Bank Trends - Metropolitan Atlanta Construction and Development Lending Trends
Although national real estate
markets seem to be in equilibrium, some supply/demand disequilibrium appears
to be forming in a few metropolitan markets. The Atlanta metropolitan
area is one such market that merits attention. FDIC-insured institutions
headquartered in metropolitan Atlanta have been actively supplying credit
that is fueling the recent wave of building in the area. This paper analyzes
the participation of FDIC-insured institutions in the current building
boom in Atlanta. Comparisons are made with the last real estate bubble
that burst during the economic recession in 1990-91. Current economic
conditions in metropolitan Atlanta as well as the condition of the residential
and various commercial real estate sectors in the area are analyzed. Moreover,
we examine structural forces--in particular, real estate investment trusts--which
may be influencing the area's commercial real estate sectors. Bankers
should closely monitor economic and real estate conditions in metropolitan
Atlanta because of the sizable construction and development lending concentrations
at FDIC-insured institutions operating in the area and the intrinsic volatility
of this lending.
Atlanta Construction and Development Lending Trends
Booms do not
merely precede busts. In some important sense, they cause them. Because
people in markets make mistakes, tearing down is an indispensable
part of the process of building up. The errors of the up cycle must
be sorted out, reorganized, and auctioned off.
James Grant, The
Trouble with Prosperity, 1996
Cycles are a by-product
of a market economy. Real estate markets are no exception. Because much
of the nation's bank and thrift loan portfolios are serviced or secured
(or both) by real property, there is a positive correlation between cycles
in the real estate and banking sectors. Real estate markets were strong
throughout the economic expansion of the early and mid-1980s. However,
during the recession of 1990-91, it became evident that construction activity
(supply) ultimately had exceeded demand. Property values plunged in several
regions of the country, eroding the financial strength of many bank and
thrift institutions and contributing to the failure of others.
Since 1992, a strong
economy and favorable interest rates again have spurred real estate demand
and fueled another wave of construction and development. While most national
markets remain in equilibrium, signs of possible oversupply are beginning
to surface in some metropolitan areas. Metropolitan Atlanta's economic
performance has outpaced the nation in recent years, and its real estate
markets certainly have been among the most active. The rapid pace of construction
activity across the metro area has prompted some industry observers to
question Atlanta's ability to maintain market equilibrium if current trends
This paper analyzes
construction and development lending trends at FDIC-insured institutions
headquartered in metropolitan Atlanta. Comparisons are made to the active
real estate markets of the 1980s, and structural changes such as the trend
toward asset securitization are examined for their potential impact on
real estate market volatility. The paper concludes with a detailed look
at current economic and real estate subsector conditions across the Atlanta
Development Lending at Metro Atlanta Financial Institutions
institutions in metropolitan Atlanta are actively involved in real estate
and related lending. Driving through the area, one cannot help but notice
the "financed by" signs fronting the many construction projects
currently under way. While large regional and superregional banks are
either providing or arranging funding for the majority of retail, office,
and multifamily projects, smaller institutions are helping to finance
Atlanta's continuing residential development boom.
It is difficult to
obtain data on the extent to which insured institutions, large or small,
are engaging in real estate and related lending in the metro area, as
the only source data are Bank and Thrift Call Reports, which do not provide
detailed product-type or geographic information. Moreover, the extent
of local funding being provided by institutions headquartered outside
the metropolitan area cannot be discerned. Call Report data must be parsed
and certain inferences made in order to draw conclusions about the area's
construction lending environment.
The data set for
this paper was culled to include only those commercial banks and thrifts
headquartered in the Atlanta metropolitan statistical area (MSA) with
assets under $1 billion. This obviously excludes the sizable activities
of large in-market banks and thrifts as well as institutions headquartered
outside the MSA. Nonetheless, the data set does include smaller "community"
institutions, which are likely to have little geographic diversity in
their loan portfolios. The prospects of these smaller institutions are
much more closely linked to the performance of the local economy and the
strength and stability of local real estate markets.
development (C&D) loan volume grew steadily at metro Atlanta community
institutions from 1992 through 1996, although overall loan levels relative
to assets were stable during much of the period. As reflected in Chart
1, this trend reverses that of the previous four years, in which changes
in C&D loan volume tracked the overall portfolio.
that C&D loans as a percentage of assets at metro Atlanta community
institutions nearly doubled from a cyclical low of 7.5 percent in 1991
to a ten-year high of 14.4 percent in 1996 before moderating slightly
to 13.1 in 1997. Interestingly, the levels seen over the past two years
are above those reached at a similar point of five to six years into the
last sustained economic expansion (1988). The subsequent decline in absorption
rates that occurred in certain segments and a general slowdown in the
overall economy may have been contributing factors to the erosion of commercial
bank and thrift profitability in 1990 and 1991. Given the very strong
development activity that has occurred in metro Atlanta over the past
six years, a decline in real estate demand (absorption) again could pressure
bank earnings. It is imperative that management of insured institutions
anticipate and plan for the possibility of slower growth.
