New York City - With all the talk of the recession ending, my comment to our commercial construction lenders is "show us the money." For the past 18 months construction has come to a standstill from your typical starter house to the local mall around the corner. Banks are simply not lending. With international investor appetite for more U.S. debt waning, the U.S. government will need domestic investors to buy an unprecedented amount of Treasuries in order to fund record future budget deficits.

Our government is giving banks free money so that they can reinvest it in Treasuries. (auscarehomeloans.com)

The Federal Reserve has created abnormally wide credit spreads with a very accommodative monetary policy. To put it simply, our government is giving banks free money so that they can reinvest it in Treasuries and make a great profit while supporting our economy. In such an environment, banks are encouraged to purchase and hold government debt on their balance sheets, which limits the amount of credit available to the private sector.

This cozy relationship between government and banks will persist for some time. So if you were a bank, why would you lend on a risky construction project? It is simply more profitable and patriotic for banks to lend to the government rather than to lend to private borrowers. In addition, the stronger banks are waiting to be appointed FDIC receivers in order to pick up market share by acquiring failed banks. In this game, the winner is whoever has the most capital and can wait out the storm.

Banks are slowly healing but this process will take another three to five years. During this time, they will continue to slow down lending because they need to reserve precious capital for expected future losses from legacy loans. What this means to local real estate developers is that it will be very difficult to get any project built unless they are using their own money or they can find private investors to put up most of the construction financing.

Is there a silver lining in all of this? Let's consider that construction starts in the last 18 months have been practically nonexistent. Further, in the last few months we have seen a significant upturn in home sales, unemployment numbers that are slowly abating, and commercial properties that are beginning to stabilize as rents have reached bottom. With positive indicators showing "green shoots" across the real estate market, there is only one conclusion - absorption of excess real estate inventory will lead to price increases. Eventually, we will have private funding filling the gap that the banks have created. With falling risk and increased profit potential, the banks will slowly move back into the construction lending and we will once again fill the empty lots from Manhattan to Bridgehampton.