Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION THIRD QUARTER 2000 

FDIC
 

Atlanta
 

Region
 

Division of
 

Insurance
 

Jack M.W. Phelps,
 

Regional Manager
 

Scott C. Hughes,
 

Regional Economist
 

Pamela R. Stallings,
 

Senior Financial
 

Analyst
 

Regional Perspectives 

◆ The expansion of the high-tech industry has represented a key component of the 

economic momentum in many Atlanta Region metropolitan areas. However, as economic growth becomes more dependent on high-tech development, setbacks in the industry could reverberate throughout the rest of the economy and potentially affect insured 

institutions’ asset quality. See page 3. 

◆ The rapid economic and demographic growth and the significant merger and 

acquisition activity that has occurred in Southwest Florida during the 1990s appear to 

have contributed to the trend in increased de novo activity. The rapid pace of new institution openings and the large number of mergers have changed the competitive landscape 

for deposits in Southwest Florida. See page 7. 

◆ Given the preponderance of real estate-related lending among new entrants, continued expansion and absorption in local real estate markets may be critical to the 

prospects for Southwest Florida’s non-recession-tested banks. See page 12. 

By the Atlanta Region Staff 

In Focus This Quarter 

◆ Ranking Metropolitan Areas at Risk for Commercial Real Estate Overbuilding— 

Commercial real estate construction has boomed in a number of U.S. metropolitan markets 

during recent years. Insured depository institutions have reasserted their role as primary 

sources of capital for this construction in the wake of the 1998 financial markets crisis. Recent 

data show that on-balance-sheet exposures of FDIC-insured institutions are by some measures 

higher now than at the peak of the last commercial real estate cycle during the late 1980s. This 

article reassesses major U.S. metropolitan real estate markets in search of possible signs 

of overbuilding that could drive up vacancy rates and drive down rents in the near term. This 

review points to an underlying trend of markets experiencing more vigorous construction 

activity across multiple property types. See page 13. 

By Thomas A. Murray, Senior Financial Analyst 

◆ Atlanta Region Markets Most Vulnerable to Overbuilding—On the basis of the preceding information, the following four markets are considered to be most at risk for broadbased overbuilding: Atlanta, Charlotte, Jacksonville, and Orlando. See page 20. 

By the Atlanta Region Staff 

◆ Rising Home Values and New Lending Programs Are Reshaping the Outlook for 

Residential Real Estate—Rising home prices and high levels of activity in the single-family 

housing market have been supported by excellent economic conditions and generally low 

interest rates. However, as interest rates have begun to rise, housing market activity has 

slowed. Historically, residential real estate has been one of the best-performing asset classes 

at insured institutions. Concerns have recently arisen, however, that new, higher-risk lending 

lines of business could adversely affect the future credit quality of residential real estate portfolios. See page 25. 

By Alan Deaton, Financial Economist 

A Publication of the Division of Insurance 
The Regional Outlook is published quarterly by the Division of Insurance of the Federal Deposit 

Insurance Corporation as an information source on banking and economic issues for insured 

financial institutions and financial institution regulators. It is produced for the following eight 

geographic regions: 

Atlanta Region (AL, FL, GA, NC, SC, VA, WV)
 

Boston Region (CT, MA, ME, NH, RI, VT)
 

Chicago Region (IL, IN, MI, OH, WI)
 

Dallas Region (CO, NM, OK, TX)
 

Kansas City Region (IA, KS, MN, MO, ND, NE, SD)
 

Memphis Region (AR, KY, LA, MS, TN)
 

New York Region (DC, DE, MD, NJ, NY, PA, PR, VI)
 

San Francisco Region (AK, AZ, CA, FJ, FM, GU, HI, ID, MT, NV, OR, UT, WA, WY)
 

Single copy subscriptions of the Regional Outlook can be obtained by sending the subscription 

form found on the back cover to the FDIC Public Information Center. Contact the Public Information Center for current pricing on bulk orders. 

The Regional Outlook is available on-line by visiting the FDIC’s website at www.fdic.gov. For 

more information or to provide comments or suggestions about the Atlanta Region’s Regional 

Outlook, please call Jack Phelps at (404) 817-2590 or send an e-mail to jphelps@fdic.gov. 

The views expressed in the Regional Outlook are those of the authors and do not necessarily reflect 

official positions of the Federal Deposit Insurance Corporation. Some of the information used in 

the preparation of this publication was obtained from publicly available sources that are considered 

reliable. However, the use of this information does not constitute an endorsement of its accuracy by 

the Federal Deposit Insurance Corporation. 

Chairman Donna Tanoue 

Director, Division of Insurance Arthur J. Murton 

Executive Editor George E. French 

Writer/Editor Kim E. Lowry 

Editors Lynn A. Nejezchleb 

Maureen E. Sweeney 

Richard A. Brown 

Ronald L. Spieker 

Publications Manager Teresa J. Franks 
Regional Perspectives
 

Regional Perspectives
 

•	 Despite its relatively small share of the Atlanta Region’s total employment, the high-tech sector is one of the 

fastest-growing employers. 

•	 As growth becomes more dependent on high-tech development in many Atlanta Region economies, setbacks 

in the high-tech industry could reverberate throughout the economy and potentially adversely affect insured 

institutions’ asset quality. 

•	 De novo activity in Southwest Florida can be attributed in part to the area’s rapid pace of economic and 

demographic growth and high level of mergers and acquisitions over the past several years. Given the preponderance of real estate-related lending among these institutions, continued expansion and absorption in 

local real estate markets may be critical to the prospects of Southwest Florida’s non-recession-tested banks. 

High Tech Boosts Region’s Economy, but Is Not Recession-Tested 

The expansion of the high-tech1 industry is a key component of the economic momentum in many Atlanta 

Region metropolitan areas. Historically, high-tech has 

fueled job growth and, for the most part, paid salaries 

well above other private sector wages. Higher wages 

boost the surrounding economy through increased consumer spending and heightened residential and commercial real estate development. Furthermore, high tech 

often draws supporting industries and suppliers to the 

area, further stimulating the surrounding economy and 

increasing the demand for other goods and services. 