1 highlights the extent of Atlanta's C&D lending activity relative
to the nation's other MSAs. The average C&D loans-to-assets ratio
for all MSAs, for institutions with assets under $1 billion, was 4.0 percent
as of December 31, 1997--less than one-third of the metro Atlanta average
of 13.1 percent. Moreover, there was a notable divergence between
C&D loan concentrations in Atlanta and other MSAs from 1992 to 1996:
The nationwide average rose only 50 basis points, from 3.5 percent to
4.0 percent, compared with a 560 basis point (7.5 percent to 13.1 percent)
increase in metro Atlanta.
A final point reflected
in Chart 1 is that total loans at metro Atlanta
community institutions make up a larger percentage of total assets than
at similar-sized institutions in other MSAs (67.7 percent versus 63.7
percent), which may indicate less financial flexibility in the event of
an economic downturn.
The increase in C&D
loan concentrations reflects strong, sustained growth in this product.
In 1996, the 79 institutions comprising the metro Atlanta community bank
peer group increased outstanding C&D loans by an average rate of 24
percent, following robust growth of 19 percent, 29 percent, and 42 percent
in 1995, 1994, and 1993, respectively. The 1996 Summer Olympics contributed
much to the development activity during this period; however, the pace
of construction after the Olympics has not slowed nearly as much as many
analysts and economists had anticipated. C&D loan growth did moderate
to 11 percent in 1997, consistent with slower growth in residential construction
permit issuance. C&D outstandings for the peer group totaled $1.5
billion as of December 31, 1997.
Consistent with the
rapid pace of growth and development across metro Atlanta, the percentage
of local community institutions reporting high C&D loan concentrations
is rising. Table 1 compares current C&D loan exposures to those measured
during the high and low points of the past ten years--1988 and 1991, respectively.
As of year-end 1997, 14 institutions reported C&D loan concentrations
of at least 20 percent of assets. This number is down from 19 institutions
in 1988 but represents roughly an equal percentage (17 percent) of the
total peer group. Moreover, the percent-of-peer-group measure in 1997
was deflated by the opening of three de novo institutions in the fourth
quarter that were included in the peer group but reported negligible C&D
loans. When concentrations of 15 percent, 10 percent, and 5 percent of
assets are compared across each time period, the current percentage of
institutions with C&D loan concentrations is higher in each category
than in 1988. Only at the 30 percent concentration level does the current
distribution of institutions compare favorably to 1988.
Tracking the performance
of the 33 institutions that reported 15 percent C&D loan concentrations
in 1988, we find that those institutions performed rather poorly during
the real estate market downturn that followed in 1990 and 1991. As shown
in Table 2,7 of the 33 institutions failed between 1989 and
1992. This represents a 21 percent failure rate for institutions with
high C&D loan concentrations, versus only 5 percent (4 of 77) during
the same period for metro Atlanta institutions that did not report high
concentrations in 1988.
Atlanta is not the
only area of the country where community institutions are reporting high
C&D loan concentrations. Using a nationwide peer group of insured
community institutions (assets under $1 billion) that are located in an
MSA, Map 1 highlights those MSAs where the average
C&D loans-to-assets ratio is at least twice the national average of
4.02 percent and where at least 25 percent of community institutions in
the MSA have C&D concentrations of 15 percent or higher. As of year-end
1997, only 17 of 326 MSAs met these criteria. Obviously, some percentages
are skewed by the size of the MSA. For example, smaller markets such as
Panama City, Florida; Rocky Mount, North Carolina; and Medford, Oregon,
show a high percentage of institutions with a 15 percent C&D loan
exposure because few institutions are headquartered in these markets.
