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As Housing Risk Subsides, Banks Returning to Construction Lending
Mark Heschmeyer / CoStar / June 3, 2013
Early Recovery Benefiting Large Developers and Larger Regional Banks
With the continued strength of the housing sector, banks are again seeing growth in demand for construction and development (C&D) loans and are starting to respond in kind.
The total amount of C&D loans on banks books at the end of the first quarter declined from $203.7 billion at the end of 2012 to $201.6 billion, however, 42% of the nation’s banks reported increases in C&D loans, according to CoStar analysis of FDIC numbers.
There were other signs of improvement as well. Noncurrent real estate construction and development loans declined by $2.2 billion (12.7%) quarter to quarter.
Aggregate construction and development (C&D) balances have fallen dramatically since peaking in 2007, as the industry grappled with bad loans during the depths of the financial crisis. However, steady recovery in the homebuilding sector (average market cap has increased about 140% since 2012), together with a more favorable real estate market, presents a more viable growth outlook for the banks in the coming quarters, according to Todd L. Hagerman, an analyst with Sterne Agee.
Moreover, enhanced credit underwriting, collateral appraisal, and concentration risk limits should enable the banks to selectively grow C&D portfolios, Hagerman said.
While the beneficiaries of the housing recovery are likely to remain uneven, potential growth opportunities are weighted toward the larger regionals as certain of the smaller regionals are forced to cut their traditional dependence on commercial real estate and develop more measured risk profiles, Hagerman said.
According to CoStar analysis, four large regional banks showed the largest increases in C&D lending: PNC Bank, Manufacturers and Traders Trust, Trustmark and Comerica.