Because of the potential benefits high tech has brought 

to many areas (jobs, higher wages, a more robust real 

estate sector), some view it as a panacea for any area it 

enters. However, the industry is evolving, and many of 

the e-commerce and dot-com firms that are now driving 

the market have not been recession-tested. 

Tight labor markets are making it difficult for many 

high-tech companies to attract qualified workers. Many 

sectors within the high-tech industry require complex, 

specialized skills that are in short supply. With unemployment rates falling to the lowest level since 1969, it 

has become increasingly difficult to locate and retain 

the expertise required to remain competitive. The fol1 For the purpose of this analysis, we use primarily a WEFA, Inc., definition based on multiple standard industrial codes (SICs), which 

includes drugs (SIC 283), computer and office equipment (SIC 357), 

communications equipment (SIC 366), electronic components and 

accessories (SIC 367), aircraft and parts (SIC 372), guided missiles, 

space vehicles, and parts (SIC 376), search and navigation equipment 

(SIC 381), measuring and controlling devices (SIC 382), medical 

instruments and supplies (SIC 384), telephone communications (SIC 

481), computer and data processing services (SIC 737), motion picture production and services (SIC 781), engineering and architectural services (SIC 871), and research and testing services (SIC 873). 

lowing analysis assesses the high-tech sector’s impact 

on Atlanta Region economies that have significant concentrations in this sector and identifies potential risks to 

local community banks. 

High Tech in the Atlanta Region 

Employment in the Atlanta Region is expanding in 

some high-tech sectors while contracting in others. 

While high tech accounts for just 4.5 percent of the 

Region’s total employment, the number of high-tech 

employees is growing rapidly. In 1999, the high-tech 

industry employed more than one million workers, an 

increase of more than 30 percent from 1990. For the 

most part, employment distribution in the Region’s 

high-tech industry mirrors that of the industry nationwide, with the highest concentration of workers 

employed in computer and data processing services 

(26 percent), telephone communications (19 percent), 

and engineering and architectural services (19 percent). 

Virginia 

The Atlanta Region’s fastest-growing high-tech area is 

in the Northern Virginia corridor (see Map 1, next 

page). According to Regional Financial Associates, the 

Northern Virginia metropolitan area’s high-tech success 

is due in part to its proximity to the Metropolitan Area 

Ethernet for the East Coast (MAE East), which is the 

point of exchange for major networks offering low-cost 

Internet access. Further, the metropolitan area has 

access to a significant amount of fiber-optic cable 

already installed by Bell Atlantic. As a result, “The area, 

dubbed netplex, has become a mecca for telecommunications and other high-tech companies,” which has 

Atlanta Regional Outlook 3	 Third Quarter 2000 
Regional Perspectives
 

resulted in thousands of new jobs, according to an analyst with Real Estate Alert.2 With the expansion of the 

high-tech industry has come a rebound in in-migration, 

which helped boost annual population growth to 2.5 

percent in 1999. (See Regional Outlook, second quarter 

2000, for a more in-depth look at the Northern Virginia 

high-tech industry.) In addition, the Richmond metropolitan area has experienced a surge in high-tech 

growth. However, several announced delays in Motorola’s plans to build a $3 billion semiconductor plant 

could constrain high-tech growth in Richmond, as suppliers to this plant may be drawn to the Northern Virginia area instead. 

Florida 

Florida’s economy has historically thrived on the tourism 

industry. However, high tech is becoming more important 

to the state’s economy. In 1999, the state was home to the 

largest number of high-tech employees in the Atlanta 

Region (see Table 1), but concentrations differ among the 

state’s metropolitan areas. For example, telephone communications is very strong in the Orlando and Tampa 

metropolitan areas but has weakened substantially in the 

Jacksonville and Miami metropolitan areas. Likewise, 

engineering and telephone communications have been 

strong industry performers, particularly in the southern 

and southwest metropolitan areas where Latin American 

trade is vital to the economy. Conversely, defense- and 

space-exploration-related industries such as guided missiles, space vehicles and parts, search and navigation 

equipment, and aircraft and parts have declined since the 

end of the Cold War. This downturn is particularly eviTABLE 1 

MAP 1 

Atlanta Region High-Tech Employment Remains 

Concentrated in Key Urban Areas 

Source: WEFA, Inc., 1999 

High-Tech Employment 

10 65,760 131,520 

dent in the Orlando and Melbourne-Titusville-Palm 

Bay metropolitan areas. Unlike the Huntsville metropolitan area (discussed below), where the space program is 

expanding, the Melbourne metropolitan area has experienced sizable cutbacks in this industry, as evidenced by a 

71 percent decline in workers since the early 1990s. 

Included in the layoffs are many high-paying jobs that 

have been replaced with lower-paid service jobs; however, the high-tech industry has experienced considerable 

Florida Leads the Atlanta Region in High-Tech Employment 

1990 1999 1990–1999 

STATE LEVEL 

SHARE 

(%) LEVEL 

SHARE 

(%) 

CHANGE IN 

EMPLOYMENT 

PERCENTAGE 

INCREASE 

ALABAMA 

FLORIDA 

GEORGIA 

NORTH CAROLINA 

SOUTH CAROLINA 

VIRGINIA 

WEST VIRGINIA 

68,577 

259,536 

147,130 

125,672 

53,847 

180,248 

14,933 

8.1 

30.5 

17.3 

14.8 

6.3 

21.2 

1.8 

74,271 

320,149 

205,900 

160,523 

55,649 

278,537 

21,417 

6.7 

28.7 

18.4 

14.4 

5.0 

24.9 

1.9 

5,694 

60,613 

58,770 

34,851 

1,802 

98,289 

6,584 

8.3 

23.4 

39.9 

27.7 

3.3 

54.5 

44.1 

TOTAL REGION 849,943 100.0 1,116,546 100.0 266,603 — 

Source: WEFA, Inc. 

2 Real Estate Alert, January 24, 2000, “Flurry of Offices Hits Market 

in Northern Va.,” p.1. 

Atlanta Regional Outlook 4 Third Quarter 2000 
Regional Perspectives
 

volatility in this metropolitan area. Orlando’s Lockheed 

Martin facility continues to lay off employees in its missiles and electronics unit as the parent company restructures. However, Orlando’s diverse economy is adding 

high-tech jobs, which may offset any industry layoffs. 