From an assets-at-risk perspective, greater emphasis is placed on the
larger metropolitan areas where several community institutions are heavily
involved in C&D lending. In addition to Atlanta, other large MSAs
(defined here as those headquartering ten or more community institutions,
with above-average C&D loan exposures) include Las Vegas, Nevada;
Memphis, Tennessee; Oakland, California; Portland, Oregon; and Salt Lake
The number of metro
Atlanta institutions with high C&D loan exposures, as well as the
total assets represented by those institutions, is higher than in most
other MSAs. Thirty-one institutions in metro Atlanta have C&D loan
concentrations of at least 15 percent of assets, which is more than four
times the number reported in any other MSA. Further, the $11.7 billion
in assets represented by Atlanta's community bank peer group rank eighth
among the nation's 326 MSAs and are nearly five times higher than any
other MSA highlighted on Map 1.
The location of metro
Atlanta community institutions with large C&D loan concentrations
is shown in Maps 2 through 4. Three year-end periods--1997,
1991, and 1988--were mapped to provide a time-series perspective. In 1988,
19 institutions in ten metro counties reported C&D concentrations
in excess of 20 percent of assets (Map 4). Following
a sharp decline in local real estate markets in 1990 and 1991, only four
institutions in two counties had similar concentrations by the end of
1991 (Map 3). By year-end 1997, however, the number
of community institutions with concentrations greater than 20 percent
had risen to 14 and covered nine counties (Map 2).
When the concentration threshold is lowered to 10 percent, it
becomes evident that suburban sprawl is stretching farther beyond
the perimeter highway that encircles the city. There is now at
least one institution with a 10 percent concentration in 17 of the
20 counties comprising the Atlanta MSA, including 5 counties with
four or more such institutions. By comparison, 10 percent
concentrations were reported in 16 metro counties in 1988, and only
3 counties headquartered four or more of those institutions.
C&D loan concentrations could represent an emerging risk to
insured community banks and thrifts. In addition to notable
parallels between current local real estate and economic conditions
and those that preceded the recession of 1990-91, FDIC examiners in
the Atlanta metropolitan area report an increase in the number of
nonprofessional builders to whom banks are extending credit as well
as an increase in the number of speculative loans. Examiners also
note intense competition among financial service providers in the
C&D product line. An intensely competitive environment can
lead to presale downpayment commitments that are not punitive
(which essentially renders the related projects speculative) as
well as diminished pricing power of institutions to compensate for
the risk of possible overbuilding or slower economic activity.
To summarize, sustained
economic growth, particularly as it stimulates real estate development
activity, historically has had a favorable impact on insured institution
performance. History also has shown, however, that when the rate of economic
expansion slows, banks can experience varying degrees of credit-quality
deterioration, including reduced repayment capacity and collateral devaluation,
as well as weaker loan demand, lower fee income, and higher charge-offs.
The impact of these forces may be greater at smaller community institutions,
as they typically have less geographic and product diversification than
their larger counterparts. It is important, therefore, that insured institution
managers be aware of emerging trends in the economy, particularly in their
local and regional markets, and plan appropriately for events that could
impair credit quality. High C&D loan concentrations represent one
area that community institutions in metro Atlanta should be closely monitoring,
given the inherent volatility in this type of lending as well as some
economists' projections of slowing economic growth going forward.
Impact of Securitization
on Commercial Real Estate Markets
Some industry analysts
believe the real estate sector is undergoing a longer-term structural
evolution that could affect market stability in the future. Specifically,
this change involves the increasing trend toward securitization, whereby
privately owned properties are being pooled and resold to public securities
market investors. Growth in securitization is occurring primarily through
commercial mortgage-backed security (CMBS) issuance and real estate investment
trust (REIT) acquisitions.
Growth in CMBSs has
exploded in the 1990s because of the benefits they offer both issuers
(typically, financial institutions) and purchasers (institutional and
individual investors). CMBSs allow financial institutions (lenders) to
transfer credit risk off-balance-sheet while generating sales proceeds
that can be used to fund additional growth. Specifically, lenders package
pools of commercial mortgages, securitize them into bond-like instruments
backed by the collateral and cash flow of the underlying loans, and then
sell the securities to market investors. For the investor, CMBSs provide
an opportunity to own, as a liquid asset, a prorata share of a diversified
portfolio of commercial real estate; in the past, this was not an option
for many investors.
Mortgage Alert reports that CMBS issuance rose from $4.8 billion
in 1990 to $44.1 billion in 1997 (an 820 percent increase), andMorgan
Stanley CMBS Research measured year-end 1997 market capitalization
of outstanding issues at $133 billion. Some analysts estimate that low
interest rates and a strong economy could push 1998 issuance over $50
billion. The level of CMBS activity specific to the metro Atlanta area
cannot be discerned, as detailed geographic and property-type information
for underlying commercial mortgages is unavailable.
