New Data Illustrate Why Banks Fear Construction Loans

WASHINGTON, DC—The data show that loan performance on construction loans is much more sensitive to the economic cycle than the performance for commercial real estate backed by income-producing properties.

WASHINGTON, DC–Construction finance, especially from banks, is viewed in the capital markets as the proverbial canary in the coalmine, in that it is usually the first type of lending to dry up when the cycle matures or otherwise signals a slowdown ahead. It makes intuitive sense — why would a lender risk capital on a project where the future cash flow is so uncertain?

Now, new statistics in the New York Fed’s recently released Quarterly Trends for Consolidated US Banking Organizations provide more insight into this reasoning.

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.

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