Georgia 

Georgia ranks third in the Region in high-tech growth 

in terms of the number of employees. The Atlanta metropolitan area accounts for over three-fourths of the 

state’s employment in this sector and dominates the 

state’s high-tech industry. For the most part, Georgia’s 

high-tech growth is concentrated in computer and data 

processing services, telephone communications, and 

engineering. High-tech workers in the state earn about 

83 percent more than the average private sector worker. These higher-wage jobs have contributed to 

increased in-migration, and therefore, higher residential and commercial real estate development and consumer spending. Employment in the computer and 

data processing services sector has more than doubled 

since 1990, while employment in telephone communications and engineering has risen by 35 percent and 20 

percent, respectively. Among Atlanta’s major high-tech 

employers are BellSouth, AT&T, and Lockheed Martin, all of which have announced sizable layoffs over 

the next two or more years. To date, displaced employees have easily transitioned into similar industries. 

However, layoffs or a slowing regional economy could 

cloud the outlook for high-tech growth in the Atlanta 

metropolitan statistical area. 

The flow of capital into high-tech ventures has had a very 

pronounced effect on real estate markets in metro 

Atlanta. According to the Atlanta Journal-Constitution, 

about 60 percent of leasing demand in 1999 came from 

high-tech and associated companies. As one principal of 

Corporate Real Estate Service Advisors (CRESA)3 Partners of Georgia observed, “high-tech is everything [to 

real estate right now]....without the high-tech and telco 

growth, it would have been a mediocre year.” Office and 

industrial space—that just two years ago required 60 to 

70 percent preleasing—is increasingly coming on line 

with no advance tenants, according to the Federal 

Reserve Bank of Atlanta.4 Likewise, high-tech workers 

on average earn higher wages; as a result, demand and 

prices paid for residential real estate have risen sharply in 

3 CRESA is a provider of national corporate real estate advisory and 

tenant representation services. 

4 Commercial Real Estate Market Profiles, “A Review of Markets 

Affecting Sixth District Financial Institutions,” for the quarter ending 

December 31, 1999. 

the midtown, downtown, and Buckhead areas where 

high-tech companies are concentrated. According to the 

Atlanta Journal Constitution, about one-fifth of public 

Internet companies could run out of cash within a year.5 

Given Atlanta’s strong high-tech presence, consolidation 

in the industry could pose a risk to absorption in the commercial and residential markets. 

North Carolina 

The Atlanta Region’s outlier, in terms of high-tech 

employment distribution, is North Carolina, specifically the Raleigh-Durham metropolitan area. Unlike 

the Charlotte metropolitan area, which has high-tech 

concentrations in the services sector (telephone communications, computer and data processing services, 

and engineering), Raleigh-Durham’s concentrations are 

in equipment manufacturing. Strengthening global 

economies are expected to keep demand high for computer and telecommunications equipment even if 

domestic demand wanes, according to Regional Financial Associates. Growing dependence on this industry 

may be problematic, however. For example, tight labor 

markets already are a growing concern among hightech companies. Continued growth may depend on the 

area’s ability to attract and retain a qualified workforce. 

For now, vacancy rates in Raleigh-Durham’s industrial 

real estate market, driven by the high-tech industry, are 

stable, according to Reis.com. While the absorption rate 

for office real estate was high in 1999, new supply outstripped demand, resulting in a rising vacancy rate. 

Reis.com estimated the metropolitan area’s office 

vacancy rate at 7.1 percent in January 2000, which was 

considerably higher than the previous year’s 6.4 percent 

vacancy rate. Continued disequilibrium in supply and 

demand may give rise to the risk of overbuilding. 

Alabama 

The impact of the high-tech sector on Alabama’s economy varies. High-tech employment—specifically engineering, telephone communications, computer and data 

processing services, and computer and office equipment—has been on the upswing in several areas of the 

state, particularly in the Birmingham and Huntsville 

metropolitan areas and along the southern coast (see 

Map 1). According to a 1999 study by the Milken Institute,6 Birmingham ranked second in concentration of 

5 “Cash on hand becomes rallying cry for dot-com firms,” Atlanta 

Journal and Constitution, May 31, 2000, refers to a study conducted 

by New York-based Pegasus Research International. 

6 Study referenced in Alabama Business, Spring 2000, “The New 

Economy: What is it and is Alabama ready?” Volume 69, Number 2, 

p. 10. 

Atlanta Regional Outlook 5 Third Quarter 2000 
Regional Perspectives
 

telephone communications services among all metropolitan areas in the nation. However, high-tech employment growth has been erratic throughout most 

component sectors. Perhaps the most heavily watched 

component in the state is guided missiles, space vehicles, parts, and space-related industries located in the 

Decatur and Huntsville metropolitan areas. The 

National Aeronautics and Space Administration Marshall Space Flight Center in Decatur is a vital contributor to the local economy. The recent opening of Boeing’s 

Delta IV rocket facility, located about 20 miles from 

Boeing’s other facility in Decatur, may dramatically 

increase the high-tech sector’s importance to the 

Huntsville metropolitan area. Boeing recently invested 

an estimated one-half billion dollars in the construction 

of its 1.5-million-square foot Decatur plant, which now 

employs about 500 workers and is expected to expand to 

2,000 workers over the next four years. While the economic impact of the space industry has been positive, 

significant concentration in a single industry may prove 

problematic in the long run. 

South Carolina and West Virginia 

Although limited high-tech growth in South Carolina 

and West Virginia may result in lower economic exposure in the event of a recession, the lack of skilled 

high-tech workers and industries may place these 

states at a competitive disadvantage, making it difficult for them to attract new industries. In South Carolina, for example, high-tech growth is limited to the 

Greenville-Spartanburg-Anderson and Columbia 

metropolitan areas. Perhaps the driving force behind 

the high-tech growth in Spartanburg was BMW’s decision to build its Z3 Roadster assembly plant in the 

metropolitan area. This decision drew attention to the 

area’s available labor supply and employer incentives 

for job creation. It is unlikely, however, that this plant 

will generate continued growth for the industry, particularly since high-tech growth has been slowing 

since 1996. In the Columbia metropolitan area, 

expanding high-tech industries account for 2.3 percent 

of total employment, compared with the state’s 1.5 

percent share. Regional Financial Associates estimates that approximately 7,000 workers in this area 

are employed in high-tech occupations, particularly in 

computer and data processing. 

