For only the second time since the financial crisis, banksincreased net construction lending during the third quarter.Construction loans held on balance sheet inched up $3.6 billion, ofwhich $1.1 was for single-family and small residential properties;$2.5 billion, for multifamily and broadly-defined non-residentialdevelopment.

Banks' legacy exposure to construction lending has improvedsignificantly over the last several quarters. From a peak defaultrate of nearly 17 percent in early 2010, the percentage ofconstruction loans 90 days or more delinquent or in non-accrualstatus has fallen to 4.9 percent, half its year-ago level.Construction loans in REO have been halved, as well. Not everythingis improving. The recidivism rate of construction troubled debtrestructuring is still 47 percent.

Construction lending has been concentrated in the multifamilysector until recently, with banks underpresented as sources ofcapital in that market segment. As new opportunities have emergedfor lending on core and mixed use development, constructionfinancing has reasserted in primary and some secondarymarkets. In Tier 1 markets likeNew York, transformative projects are already underway with supportfrom a wide range of lenders and REITs' access to public markets.The largest banks may compete for these loans individually orthrough syndication, but the primary beneficiaries of new regionaland community bank lending (and credit unions, as well) arerelatively smaller borrowers.

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Dr. Sam Chandan

An irreverent take on the macroeconomic environment. Dr Sam Chandan is President and Chief Economist of Chandan Economics and an adjunct professor in real estate and public policy at the Wharton School of the University of Pennsylvania.