The accelerated trend
toward securitization can be attributed, in large part, to the resurgence
of the REIT (this discussion focuses on equity REITs, as they comprise
the bulk of the industry). The market's acceptance of REITs has been somewhat
surprising after their poor performance in the 1970s. Today's REITs differ
significantly from their predecessors, however; most notably in that modern
REITs have, on average, very low leverage and high capital. Management
professionalism and expertise also are believed to have improved, and
public confidence has been strengthened by more timely and accurate disclosure
of property and performance information to the investing public.
According to the
National Association of Real Estate Investment Trusts (NAREIT),
there were 210 publicly traded REITs with an equity market capitalization
of roughly $141 billion as of year-end 1997, compared with 142 REITs with
a market capitalization of only $16 billion just five years earlier. Competitive
dividend yields and total returns, as well as investor interest in owning
real estate as a liquid asset, have led to a wealth of new and secondary
equity offerings. A record amount of REIT capital (over $45 billion) was
raised, and a record number of securities (315 initial and secondary offerings)
were issued in 1997. In fact, according to NAREIT, the flow of capital
into REITs in 1997 exceeded the cumulative funds raised by the industry
over the previous three years.
Perhaps nowhere has
REIT activity been more prevalent in the 1990s than in metropolitan Atlanta.
The volume of properties under REIT management in Atlanta has soared in
recent years, and property trusts represent a significant source of demand
in the local multifamily, office, industrial, and retail markets. The
National Real Estate Index of Alliance Capital and CB Commercial,
which tracks transactions in which REITs acquire privately owned properties,
identifies Atlanta as one of the nation's most active REIT markets. According
to the Index, REIT holdings in Atlanta totaled $9.95 billion at year-end,
second only to Washington, D.C., which had $10.2 billion. Also, regarding
1997 REIT acquisitions, Atlanta ranked third nationally with purchases
of $2.3 billion, trailing only Chicago ($3.7 billion) and Los Angeles
The bulk of Atlanta's
1997 REIT acquisitions involved office space, but the preferred property
type for much of the decade has been multifamily housing (apartment) communities.
As a result, market prices per square foot are currently above replacement
costs for this segment, which is enticing profit-minded developers to
aggressively pursue new construction to take advantage of the high resale
prices. According to the U.S. Census Bureau, metro
Atlanta ranked fourth in 1997 with 11,026 multifamily permits issued,
trailing only Dallas, Houston, and Phoenix. Thirty-seven new apartment
communities were developed in the metro area in 1997, mostly in the city's
northern suburban markets, despite evidence of rising vacancies, stagnating
rents, and increasing concessions. Rent levels are being constrained by
the steady supply of new units coming to market as well as low mortgage-interest
rates that are luring apartment dwellers toward home ownership.
As mentioned, 1997
REIT activity focused primarily on office space, spawning a wave of new
construction in that product, again despite rising vacancies. A first-quarter
1998 market study by Cushman & Wakefield found that
office vacancy rates in suburban Atlanta rose to 12.2 percent in the first
quarter of 1998 from 11.7 percent at year-end 1997. The study also reports
that office vacancy rates along North Fulton County's Georgia 400 corridor
increased dramatically, from 9.2 percent to 24.6 percent, from the first
quarter of 1997 to the first quarter of 1998. Separate data released
by LaSalle Partners, a Chicago-based real estate services
firm,indicate that nearly 1.4 million square feet of Class A office
space is currently under construction in North Fulton County that, when
completed, will represent a 44 percent increase in existing supply. That
report places the current vacancy rate for North Fulton County Class A
property at 23 percent.
The direction and
magnitude of the CMBS and REIT influence on property values in the event
of an economic slowdown are uncertain. The fact that the capital markets
have emerged as a substantial source of funding for these vehicles has
securities investors bearing some of the risk that, in the past, was borne
by insured financial institutions. It is also possible that diverse public
ownership may help discipline cash flow and, therefore, future development
activity, resulting in more stable real estate markets.
However, only about
15 percent of the nation's $1.5 trillion commercial real estate market
has been securitized to date, meaning that private owners, many likely
using bank financing, retain the majority of property ownership and its
related risks. Among those risks is the fact that, in areas where REIT
activity has been particularly strong, such as metro Atlanta, property
values may be driven more by the liquidity (acquisition funds) flowing
into REITs from the capital markets than by fundamental bases such as
discounted cash-flow analysis or replacement-cost comparison. Adding to
the possibility of liquidity-driven price appreciation is the fact that,
with minimal income retention (REITs are required to pay out at least
95 percent of operating income in the form of dividends), REIT growth
must come primarily through acquisitions. The constant need to acquire
properties could result in a further decoupling of transaction prices
from fundamental values.