Conversely, West Virginia’s economy continues to 

underperform the rest of the Region. A shrinking labor 

force, combined with the nation’s lowest ranking in venture capital funding, has restricted the state’s ability to 

attract high-tech companies. A shortage of qualified 

labor appears to be a key problem. Amazon.com is planning to open a customer service center in the Huntington metropolitan area, which will add about 370 new 

jobs to the area by midyear 2000. While the company is 

a high-tech firm, the jobs created will be lower-wage 

service jobs. Likewise, the Charleston metropolitan 

area has only a small pool of skilled workers to lure 

potential employers to the area. Failure to attract new 

companies may limit economic development opportunities going forward. 

Economic and Banking Implications for the 

Atlanta Region 

In the new economy, the perception that high-tech 

growth is the key to guaranteed, rapid, and sustained 

economic development may be emerging. The addition 

of more than one-quarter million new, high-paying, 

high-tech jobs to the Atlanta Region during the 1990s 

has undoubtedly helped fuel economic growth. The 

higher incomes have helped boost demand for local 

goods and services, including real estate development, 

generating a positive spillover effect in the rest of the 

economy. However, factors could coalesce that may 

make continued strong performance of the high-tech 

industry problematic. Any slowing or a downturn in the 

high-tech sector could negatively affect other sectors of 

the economy, as well as the local banking industry. 

Nationally, the effects of rising interest rates or bearish 

trends in the NASDAQ could reverberate, slowing local 

high-tech industry growth as companies experience 

problems obtaining financing. Already, stock market 

turmoil is postponing or canceling expansion by some 

Internet companies. Cushman & Wakefield reported 

that northern Virginia landlords are asking for two years 

of rent as security for some properties—a trend that is 

emerging in other similar markets throughout the country.7 An economic downturn could adversely affect the 

Region because many of its high-tech firms are not 

recession-tested. Locally, expansion of an area’s hightech industry could be curtailed because of a shortage of 

qualified workers. Also, changing technology, slowing 

growth in a component industry, or events such as an 

individual company falling out of favor could significantly affect a given area’s economy. 

7 The Wall Street Journal, May 31, 2000, “Landlords Feel Effects of 

Dot-Com Shakeout,” p. B12. 

Atlanta Regional Outlook 6 Third Quarter 2000 
Regional Perspectives
 

Underwriting high-tech tenants has become a balancing act between risk and reward for many lenders and 

property managers. According to a recent article in the 

National Real Estate Investor, “Dot.coms can be out 

of business in a year, or they can come back to double 

or triple their space in a year.”8 The unpredictability of 

many start-up companies, because of the absence of a 

credit history or rating from which to draw conclusions of credit quality, may pose additional challenges 

for landlords and lenders. Volatility in the domestic 

equity markets has caused some lenders to increase 

collateralization of leased space in the form of options, 

warrants, letters of credit, or security deposits well in 

excess of those required of non-high-tech tenants. 

As high tech has been an engine of growth in many local 

economies in the Atlanta Region, a slowdown or contraction in this sector could negatively affect the rest of the 

economy. Slower economic growth could result in declining real estate absorption or weakening credit quality if 

layoffs occur. Lenders should be aware that, as growth 

becomes more dependent on high-tech development, setbacks in the industry could reverberate throughout the 

rest of the economy and potentially affect asset quality. 

De Novo Banking: A Southwest Florida Micro-Analysis
 

Southwest Florida9 may be representative of a market 

that has fostered an amenable environment for de novo 

bank activity. In Atlanta Regional Outlook, first quarter 2000, de novo bank activity in the Atlanta Region 

was analyzed, and one of the key observations was that 

new bank charters tended to occur in areas of high economic and demographic growth. The following section 

examines the Southwest Florida market and trends in de 

novo bank activity in light of the market’s substantial 

recent economic growth. Subsequent issues will focus 

on other individual markets in the Region to determine 

whether generalized relationships found at the regional 

level also exist at the local level. 

An Economic and Demographic Analysis of 

Southwest Florida 

The Southwest Florida market experienced substantial 

growth during the 1990s, as tourism, in-migration, and 

an emergent high-tech industry helped fuel the local 

economy. WEFA, Inc., estimates that since 1992, 

employment growth in the market area has averaged 

more than 3 percent annually, ahead of the national 

average of 2.4 percent. One consequence of this rapid 

job growth, however, has been a significant tightening 

Freeman, Tyson, “What do we do with high-tech tenants?” 

http://www.nreionline.com. 9 For the purposes of this analysis, Southwest Florida is considered to 

encompass four metropolitan areas located south of Tampa: SarasotaBradenton (Manatee and Sarasota counties), Punta Gorda (Charlotte 

County), Fort Myers (Lee County), and Naples (Collier County). 

in the local labor market. In 1992, the area’s jobless rate 

stood at nearly 7 percent. By 1999, it had declined to 2.8 

percent and, by first quarter 2000, had fallen by almost 

another half percentage point. Growth has been such 

that, although distinctions remain, the four-metro area 

of Southwest Florida may be becoming an increasingly 

integrated economic region. 

Rapid population growth in Southwest Florida is 

attributed to two types of in-migration: retirees and 

workers in services and retail trade. Retirees form an 

important component of the local economy, with the 

65+ cohort accounting for 28 percent of Southwest 

Florida’s residents. In contrast, this older population 

group holds 18 and 13 percent shares at the state and 

national levels, respectively. The needs and consumption patterns of retirees are often different than those 

of other segments of an area’s population. Older residents, for example, often demand more health services 

than other cohorts. Southwest Florida, for example, is 

home to more than a dozen hospitals and skilled nursing care facilities. 

The needs of Southwest Florida’s retirees have boosted 

demand for workers in the services and trade sectors. 

