The most recent Bank Lending and Default Report from Chandan Economics showed that banks are now growing their construction loan balances at a faster rate than their commercial or multifamily mortgages (see GlobeSt's coverage). As of Q1 2015, the balance of construction loans held by banks had increased by an impressive 14.6 percent from a year earlier. In comparison, commercial and multifamily loans increased over the same one-year period by 4.1 percent and 12.4 percent respectively.

A later trough in construction lending and the very low balance of construction loans currently held by banks are parts of the explanation for its relatively large increase in the new data. As of the first quarter, construction loans totaled $246.1 billion, down more than 60 percent from their peak seven years earlier in Q1 2008. From that small base (by historic standards), the near-15 percent increase reflects a $31.3 billion climb in construction loans outstanding. The absolute in increase in commercial loan balances was nearly 50 percent higher at $46.0 billion. But the base was a heftier $1.2 trillion.

Examined from a different angle, the relatively faster increase in construction lending captures that banks' commercial real estate loan balances are the ones growing at an unsually slow clip. Between 2004 and 2008, commercial loan exposure across all banks increased at an average year-over-year rate of more than 9 percent. As the following chart shows, the current balance sheet expansion is plodding in comparison.

Slow Growth in Bank CRE Lending

What is behind the weak commercial loan numbers? It likely reflects several factors, including a frustratingly slow rate of growth in the pool of well-qualified borrowers and, until recently, the weight of legacy non-performing loans and recidivism in troubled debt restructuring pools. Both of these have their roots in the long slog of the economy's expansion. Competition for good lending opportunities from other capital sources is another important factor for individual institutions. Not to be omitted from the list, banks' engagement with their examiners and the changing regulatory environment are almost certainly constraints as well. More to come on that in the next months, as the impact of new risk weights and other regulatory initiatives on bank incentives becomes discernible.

Instant Insights /

Compared to Prior Cycle, Slow Growth in Banks' Commercial Property Lending

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