The above concerns
were highlighted during two recent meetings of the Atlanta Society of
Financial Analysts. At one meeting, the guest speaker, an executive officer
of an Atlanta-based retail REIT, alluded to an "overbuilt" local market
and expressed "surprise" at banks' willingness to continue to advance
construction funds. At a subsequent meeting, an executive from one of
the Southeast's largest multifamily housing REITs stated that Atlanta
rent growth essentially has stalled and that acquisitions in this market
must be made "selectively."
Not only could REIT
demand ultimately have a great impact on property values and, therefore,
insured institutions' real estate loan portfolios, but an increasing number
of institutions are lending directly to REITs on an unsecured commercial
basis supported by investment-grade credit ratings. While these funds
are being used in various real estate-related activities, the loans are
reported as Commercial and Industrial because they are not collateralized
by real estate. As a result, real estate exposure as reported in Call
Reports may be understated for some institutions. According to NAREIT,
banks advanced a record $10.5 billion of unsecured credit to REITs in
1997. Much of this funding is being used to facilitate industry consolidation,
which essentially represents purchases of real estate portfolios. Many
of today's REITs have not been in existence long enough to have experienced
a turbulent market, and there is some concern among industry observers
as to the ability of REITs to repay their unsecured loans in the event
of a market decline, particularly if access to equity-market funding diminishes.
Atlanta Economic Conditions
Atlanta is one of
the nation's largest metropolitan areas, ranking ninth in terms of population
growth and employing nearly two million people in 1997. Key industries
in the metropolitan area include retail trade, transportation services,
wholesale trade, and office employment.
conditions in the Atlanta metropolitan area remain favorable. After slowing
throughout most of 1997 in the wake of the 1996 Olympics, year-over-year
job growth in the metropolitan area rose during the first quarter of 1998
to 4.4 percent. Even so, the economy's expansion remains below the peak
of the current business cycle that occurred in 1994 (see Chart
2). Indeed, the impact of the Olympics notwithstanding, the economy
still appears to be on a slowing trend, decelerating from its peak four
years ago. Many analysts believe that decelerating growth will persist
through the end of 1998 as the expansion continues to mature. Continued
rapid economic growth, however, may be critical to the health of metro
Atlanta's real estate markets, given current levels of construction activity.
Slower rates of growth could weaken absorption rates.
The persistent growth
has enabled the metropolitan area's jobless rate to decline. In the fourth
quarter of 1997, Atlanta's non-seasonally-adjusted rate of unemployment
was 3.1 percent, well below the national average of 4.4 percent. The metropolitan
area's labor markets are not uniformly tight, however. Most economic development
over the past few years has occurred in the northern suburbs. County unemployment
rates in these areas are exceptionally tight, often falling below 2.5
percent (see Map 5). The largest declines in jobless
rates over the past year, however, have occurred in Fulton County and
in the southeastern portion of the metropolitan area. Scarcity of labor
and consequent wage inflation may discourage local employers from further
hiring and encourage relocating companies to expand operations in other
areas of the nation.
performance during the 1990s has been healthy as the area witnessed high
levels of corporate relocation and in-migration. Since 1990, the metropolitan
area has added nearly 600,000 residents, representing an average annual
growth rate of 3.0 percent. In 1996, the Bureau of the Census
estimated Atlanta's population at just over 3.5 million. Such rapid population
growth has fueled demand for new housing. Annual population growth has
slowed, however, from its peak at 3.3 percent in 1994 to 2.6 percent in
1997 (Claritas estimate). Although growth is expected to slow further,
many analysts foresee Atlanta's population topping 4 million residents
within five years.
By a wide margin,
Atlanta's population remains concentrated in its centrally located counties
(Fulton, DeKalb, Cobb, and Gwinnett). The most rapid growth, in contrast,
generally has occurred in outlying areas (see Map 6)
such as Paulding, Forsyth, and Henry Counties, where population levels
have surged by more than 50 percent during the 1990s. Faster growth in
less-developed counties often has overtaxed public infrastructure, such
as transportation routes and water resources.
real estate market has been shaped by several factors during the 1990s.
On the supply side, the metro area has enjoyed six years of growth in
new construction (see Chart 3). Strong income and population growth and lower mortgage
rates relative to the late 1980s (see Chart 4) have fueled demand for new housing and encouraged
renters to purchase homes, creating what might be described as a seller's
market. Even with high levels of construction, home prices have continued
to climb (see Chart 5).
