Construction loans plunge in March as financing vanishes.

Construction loans plunge in March as financing vanishes

In chilling news for the Southland's beleaguered building industry, construction loan volume for Los Angeles County projects fell to $39.6 million in March, off 68.1 percent from February and 90.7 percent from $426.1 million in March a year ago, according to information compiled by Dataquick Information Systems Inc.

Two years ago, in 1989, March lending reached $679.4 million.

Construction lending has been slipping in Los Angeles since early 1990, but has been dropping more sharply since October of last year.

Industry denizens said last week construction lending was the weakest in memory. "I started in this business in 1964, and this is the worst I have ever seen it," said Hal Rose, vice president with Northland Financial Co. in Pasadena, a mortgage lender. "The S&Ls have stopped lending, the banks have stopped lending and now the insurance industry is getting cold feet."

Ben Bartolotto, veteran research director at the Burbank-based Construction Industry Research Board, a private non-profit industry think tank, echoed Rose's comments.

"In terms of absolute dollar amounts, the industry is going through the sharpest contraction I have ever seen," said Bartolotto. "We haven't seen anything like this since the sharp contractions in the early 1980s, following the 1970s building boom."

Bartolotto said the slowdown has been exacerbated by the "credit crunch. The banks are not funding, and also builders may not be offering as many projects to get funded, given the recessionary climate."

Banks, nationwide, have been reluctant to lend on real estate, particularly in the face of tough, new federal capital reserve requirements, and the situation is no different in Los Angeles, commented Bartolotto.

Generally speaking, banks and other lenders are asking that builders put up to 30 percent equity into a deal -- in other words, self-finance 30 percent of the cost of a building -- and get a building 60 percent pre-leased before they'll lend.

That constrasts vividly with heydays of building in the 1980s, when builders could get financing for 5 percent down and tenants on the horizon.

Bartolotto said he thought the worst was over for Southland builders, but "I thought we hit bottom in January, and now the numbers are worse."

Rose at Northland said the worst may be yet to come. "We may not yet have seen the bottom. It may be a year before we see the pick-up (in construction). We will have to get back to economics, with buildings being built for a reason, instead of all this building on speculation we had in the 1980s."