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New Data Illustrate Why Banks Fear Construction Loans

WASHINGTON, DC—The data show that loan performance on construction loans is much more sensitive to the economic cycle than the performance for commercial real estate backed by income-producing properties.

By Erika Morphy | erikamorphy | Updated on June 05, 2017

The Federal Reserve Bank in Washington DC

WASHINGTON, DC–Construction finance, especially from banks, is viewed in the capital markets as the proverbial canary in the coalmine, in that it is usually the first type of lending to dry up when the cycle matures or otherwise signals a slowdown ahead. It makes intuitive sense — why would a lender risk capital on a project where the future cash flow is so uncertain?

Now, new statistics in the New York Fed’s recently released Quarterly Trends for Consolidated US Banking Organizations provide more insight into this reasoning.

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