Growth in construction
activity, however, has been slowing from its postrecession cyclical peak
in 1992. During 1997, single-family permit issuance in the metropolitan
area increased by 2.5 percent (see Chart 3). Even
so, the number of homes under construction in the market by the end of
the third quarter of 1997 was below year-ago levels after peaking at 13,600
units in 1996. The previous peak in the number of homes under construction
occurred in 1987 at 12,300 units before sliding to nearly half that level
during the recession in the early 1990s. A slowdown in construction activity
now would likely lead to higher levels of competition as developers fight
to maintain market share.
1998 home prices were up a soild 8.4 percent from one year earlier, forces
of demand may begin to moderate. Part of the recent acceleration in home-price
appreciation may be the result of moderating mortgage rates, which often
have an inverse relationship with home prices. As Atlanta's economy moves
away from its cyclical peak and as population growth continues to slow,
however, growth in demand for new housing may cool, easing pressure on
Mortgage rates also
play a role in shaping demand for new housing. In late January 1998, the
average 30-year fixed-rate mortgage fell to 6.79 percent in the Atlanta
metro area. This rate is somewhat below the national average, the result,
in part, of competitive pressures in the metropolitan area. The current
interest rate environment and economic conditions have led to the emergence
of a seller's market for new and existing homes as buyers are encouraged
by lower rates.
Despite overall slowing
growth in market activity, single-family construction continues to expand
strongly in some component counties (Carroll, DeKalb, Fulton, Paulding,
Pickens, Spalding) (see Table 4). Continued rapid
homebuilding in excess of estimated growth in population in Paulding and
Pickens Counties may be of some concern (see Map 7).
The ratio of permit issuance to resident population also remains well
above average across most of the metropolitan area's northern counties.
Retail Real Estate
sector has enjoyed six years of sustained growth following the recession
of 1990-91. Retail-trade employment growth peaked in 1993, then slowed.
Even so, the industry has experienced gains well in excess of the national
average. This is partially the result of Atlanta's emergence as a regional
retailing center in the Southeast. The Olympics in 1996 gave retailers
an additional boost. By 1997, however, growth in retail trade had slowed
to almost even with the national average. If expansion in the industry
continues to slow, absorption rates in retail real estate markets may
activity across the Atlanta Region has been strong over the past few years
as developers responded to an economy enjoying rapid growth. Although
vacancy rates have started rising in nearly one-half of the Region's metropolitan
areas, nowhere has the upward pressure been more noticeable than in Atlanta.
In the third quarter of 1997, the retail vacancy rate in this metropolitan
area was 10.2 percent, up more than 3 percentage points from just two
years earlier to its highest level since the last recession (see Chart
6). The rise in Atlanta's retail vacancy rate is, to a large extent,
the product of persistent construction activity in excess of absorption
According to data
provided by the F.W. Dodge Real Estate Analysis and Planning Service,
retail space construction has increased substantially since its cyclical
trough in 1991 at 2.13 million square feet of net new supply. In contrast,
7.77 million square feet of net new supply were injected into the Atlanta
metropolitan area market in 1996. Third-quarter 1997 data show that construction
activity is below last year, but the gap between net new supply and absorption
has risen to its highest level since 1989. The overall retail stock now
has surpassed 100 million square feet. There are indications that expansion
of retail space may continue. According to F.W. Dodge, as
of December 1997, retail projects totaling nearly 30 million square feet
were in the planning stages, with three new regional malls slated for development
over the next few years in the Atlanta metropolitan area.
The most active submarket
in the Atlanta metropolitan area is Gwinnett County, where over 1.83 million
square feet are under development as of year-end 1997, according to a
recent report by Jamison Research Inc. Most building activity,
however, is the result of 1.7 million square feet of space under construction
for the Mall of Georgia project. Many local analysts foresee that construction
activity in the area of the mall will climb as big-box retailers are attracted
to the mall site, although construction could be constrained by limited
amounts of land.
Office Real Estate
in the Atlanta metropolitan area continues to grow, albeit at a rate well
below its cyclical peak in 1994. In 1997, employment in this category
rose by 4.1 percent compared with the national rate of increase of 3.3
percent. Office employment growth is a significant component of demand
for office space.
The office real estate
market space continues to expand. According to the Atlanta Business
Chronicle, over 5 million square feet of new space was injected
into the metropolitan area's markets during 1997. Nine million square
feet of office space is expected to come on-line within the next two years
as construction activity continues unabated.
