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Bank Trends

Ranking the Risk of Overbuilding in Commercial Real Estate Markets

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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.

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.

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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.

Last Updated 8/13/1999

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