This demand also has been augmented by tourism, 

another critical element in Southwest Florida’s economic equation. Rising incomes resulting from the prolonged national expansion have helped support rising 

demand in the local tourist industry. Growth in tourism 

and the retiree population has helped push population 

growth in Southwest Florida to more than twice the 

national average. 

Atlanta Regional Outlook 7 Third Quarter 2000 

8 
Regional Perspectives
 

Although small in comparison to the rest of the economy, 

high-tech10 industries are slowly starting to make their 

presence felt in Southwest Florida. Since 1992, job 

growth in these industries has outpaced total job growth. 

As of 1999, WEFA estimates that over 17,000 jobs in 

Southwest Florida may be classified as residing in hightech sectors. A 1999 survey by the Suncoast Technology 

Alliance puts the figure in the Sarasota-Bradenton metropolitan area at 8,350, distributed among 520 companies. Most of these positions are in software, research, 

engineering, communications, or electronic components 

manufacturing. Software development and research posted double-digit annual employment growth throughout 

the latter half of the 1990s. According to a recent Sarasota Herald-Tribune article,11 expectations for Southwest Florida’s high-tech industries are tempered by the 

lack of a large research university nearby. In any event, 

the high-tech sector, though small, has been a contributing factor to the area’s strong growth in recent years. 

Reflecting the rapid economic and population growth, 

building activity and the construction industry’s share of 

total employment in Southwest Florida have increased in 

recent years. The influx of residents pushed homebuilding to its highest level in a decade during 1999. Demand 

for local goods and services, resulting from high levels of 

population growth, has fueled demand for new office and 

retail commercial space. Growth in high-tech industries 

likewise has boosted the need for commercial space. 

From 1997 to 1999, commercial starts have remained at 

historically high levels. 

De Novo Bank Activity in the Southwest 

Florida Market 

The analysis presented in Atlanta Regional Outlook, first 

quarter 2000, suggested that economic and demographic 

growth and industry mergers and acquisitions (M&As) 

are correlated with the incidence of new bank charters. 

Southwest Florida’s population increased significantly 

during the 1990s as net in-migration rose. The area’s averM&A activity has been robust as 27 of the 41 insured 

institutions headquartered in the area in 1991 have been 

acquired. A majority, 22 institutions, have been acquired 

by out-of-state banking organizations. Therefore, the 

rapid economic and demographic growth and the significant M&A activity that have occurred in Southwest 

Florida during the 1990s appear to have contributed to 

the trend in increased de novo activity (see Chart 1). 

During the 1990s, 25 new institutions were chartered in 

Southwest Florida, including six in 1999. By year-to-date 

April 2000, two additional community banks were chartered while one application was pending. As of fourth 

quarter 1999, a total of 39 community institutions, each 

with assets less than $1 billion, were headquartered in 

Southwest Florida. Over 60 percent of these insured 

financial institutions, accounting for 33 percent or $1.7 

billion of the area’s total assets, have never experienced 

an economic downturn. Moreover, non-recession-tested 

banks represent a rapidly increasing share of community 

banks in Southwest Florida (see Chart 2). 

The rapid pace of new institution openings and the large 

number of merger transactions have changed the competitive landscape for deposits in Southwest Florida. As seen 

in Table 2 and Table 3, the number of banking organizations and offices rose 36 percent and 47 percent, respectively, from 1991 to 1999. The dramatic increase in the 

number of organizations and offices occurred despite 27 

institutions exiting the market during this period via 

mergers. The M&A activity has resulted in out-of-state 

acquirers holding more than 73 percent of deposits in 

Southwest Florida, compared with only 42 percent of 

deposits in 1991. The preponderance of out-of-state institutions may affect competitive aspects of the local market 

CHART 1 

De Novo Activity in Southwest Florida* 

Continues to Increase
 

7
 

6 

age annual population growth of 2.2 percent from 1990 to 

1999 was one-half percentage point above the average for 

Florida and more than twice the national growth rate. In 

absolute terms, this translated into approximately 300,000 

new residents in Southwest Florida during the 1990s. 

De Novo Count 5 

4 

3 

2 

1 

10 0 For a description of the component parts of “high-tech” and an ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 

analysis of the impact it can have on the local economy, please see the * Southwest Florida includes four metropolitan areas located south of Tampa: 

preceding article in this issue.	 Sarasota-Bradenton (Manatee and Sarasota Counties), Punta Gorda (Charlotte 

11 County), Fort Myers (Lee County), and Naples (Collier County). Hall, Jason. “A Budding Technopolis.” Sarasota Herald-Tribune, Source: FDIC Bank and Thrift Call Reports 

May 1, 2000, p. 12. 

Atlanta Regional Outlook 8	 Third Quarter 2000 
Regional Perspectives
 

CHART 2 

Non-Recession-Tested Community Institutions1 Represent a Growing 

Share of the Southwest Florida2 Market 

1

 Community institutions have assets less than $1 billion and are not affiliated with larger hold companies. Non-recession-tested institutions are community institutions formed 

after the 1990–91 recession. 

2

 Southwest Florida includes four metropolitan areas located south of Tampa: Sarasota-Bradenton (Manatee and Sarasota Counties), Punta Gorda (Charlotte County), Fort 

Myers (Lee County), and Naples (Collier County). 

Recession-Tested 

Non-Recession-Tested 

0 

10 

20 

30 

40 

50 

60 

Count 

’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 

through the types of services and products offered and 

differences in corporate cultures. 

Many of the new entrants to the local market are pursuing a similar general strategy. Given the large influx of 

out-of-state companies, many new entrants are emphasizing local roots—ownership and management—to gain 

market share. While this strategy of “out-local the national players” may prove successful for some new entrants, 

all may not be able to exploit it because of the saturation 

of new entrants. According to a recent report in the Sarasota Herald-Tribune,12 the increased competition attributed to the rising number of entrants may have forced 

changes in some financial institutions’ business plans. 

TABLE 2 

Banking Organizations1 with Deposits 

in Southwest Florida Increased 

during the 1990s 

LOCATION 1991 1999 

CHARLOTTE COUNTY 11 14 

COLLIER COUNTY 19 28 

LEE COUNTY 19 27 

MANATEE COUNTY 12 21 

SARASOTA COUNTY 19 31 

SOUTHWEST FLORIDA2 47 64 

1 Banking organization is the top owner (affiliates
 

were summed). Thrift data not available.
 