In contrast to rising
deliveries of office space, absorption in the metropolitan area appears
to be moderating. Through the first half of 1997, annualized absorption
stood at just under 2 million square feet, the lowest level in more than
ten years. Slowing absorption in the face of strong building halted a
five-year retreat in Atlanta's office vacancy rate (see Chart
7). Tightness remains readily apparent in most suburban markets, however,
where vacancies stood at 7.6 percent at year-end 1997. This compares favorably
with downtown, where the vacancy rate in the fourth quarter of 1997 was
15.2, according to CB Commercial.
The most active submarkets
of the Atlanta metropolitan area remain centered along a line extending
from Buckhead through Alpharetta along GA Highway 400 (North Fulton County),
where nearly one-third of all new construction activity is taking place.
Such has been the pace of new construction that Class A vacancies had
risen to 23 percent in early 1998, according to LaSalle Partners.
One area that could see greater levels of office and retail development
in the coming years, however, may be a corridor located between the site
of the Mall of Georgia (northeast Gwinnett County at Interstate 85 and
GA Highway 20), which is scheduled for completion in August 1999, and
Gwinnett Place Mall.
in the economy and demand for office space have spurred speculative construction
throughout metropolitan Atlanta. Even in the downtown market, plans are
being made for the submarket's first speculative office high rise in several
REITs are playing
a large role in the recent round of office-space development in the Atlanta
metropolitan area. According to a recent Lehman Brothers
study, REIT ownership in the central business district is at 14.8 percent.
The ownership share is even higher in the suburbs, where eight REITs control
22.7 percent of office space. The degree to which the market is concentrated
may give REITs some ability to inflate rents and, consequently, property
permit issuance is below its cyclical peak in 1995, construction activity
remains at historically high levels. Year-to-date multifamily permit issuance
in 1997 was well in excess of 10,000 units (see Chart
8). Over the past three years, it is estimated that more than 20,000
new apartment units have been delivered to the market. Overbuilding may
emerge as a concern if economic and population growth continue to moderate
while building activity remains close to current levels (see Chart 9). Rent appreciation has stalled and occupancy rates
already have fallen by over 1 percentage point over the past year and
currently stand near 94 percent. Dale Henson Associates,
an apartment tracking firm, expects that occupancy levels may fall by
another 2 percentage points in 1998, as apartment openings surpass 1997
levels and population growth continues to slow. Lower interest rates also
may encourage renters into home buying during 1998.
The largest segments
of the Atlanta multifamily market remain its core counties. Together,
Cobb, DeKalb, Fulton, and Gwinnett Counties accounted for over 80 percent
of construction in the market during 1997 (see Table
5). With the exception of Fulton, permit issuance is up more than
10 percent in each of these counties. Permit issuance in Fulton County
is down 24 percent from 1996, but this may have been the result of a temporary
ban on permit issuance in Atlanta from April 1997 to June 1997 because
of growth restrictions associated with overburdened sewer lines. Growth
in Fulton County in 1998 may likewise be constrained by other types of
moratoria throughout the county.
growth in the Atlanta metropolitan area has eased over the past few years
and, in the fourth quarter of 1997, fell below the national average for
the first time during the 1990s. Nearly 450,000 workers in the Atlanta
area are classified as being employed in industrial sectors of the economy,
which include manufacturing, warehousing, mining, and utilities. Continued
expansion in industrial employment is one factor influencing demand for
new industrial space.
construction in the Atlanta metropolitan area has enjoyed successive gains
for the past several years (see Chart 10), making it one of the most active markets in the
country. According to Jamison Research Inc., an additional
17.2 million square feet was injected into the market in 1997, a substantial
increase over 1996 construction levels. Absorption likewise saw a rise
in 1997 to over 13.2 million square feet. The gap between supply and demand,
however, resulted in an increase in the metropolitan market's overall
vacancy for the second year in a row as development surpassed absorption
by 4 million square feet. CB Commercial estimates that the
industrial vacancy rate in the third quarter of 1997 was 11.0 percent,
compared with 9.9 percent one year earlier. From 1998 to 1995, in contrast,
vacancy rates in the metropolitan area generally trended downward, except
The Northeast Submarket
(Gwinnett County) dominates Atlanta's industrial market, with 6 million
square feet of new space coming on-line over the past year. Absorption
in this submarket has remained constant over this period at over 2.3 million
square feet. Continued growth in the metropolitan area's economy has spurred
speculative construction, and more developers have moved into the market
over the past year, according to an article in Commercial Real Estate
South. Jamison Research Inc. estimates that, as
of year-end 1997, over 8 million square feet of space was under construction
in the Atlanta metropolitan market, three-quarters of which is considered
speculative. Higher construction levels and greater numbers of developers
could intensify competitive pressures in the future. Although higher levels
of competition are expected, the industrial market currently remains relatively
concentrated, with six REITs controlling 9.1 percent of the market.
