Elevated borrowing costs, slowing construction starts and higher regulatory scrutiny of CRE concentration risks have U.S. banks maintaining a decrease in construction lending, a new report has found.
CRED iQ’s data shows lending for construction and development continuing to shrink, even though broader market conditions are showing signs of stabilization.
Construction and development loan balances fell to $456.3B, a 5.7% year-over year drop. The decrease marks the sixth quarter in a row in which banks construction lending has contracted.
Lending’s most recent peak came in Q4 2023, reaching $505.5B. Banks have since reduced their exposure due to elevated interest rates, stricter standards for underwriting and a softening of commercial real estate fundamentals.
The current trend, however, is considered a “measured cooling” and is not comparable to the 68% drop experienced with the Great Recession between 2008 and 2013.
Credit performance has remained relatively stable. The overall past-due and nonaccrual rate for construction and development loans in Q4 2025 was slightly less than 1%, which is higher than recent lows but well below the Recession-era stress levels.
Regulators continue to focus on the volume of construction lending by smaller institutions, as community banks hold approximately $153B in outstanding construction and development loans.
The CRED iQ report found the overall lending retreat shows banks deliberately managing their balance sheets, rather than demonstrating more general distress in the sector. Capital availability remains constrained, however, and the pace of a lending rebound will be dependent upon interest rates, bank capital allocations and fundamentals at the property level. (Source)