Murray, Michael
Construction and development lending will not return to the United States market until current lender caution subsides, said Reis Inc., New York.

“Lenders remain cautious about lending except for the most compelling or most distressed assets; in between two extremes, the market is proving to be much more cautious with a far less voracious appetite,” said Ryan Severino, an economist at Reis. “It is difficult to imagine in such a risk-averse environment, that willingness to lend on construction and development projects will return until lending on existing properties returns in a broader, less discriminating fashion. Until then, we expect to see the balance for outstanding construction and development loans to continue to decline and their overall performance to continue to worsen.”

Severino said that without new construction and development loans to replace maturing debt, outstanding balance on the loans continue to trend downward. The most recent data from the Federal Deposit Insurance Corp. showed delinquency rates on construction and land development loans increased to nearly 16 percent as of the fourth quarter last year.

“Lenders on existing properties appear to be working with their borrowers in order to keep loan payments current, resulting in only very modest increases to the delinquency rate,” Severino said. “However, the continuing increases in the overall delinquency rates imply that the performance of construction and development loans is still worsening.”

Data from the Mortgage Bankers Association and FDIC showed banks and thrifts held $444.6 billion in construction loans in 2008, which fell to $422.1 billion by the fourth quarter of 2009.Other than multifamily mortgages at $211.4 billion by the fourth quarter, construction loan volume at banks and thrifts was below nearly $2 trillion in residential loans and more than $1.09 trillion in nonfarm, nonresidential mortgages, MBA said.

Banks earned $18 billion in the first quarter, $12.5 billion above the $5.6 billion earned in the first last year, "but still well below historical norms for quarterly profits," the FDIC reported yesterday.

"Industry earnings are up," said FDIC Chair Sheila Bair. "More banks reported higher earnings, and fewer lost money."

Bair said the $18 billion in net income during the quarter "is more than three times as much as banks earned a year ago, and it is the best quarterly earnings for the industry in two years."

However, the FDIC also reported troubled banks increased to 775--a nearly 20-year high--up from 702 at the end of the year..

Construction and development performance will likely begin to stabilize when the financial markets feel “confident enough to issue new loans,” Severino said.

Liquidity would help refinance performing loans in current extensions. With tight bank lending, the commercial mortgage-backed securities market remains a “key component” of CRE debt but remains a “mere shadow of its former self and has not fully awakened from its slumber,” Severino said.

In the past 10 years, the CMBS market competed with FHA and Fannie Mae and Freddie Mac to finance multifamily properties, and CMBS financed larger loans for office, retail and hotel properties. However, confidence waned among CMBS investors with fears of a residential spillover into the commercial market and the overall economy. Many CMBS investors also lack confidence in ratings agencies as downgrades continue to plague CMBS classes. Special servicing shops also continue to receive a plethora of maturing and/or delinquent CMBS loans without available liquidity.

In March, the Term Asset-Backed Securities Loan Facility program expired for CMBS after the Federal Reserve Bank of New York approved nearly 91 percent of $13.2 billion of loan applications for legacy CMBS.

“The program succeeded in increasing transaction activity and tightening spreads for AA loans which had widened significantly in the wake of the credit crisis,” Severino said.

However, MBA's 2009 Commercial Real Estate/Multifamily Survey of Loan Maturity Volumes said as of December 2009, that 12 percent of loans held in CMBS will come due in 2010, including 7 percent of the $650 billion of loans in fixed-rate conduit CMBS and 72 percent of the $54 billion of loans in floating-rate and large-borrower CMBS.

Most CMBS debt--primarily 10-year fixed-rate loans--matures from 2015 to 2017, MBA said.

“Much like with construction and development loans, performance [in CMBS] continues to erode, but at least appears to be slowing slightly,” Severino said.