While vacancy rates
have risen somewhat over the past year and new supply has surpassed absorption,
many analysts do not anticipate a sharp slowdown in industrial space construction
during 1998, as much of the existing space is technologically obsolete.
All sectors of commercial
and residential real estate development in metropolitan Atlanta remain
very active. Projects currently under construction and those in the planning
stages that are expected to be completed over the next two years represent
a substantial increase in supply. These developments, if completed, could
further aggravate vacancy rates, which have edged slightly higher in a
few sectors and submarkets over the past year. A number of these new projects
are speculative, and their absorption is largely predicated on a continuation
of current economic conditions. Disequilibrium in the Atlanta real estate
markets, caused by overbuilding or a change in economic circumstances,
could pose a risk to insured institutions. Insured institutions' exposure
to the metro Atlanta real estate markets has grown substantially and is
at a level not seen since 1988, or two years before the last economic
recession. Managers of insured institutions, particularly those headquartered
in the metro area, with high construction and development loan concentrations
should closely monitor local economic and real estate market conditions,
given the inherent volatility of this lending.
ERE Yarmouth. 1998.
Emerging Trends in Real Estate: 1998, March.
Federal Deposit Insurance
Corporation. 1996-97. Loan Underwriting Survey, various.
1998. Will REITs, mortgage-backeds make a difference in downturn? American
Banker, 18 February.
1998. Bankers must hang on tight to ride realty roller coaster. American
Banker, 20 February.
1998. As REITs expand, so does banks' role as lender. American Banker,
Grant, James. 1996.
The Trouble With Prosperity. New York, NY: Times Books. Random
Hash, Steve, and
Martin, Michele. 1997. Lehman Brothers. Commercial REIT data book:
a guide to U.S. commercial real estate owned by equity REITs, December.
Kammert, Jim; Marinac,
Christopher; and Hannula, Jill. 1997. Real estate investment trusts (REITs):
staying the course with REITs. The Robinson-Humphrey Company, Inc.,
Equities Research Update Report, May.
Loan Pricing Corporation.
1997-98. LPC Gold Sheets, various issues.
The National Association
of Real Estate Investment Trusts, Inc. 1997. The REIT story. NAREIT
The National Association
of Real Estate Investment Trusts, Inc. 1998. REITs go mainstream in 1997.
NAREIT Online, 22 January.
1998. Booming office market shows signs of weakness. Atlanta Business
Chronicle, 11 May.
1998. Suburban office vacancies are on the rise, study shows. The Wall
Street Journal, 29 April.
Ratajczak, Dr. Donald.
1998. Georgia testing depths of unemployment and must slow by 1999. Georgia
State University Economic Forecasting Center'sForecast of Georgia
& Atlanta 1998, February.
Real Estate Alert,
Salter, Sallye. 1998.
Atlanta edged out of REIT's spot. The Atlanta Journal-Constitution,
Sherman, David M.;
Acheson, William L.; and Seeley, Stuart B. 1996. Smith Barney, Inc. Real
estate investment trusts: the ABCs of REITs, November.
Stacy, Neel. 1998.
Apartment market gives out conflicting signals. Atlanta Business Chronicle:
Commercial Real Estate Industry Focus, 3-9 April.
Vitner, Mark. 1997.
The southeast commercial construction outlook. First Union Regional
Economic Review, March.
The authors would
like to acknowledge the valuable contribution and insight given by many
individuals, both within and outside the FDIC, during preparation of this
About the Division
The Division of Insurance
(DOI) was created in 1995 to identify, analyze, and report on existing
and emerging risks to the banking industry and deposit insurance funds.
Arthur J. Murton is Director of DOI.
About Bank Trends
is a series of occasional papers published by the Division of Insurance.
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finance as they relate to exposures to the banking system and deposit
insurance funds. These analyses are available free of charge on the FDIC's
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can be obtained free of charge by writing to Bank Trends, Analysis
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is published quarterly by each of the FDIC's eight Regions and explores
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The views expressed
in this article are those of the author(s) and do not necessarily reflect
the official position of the Division of Insurance or the Federal Deposit