incentives, financial institutions will continue to issue new construction loans. With construction taking 18-24 months to deliver, this time provides the economy with the opportunity to stabilize and support the value of these assets.

Will Mitchell is CEO of Rabbet, headquartered in Austin.

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