Construction Lending Will Steadily Rebuild Momentum Post-COVID-19
The outlook for bank construction lending was strong prior to the onset of the COVID-19 pandemic, and bankers remain optimistic despite challenges resulting from the health and economic crisis, according to a report released by the American Bankers Association. More than 90% of bank respondents surveyed at the end of 2019 reported that their construction lending business grew or remained stable over the past two years, and nearly all, at that time (95%), expected construction lending to grow or remain stable in 2020. When questioned again after the arrival of the pandemic, they largely held those views.
The ABA Construction Lending in 2020 report provides a snapshot of construction lending in December 2019 as it stood before the COVID-19 outbreak. In followup interviews conducted in April and May 2020, bankers said that their fundamental view of the market remained unchanged, although they acknowledged that a period of transition is inevitable. Bankers identified strong credit cultures and a focus on risk management as keys to thriving in a challenging COVID-19 environment.
“While the pandemic has created significant uncertainty, it’s clear that banks are on solid footing and are helping customers weather the storm,” said ABA senior economist Rob Strand. “Construction lending has enjoyed a strong revival since the Great Recession, and the outlook remains favorable even as banks navigate the potential challenges posed by the COVID-19 crisis.”
In interviews conducted after COVID-19 reached the U.S., bankers said they were carefully reviewing loans in the pipeline, tweaking some underwriting requirements (such as loan-to-value ratios and reserve requirements), paying close attention to secondary mortgage market requirements (even if they tend to hold loans in portfolio), and scrutinizing builders’ track records and capacity. By and large, they voiced confidence that their approaches to underwriting and risk management, along with strong capital and liquidity, put them in a good position to help customers weather the storm.
Construction Lending Experienced a Revival Prior to COVID-19 Total construction spending in the U.S. – a broad measure that includes both new structures and improvements to existing structures – exceeded $1.3 trillion in 2019, roughly on par with 2018 levels, an upward trend since spending hit a trough of $788 million in 2011, according to U.S. Census Bureau data.
Just prior to the pandemic, banks indicated an intent to improve their construction lending businesses over the next two years by expanding training, streamlining loan administration, upgrading technology and outsourcing. Participants identified factors that would make them more likely to expand their construction loan portfolios more aggressively, including less risky loans (54%), easier compliance (40%) and less time needed to manage loans (28%).
The report also found that banks of all sizes are involved in a range of construction lending activities. More than 90% of respondents reported conducting new single-family and commercial real estate construction lending. In addition: 81% said they fund builders’ spec, one-off, and pre-sold residences; 78% provide consumer renovation loans; 67% offer lines of credit to home builders; and 64% finance fix-and-flip residential loans.
According to the survey, 46% of respondents cited staffing and 42% cited regulatory and compliance costs as the top drivers of expenses in construction lending. Other expenses, including technology expenditures, as well as sales and marketing costs, were each cited by 4% of survey participants.
“While compliance costs are unlikely to diminish, technology has the potential to help banks lower those expenses and more efficiently deliver on their fiduciary obligations,” said Strand. “Perhaps even more important than streamlining costs, improved efficiency can boost customer satisfaction.”
Learn more and download a complimentary copy of the report at aba.org.
–Paul Williams Brand Publishing Writer