2 Banking organizations may be represented in more
 

than one county.
 

Source: FDIC Summary of Deposit Data 

12 Hielscher, John. “Going for Broke?” Sarasota Herald-Tribune, 

January 31, 2000, p. 12. 

The changes in the structure of the Southwest Florida 

banking industry, consolidation, and de novo entrants 

have increased the competition for deposits. As seen in 

Table 4, the Herfindahl-Hirschman Index13 (HHI), which 

measures the degree of deposit concentration, has 

declined, indicating that the market is becoming more 

competitive. At the submarket level, the HHI has 

declined as well, with some counties moving from highly to moderately concentrated. Also confirming the 

increase in deposit competition is the three-firm ratio,14 

which has fallen from 60 percent in 1991 to 55 percent 

in 1999. Although these measures indicate increased 

competition, all firms do not encounter the same level 

of competition, nor do they compete in similar fashion. 

TABLE 3 

Banking Offices in Southwest Florida 

Have Increased during the 1990s 

LOCATION 1991 1999 

CHARLOTTE COUNTY 33 47 

COLLIER COUNTY 59 98 

LEE COUNTY 107 146 

MANATEE COUNTY 55 92 

SARASOTA COUNTY 108 148 

SOUTHWEST FLORIDA 362 531 

Source: FDIC Summary of Deposit Data 

13 The Herfindahl-Hirschman Index is a mathematical formula that 

determines if a banking market is highly concentrated (over 1,800 

points), moderately concentrated (1,000 to 1,800 points), or unconcentrated (below 1,000 points). 

14 The three-firm ratio is the sum of hte market share held by the three 

largest firms. 

Atlanta Regional Outlook 9 Third Quarter 2000 
Regional Perspectives
 

TABLE 4 

The Competition1 for Deposits in 

Southwest Florida Has Changed 

during the 1990s 

LOCATION HHI2 1991 1999 

CHARLOTTE COUNTY 2,006 1,702 

COLLIER COUNTY 1,626 1,310 

LEE COUNTY 1,598 1,587 

MANATEE COUNTY 1,901 1,577 

SARASOTA COUNTY 1,700 1,324 

SOUTHWEST FLORIDA3 1,464 1,286 

1 Competition is limited to banking organization as 

thrift data are not available. Computations based on 

the top owner (affiliates were summed). 

2 the Herfindahl-Hirschman Index (HHI) is a measure of 

market concentration. 

3 Southwest Florida is calculated independently and 

is not an average of the five counties. 

Source: FDIC Summary of Deposit Data 

The high three-firm ratio and HHI indicate that the 

local deposit market structure remains dominated by a 

few firms but is becoming increasingly competitive 

because of the large number of new entrants. This stratification in the deposit market suggests that the top 

firms may not have to compete as aggressively within 

the market to hold a large share, while the smaller firms 

may have to compete intensely on price or nonprice 

(convenience or service) terms to acquire or retain market share. Because of the high costs of moving some 

banking relationships, the smaller or new entry firms 

may be forced to offer above-market rates or lower-cost 

or free services to gain market share.15 

In general, the new entrants to the market have pursued 

different lending strategies than established players. The 

differences may result because the established firms 

may have long-standing customer relationships, gained 

a reputation, developed a niche, or have a risk preference that results in domination of certain segments of 

the local lending market. Alternatively, differences in 

loan portfolio structure could result from new firms trying to reach the breakeven point more quickly by focusing on originating larger or higher-yielding loans. As 

seen in Table 5, a majority of the non-recession-tested 

institutions are engaged more heavily than established 

institutions in construction and development (C&D) 

lending. At new institutions, C&D loans represent 10.17 

percent of assets, versus 5.89 percent at established 

15 For further discussion see The Robinson-Humphrey Company, 

LLC, “Florida’s Community Banks,” July 7, 2000. 

institutions. Conversely, consumer loans are 10.56 percent of assets at established banks, compared with 3.80 

percent at new institutions. Anecdotal reports also suggest that new entrants are engaging in out-of-territory 

lending by purchasing loan participations or establishing loan production offices outside Southwest Florida 

in response to intense lending competition. 

Although there are no significant differences in nominal 

funding costs and asset yields between new and established institutions in Southwest Florida, the data raise 

some concern (see Table 5). New institutions have been 

able to grow deposits competitively with a funding cost 

of 4.60 percent, slightly better than the 4.66 percent cost 

at established institutions. However, the lower funding 

costs and higher capitalization and volume of noninterest-bearing deposits have not translated into a higher net interest margin at new institutions. Lower asset 

yields at new firms help explain the comparative net 

interest margin performance. A lower asset yield at new 

firms appears inconsistent with their seemingly higher 

risk appetite, as indicated by lending strategies that 

emphasize C&D lending. The lower nominal asset yield 

may suggest that new firms are not being adequately 

compensated on a risk-adjusted basis. 

On the positive side, the non-recession-tested banks 

currently outperform established banks in a few metrics. Table 5 also shows that the new entrants have a 

greater percentage of core funding and a much higher 

equity-to-assets ratio, 10.11 percent, compared with 

7.72 percent for established banks. However, the higher 

capital ratio will likely erode, as the average life of the 

new entrants is 2.2 years, and the statutory minimum 

capital maintenance requirement of 8 percent usually 

expires after the third year of operation. As a result, following the capital maintenance period, new institutions 

tend to increase their amount of financial leverage to 

the same degree as established institutions. 

The new entrants in Southwest Florida are reaching the 

quarterly breakeven profitability point in the same quarter of operation as all new entrants in Florida, the eighth 

quarter (see Chart 3). Nevertheless, the new entrants in 

Southwest Florida have posted slightly lower operating 

results than the statewide average in most quarters. 

Although the short period to reach breakeven profitability is encouraging, research16 indicates that start-up 

16 For further discussion see Robert DeYoung, Federal Reserve Bank 

of Chicago. “Birth, Growth, and Life or Death of Newly Chartered 

Banks.” Economic Perspectives, third quarter 1999. 

