Construction and development lending at U.S. banks continued shrinking in late 2025, underscoring the ongoing caution gripping CRE lenders even as broader market conditions begin to stabilize, according to new research from CRED iQ.
CRED iQ's latest construction and development loan analysis found outstanding bank C&D balances fell to $456.3 billion in Q4 2025, down 5.7% year over year and marking the sixth consecutive quarter of contraction in bank construction lending.
The decline represents roughly a $45 billion pullback from the post-pandemic peak of $501.5 billion reached in Q4 2023, as banks continue reducing exposure to construction lending amid elevated interest rates, tighter underwriting standards and softer commercial real estate fundamentals.
According to the report, the current contraction is being driven by a combination of higher borrowing costs, slowing construction starts and increased regulatory scrutiny around CRE concentration risk, particularly among regional and community banks. New loan originations have also lagged behind payoffs and amortization activity, contributing to the ongoing decline in total balances.
Still, CRED iQ noted the current retrenchment remains far less severe than the collapse in construction lending seen during the Global Financial Crisis. During that cycle, bank C&D balances plunged 68% from a peak of $631.8 billion in Q1 2008 to $201.6 billion by Q1 2013. By comparison, the current downturn resembles what the firm described as a "measured cooling" rather than a systemic unwind.
Credit performance in the construction sector has also remained relatively stable so far.
The past-due and nonaccrual rate on construction and development loans stood at 1.34% in Q4 2025, while the noncurrent loan rate was 0.92%, according to the report. Both figures are above recent cycle lows but remain well below stress levels recorded during the GFC-era downturn. Community banks, which hold approximately one-third of all bank construction exposure despite representing a much smaller share of overall banking assets, posted a slightly higher past-due and nonaccrual rate of 1.42%.
The concentration of construction lending among smaller institutions remains a key area of focus for regulators and investors. Community banks currently hold roughly $153 billion in outstanding C&D loans, making their balance sheets particularly sensitive to shifts in commercial real estate fundamentals and construction activity.
CRED iQ said the broader lending pullback reflects banks' deliberate balance-sheet management rather than widespread distress across the sector. However, the report warned that capital availability for new development projects remains constrained and that the pace of any lending rebound will likely depend on interest rates, property-level fundamentals and bank capital allocation decisions through 2026.
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