U.S. banks increased their nonresidential construction lending in 2020 even as delinquencies in the segment increased sharply to their highest level since 2014.
Overall construction loans by U.S. banks totaled $385.72 billion for the year, up from $361.61 billion in 2019. Construction loans on one- to four-unit residential properties actually decreased by 3.1% year to year. But banks' holdings in nonresidential loans are much larger, so a 9.4% rise in that segment more than made up the difference.
The volume of delinquent nonresidential construction loans at U.S. banks grew to $3.48 billion in 2020 from $2.17 billion in 2019, while residential construction loan delinquencies fell to $765.7 million from $773.5 million. The percentage of loans that were delinquent ticked up for both types but rose more sharply for nonresidential loans, to 1.13% from 0.77%.
Bankers continue to show concern over commercial real estate as the COVID-19 pandemic has wreaked havoc on commercial properties, especially hotels, retail and offices. During Fifth Third Bancorp's earnings call, an analyst noted that the bank reduced reserves in almost all categories but increased reserves in commercial mortgage and commercial construction.
"In commercial real estate, we've seen continued negative migration," said Richard Stein, chief credit officer for the bank, according to a transcript. "That's just a portfolio and an asset class that has a longer tail in terms of when problems arise and a longer tail when they're going to be resolved."
Stein said criticized assets in CRE increased, and the bank made qualitative adjustments in its reserve modeling to show longer recovery periods for hospitality and retail loans.
Wells Fargo & Co. and U.S. Bancorp, the top U.S. construction lenders by volume in 2020, each increased their exposure to nonresidential construction loans in 2020 — by 11.0% and 9.4%, respectively — while decreasing their residential loan exposure. Bank OZK, where construction loans accounted for 41.89% of total loans and leases, increased nonresidential loan holdings by 45.3% and decreased its residential construction loan book by 11.8%.
Across property types, executives at Bank OZK said in a Jan. 22 earnings call that borrower demand has picked up in the southeastern and southwestern U.S., as more people migrate from large metros into markets that include South Florida, Phoenix and Texas.
"You can sort of see the emergence of these new geographies in our largest markets as migration trends and business opportunity trends are shifting," Chairman and CEO George Gleason said. Brannon Hamblen, president and COO of Bank OZK's real estate specialties group, added that the bank has pushed into secondary markets in the Northeast and found demand from borrowers on industrial and life science properties.
Other banks that increased their nonresidential construction loan balance by more than 20% year over year included Citigroup Inc., Citizens Financial Group Inc., Goldman Sachs Group Inc., TD Group US Holdings LLC, First Republic Bank and Pinnacle Financial Partners Inc.
Banks that posted substantial pullbacks in residential construction lending included M&T Bank Corp., PNC Financial Services Group Inc., Fifth Third, Comerica Inc., BMO Financial Corp. and RBC US Group Holdings LLC.
Bank OZK's Hamblen said the bank is "trying to be very careful" as it originates multifamily loans, because the segment has a relatively high level of development, with large amounts of lenders competing for business.
"We'll probably continue to see strong origination there," Hamblen said. "But we're being careful to make sure it's in the right place at the right time with the right people."