Atlanta Regional Outlook 10 Third Quarter 2000 
Regional Perspectives
 

TABLE 5 

Construction and Development Loan Exposures Are Higher among NonRecession-Tested Community Institutions Headquartered in Southwest Florida 

SOUTHWEST FLORIDA1 

NON-RECESSION­ RECESSION­ CONCEPT TESTED2 TESTED2 FLORIDA3 

COUNT 25 14 242 

AVERAGE AGE (YRS) 2.2 17.1 20.2 

ASSET YIELD 8.20% 8.23% 8.09% 

FUNDING COST 4.60% 4.66% 4.53% 

NET INTEREST MARGIN 4.24% 4.11% 4.30% 

LOANS/ASSETS 67.00% 75.07% 64.15% 

CONSTRUCTION & DEVELOPMENT LOANS/ASSETS 10.17% 5.89% 4.08% 

COMMERCIAL & INDUSTRIAL LOANS/ASSETS 7.37% 7.66% 9.18% 

CONSUMER LOANS/ASSETS 3.80% 10.56% 4.57% 

CORE DEPOSITS/ASSETS 72.21% 70.62% 66.98% 

NON-INTEREST-BEARING DEPOSITS/ASSETS 11.82% 11.51% 14.07% 

EQUITY/ASSETS 10.11% 7.72% 9.14% 

1 Includes all independent insured institutions headquartered in Southwest Florida (the metropolitan areas of
 

Sarasota-Bradenton, Fort Myers, Punta Gorda, and Naples).
 

2 Institutions formed after the 1990-91 economic downturn are considered non-recession-tested.
 

3 Includes all insured institutions headquartered in Florida with assets less than $1 billion. Excludes special-


purposes entities and multibank holding company subsidiaries.
 

Source: Bank and Thrift Call Reports, March 2000 data. 

institutions generally have earnings streams that are tributes to increased vulnerability to failure or poor 

lower and more variable than established banks. Typi­ examination rating during economic downturns (see 

cally, the earnings instability of new entrants con- Atlanta Regional Outlook, first quarter 2000). 

CHART 3 

Quarterly Return on Assets for De Novo Banks1 in Southwest Florida2
 

Lags Florida De Novos until the Ninth Quarter of Operation
 2.00
 

0.00
 

–2.00
 

–4.00
 

–6.00
 

–8.00
 

–10.00
 

–12.00
 

Number of Quarters of Operation 1 De novos include all new commercial bank openings from 1991 through 1999 and exclude any new openings for special-purpose entities or those resulting from mergers 

and acquisitions or intercompany reorganizations.

2 Southwest Florida includes four metropolitan areas located south of Tampa: Sarasota-Bradenton (Manatee and Sarasota Counties), Punta Gorda (Charlotte County), Fort 

Myers (Lee County), and Naples (Collier County). 

Source: FDIC Bank and Thrift Call Reports Return on Assets (%) 

Southwest Florida2

 de novos have a slightly lower quarterly return on 

assets than Florida de novos until their ninth quarter of operation, but 

both groups reach breakeven profitability in the same quarter. 

Southwest Florida2 De Novos 

Florida De Novos 

1 2 3 4 5 6 7 8 9 10 11 12 

Atlanta Regional Outlook 11 Third Quarter 2000 
Regional Perspectives
 

Risks and Implications for Non-RecessionTested Banks in Southwest Florida 

Given the preponderance of real estate-related lending, 

continued expansion and absorption in local real estate 

markets may be critical to the prospects for Southwest 

Florida’s non-recession-tested banks. Despite recent 

performance, Southwest Florida’s economy and, consequently, real estate markets are not without risk. 

Several factors could coalesce to constrain absorption 

and growth in construction activity, possibly calling 

into question the viability of current real estate development projects or impairing borrowers’ ability to 

service debt. A weaker real estate market combined 

with greater competition in the local banking industry, 

as new entrants increase, could affect institution 

earnings. 

Given the real estate sector’s interest rate sensitivity 

and its significant role in the Southwest Florida economy, economic conditions may be affected by changes 

in interest rates. Since mid-1999, the Federal Reserve 

has boosted the Federal Funds target rate six times, 

including a 50-basis-point increase in May 2000, in an 

effort to constrain the national economy’s rapid 

growth. For financial institutions in Southwest Florida, whose business lines are dependent on real estate 

lending, the successive rate hikes could slow loan 

originations, reduce interest income, and raise credit 

costs. The recent increase in rates may be affecting 

local real estate market conditions, as commercial 

construction starts and residential permit issuance 

have slowed, albeit from historically high levels. Nonrecession-tested institutions’ business plans that 

assume continued rapid growth in real estate markets 

may need to be revised. 

Local and other environmental issues also could adversely affect Southwest Florida’s real estate markets. In one 

way, Southwest Florida may become a victim of its own 

economic success. Years of rapid growth have depleted the 

pool of qualified labor, despite continued high levels of 

in-migration and the presence of potential labor resources 

drawn from the area’s retired residents. Given the growing shortages of qualified labor, growth in the emergent 

local high-tech industry may become constrained. Inability to expand because of a lack of qualified labor may 

constrain absorption expectations in commercial real 

estate markets. Likewise, a slowdown in job creation 

might lessen demand for residential real estate. 

Environmental factors in Southwest Florida, such as 

growing congestion, shrinking water resources, and 

endangerment of wetlands, may curtail real estate development opportunities in the future. Years of prolonged 

development and in-migration have led to areas of congestion along the I-75 corridor. Moreover, as is often the 

case in areas of high growth, infrastructure development 

may not be keeping pace with the growing number of 

residents and businesses. Other issues such as depletion 

of water resources, especially when accompanied by the 

current drought, may restrict growth as well. Also, as 

development encroaches on adjacent wetlands, calls for 

limits on real estate development may emerge. 

Last, in addition to the risks facing the Southwest Florida real estate market, the local banking industry may 

face challenges simply by virtue of the pace of new 

institution chartering activity. Is the market deep 

enough to allow these new entrants to gain market share 

at reasonable costs? 

