Andrew Johnson
The Arizona Republic
Jun. 18, 2008 12:00 AM
More real-estate developers fell behind on their loan payments in the Valley in the first quarter, a sign that the local real-estate market still has not hit bottom.
Metro Phoenix's construction loan delinquency rate of 13.5 percent was the second-highest of the largest 100 metropolitan areas in the country, according to Oakland-based Foresight Analytics LLC.
The research firm's data includes both commercial and residential construction loan data that lenders report to the Federal Deposit Insurance Corp., which insures banks.
Only metro Cleveland, at 14.8 percent, had a higher rate than the Valley.
Metro Phoenix's delinquency rate was 2.7 percent in the first quarter of 2007 and has continued to rise since then, to 3.1 percent in the second quarter, 5.3 percent in the third quarter and 8.8 percent in the fourth quarter.
Foresight Analytics Partner Matthew Anderson attributed most of the delinquencies, which include loans on which a borrower is at least 30 days late paying, to housing.
"The story with high construction delinquency rates in general are mostly related to the residential sector deteriorating," Anderson said. "Even though there's been a big pullback and a sharp drop in prices across the U.S., including in the West, I think it's just to some extent those weak market conditions catching up with residential construction projects."
While woes in the housing market may be the primary culprit, commercial developers also contribute to and feel the repercussions of higher delinquencies.
Lenders have tightened their financing standards for residential and commercial developers, requiring borrowers across the board to put down more money on projects while charging higher rates.
They also pay closer attention to the type of projects they finance.
"They really want to see heavy pre-leasing, and they really want to see a . . . great location," said Gregory Miskovsky, managing director of the Phoenix office of Cohen Financial, a commercial real-estate lender.
Foresight's data includes some evidence that commercial real-estate developers and investors are having more financial trouble than in past quarters.
Commercial mortgage delinquencies remain relatively low throughout the country but have ticked up in some areas, including Phoenix, where the average rate increased to 1.6 percent in the first quarter over 0.9 percent a year ago.
Part of the problem is the general downturn in the economy.
Developers of new speculative projects and landlords of current properties are having more difficulty attracting and keeping tenants as businesses downsize or hold off on expansion plans to save money.
Those conditions have also caused lenders to become skittish about financing projects that lack a certain amount of pre-leasing.
Another challenge for developers stems from how they usually finance their projects.
Typically, developers first get a loan to pay for the construction of a project, then they seek a permanent mortgage when the project is completed, said Scott Holland, a managing member of Phoenix-based Keystone Commercial Capital. The company originates and manages loans that are financed by life-insurance companies, banks and other financiers.
Construction lenders make loans based partly on how much they believe the project will be worth when completed, along with leasing and rent projections from the borrower.
Once construction is complete, the developer seeks permanent financing from a mortgage lender, which it uses to pay off the construction loan.
But economic changes can cause mortgage financiers to lend less money than they would have in prior years. That leaves developers scrambling to come up with more money to pay back their construction loans.
The situation could worsen in the short term as investors try to refinance commercial mortgages that are close to maturation, Holland said. Banks may be unwilling to lend as much as they did five or 10 years ago on commercial mortgages because liquidity has dried up.
Rob Curtis, a broker with Scottsdale-based development firm VP Commercial LLC, said his company has started shopping around for new lenders after relying mostly on First National Bank of Arizona for its construction financing over the past several years.
VP Commercial, which builds mostly smaller office and mixed-used projects in the Valley, has noticed that banks want more details about projects up front before agreeing to finance them, Curtis said.
"Now they run a tighter ship," he said. "They really keep an eye on where you're at with your loan extensions."
First National has been one of the lenders hardest hit by the real-estate downturn.
Foresight's data shows that 24.6 percent of the Scottsdale-based bank's construction loans were delinquent and 5.6 percent of its commercial mortgages were delinquent as of the first quarter.
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