The degree of risk borne by commercial real estate lenders is dependent
on local market conditions, which are in turn dependent on local supply
and demand factors. Following from the experience of the 1980s, when
overdevelopment led to declining property values in various markets across
the country, the threat of oversupply is watched with keen interest by
lenders and regulators alike. This paper highlights various metropolitan
markets that may be vulnerable to overbuilding based on the rapid pace of
development occurring within those markets. This analysis is further
supported by the opinions and research of credible industry experts. The
ranking schemes presented are intended to serve as a basis for
prioritizing more in-depth analysis of depository institution risk
exposures to individual markets and to specific market segments. While
this study does not predict an imminent downturn in those markets
highlighted, it does raise the degree of concern over rapid development
and a related increase in bank construction lending within these markets.
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.
Other FDIC Division of
Insurance Publications: Regional
Outlook - an analysis of current national and regional trends
that may affect the risk exposure of insured depository institutions.
Bank Trends - a
series of occasional papers providing a focused, in-depth analysis of
issues and trends in banking, economics, and finance that affect the
risk profile of insured institutions.