The Atlanta Region Staff 

Atlanta Regional Outlook 12 Third Quarter 2000 
In Focus This Quarter
 

Ranking Metropolitan Areas at Risk for 


Commercial Real Estate Overbuilding
 

•	 In analyses conducted in 1998 and 1999, nine metropolitan areas were identified as at risk for overbuilding; this analysis notes more vigorous 

building occurring across multiple property types 

and identifies 13 markets, including eight of the 

previous nine, as at risk for overbuilding. 

•	 Construction activity has accelerated during the 

current economic expansion with cyclically high 

levels of supply and demand. 

•	 Capital markets scaled back their investments in 

commercial real estate in 1998 and 1999, while 

FDIC-insured institutions increased their construction and development lending by more than 

20 percent each year. 

The banking industry and the FDIC learned during the 

late 1980s that once commercial real estate (CRE) markets become overbuilt, losses can mount quickly. During the 1980s and early 1990s, losses on CRE loans 

were responsible for hundreds of bank and thrift failures 

and billions of dollars in insurance losses for the FDIC. 

Since then, commercial vacancy rates have improved 

dramatically in a number of major U.S. metropolitan 

markets. In turn, CRE charge-offs reported by FDICinsured institutions have fallen to very low levels—less 

than 0.05 percent of average loans in both 1998 and 

1999. 

Two recent studies published by the FDIC evaluate the 

risk of overbuilding in major U.S. metropolitan areas.1 

These studies identified nine cities—Atlanta, Charlotte, Dallas, Las Vegas, Nashville, Orlando, 

Phoenix, Portland (Oregon), and Salt Lake City—as 

markets at risk for rising commercial vacancy rates. 

This article revisits the FDIC’s previous analysis of 

CRE markets. Using a more restrictive definition of 

at-risk markets, we find that eight of the previously 

identified nine markets remain on the list, joined by 

five additional markets: Denver, Fort Worth, Jacksonville, Sacramento, and Seattle.2 In general, more 

markets are experiencing increased levels of construc1 See “Ranking the Risk of Overbuilding in Commercial Real Estate 

Markets,” Bank Trends, October 1998, and “Commercial Development Still Hot in Many Major Markets, but Slower Growth May 

Be Ahead,” Regional Outlook, First Quarter 1999. 

tion activity across multiple CRE property sectors than 

was the case just two years ago. 

Like the two earlier studies, this analysis does not predict an imminent rise in vacancies and losses in the atrisk markets. Instead, as before, the goal is to raise 

awareness about substantial growth in real estate development and the corresponding increases in risk exposure to financial institutions. 

Previous Real Estate Cycles 

Are Well Documented 

Many analysts view the late 1980s U.S. experience as 

the very definition of adverse conditions in CRE markets. The factors that brought about these adverse conditions are well documented.3 During the early and 

mid-1980s, CRE construction boomed. Total office 

space completed in 54 major U.S. markets tracked by 

Torto Wheaton Research exceeded 100 million square 

feet per year every year from 1982 through 1987. 

Insured banks and thrifts were prime sources of credit 

for this building boom. Total outstanding construction 

and development (C&D) loans on the balance sheets of 

insured institutions grew by 52 percent, or $52.5 billion 

dollars, in 1985 alone, followed by three successive 

years of growth in outstanding C&D loans. A key factor 

behind this surge in lending was intense competition 

among lenders. In response to the heightened competition, many lenders loosened their underwriting standards, often extending credit on speculative projects on 

terms that did not protect them from downside risk. 

Examples of aggressive lending practices from this 

period included more collateral-based lending, higher 

loan-to-value limits, reliance on overly optimistic 

appraisals, and inattention to secondary repayment 

sources. 

2 The one metropolitan area identified in the prior analyses as at risk 

for overbuilding that did not fall into the same category using the 

stricter criteria in this analysis is Nashville. Nevertheless, Nashville 

still ranks high in terms of construction activity at fifth highest in the 

U.S. for retail and twelfth highest for office construction activity. 3 See, for example, Freund et al. 1997. History of the Eighties: 

Lessons for the Future, Chapters 9 and 10. FDIC. 

Atlanta Regional Outlook 13	 Third Quarter 2000 
In Focus This Quarter
 

Poorly underwritten credit and massive increases in 

construction resulted in overbuilding in a number of 

large U.S. metropolitan markets. Nationwide, the office 

vacancy rate for competitively leased space peaked at 

over 19 percent in 1991.4 In the Southwest and New 

England, where the cycle of overlending and overbuilding was most pronounced, metro real estate markets 

were in even worse shape. Office vacancies in Dallas 

peaked at over 27 percent in 1988, while office vacancies in Boston reached over 17 percent in 1990. As 

vacancies rose and rents fell, lenders in the Southwest, 

Northeast, and elsewhere increasingly found themselves in possession of nonperforming loans and 

impaired real estate assets. The result was a sharp 

increase in the number of failed banks in the Southwest 

and Northeast.5 

Following the CRE debacle of the late 1980s and early 

1990s, commercial construction and lending volumes 

slowed. C&D loan growth at FDIC-insured institutions 

declined every year from 1989 through 1994, while a 

similar drop in private construction expenditures lasted 

through 1993. 

Factors Contributing to Cycle 

of Overbuilding in CRE 

One reason that CRE markets are 

prone to periodic bouts of overbuilding is the business cycle itself, 

which saps demand for new space 

when business activity turns downward. But another 

important contributing factor is the lag time in the 

development process as new construction moves from 

inception to completion. Heavy demand at the start of a 

project may wane or vanish before completion occurs. 

In general, the time lag associated with CRE development is longest for hotel and office projects and 

becomes shorter for retail, multifamily, and industrial 

properties, respectively. The associated degrees of lending risk mostly follow the same pattern. In general, less 

risk is associated with industrial buildings and multifamily projects, which typically take less than one year 

to build. 

4 The U.S. vacancy rate is calculated as an aggregate of selected major 

markets tracked by Torto Wheaton Research. 

5 As further detailed in the History of the Eighties, combined assets of 

failed banks in the Northeast and Southwest comprised over 70 percent of assets of all banks failing between 1980 and 1994. 

To the extent that commercial construction projects 

involve a lag between inception and completion, net 

additions to supply can be anticipated in advance. Much 

progress has been made during this real estate cycle 

toward increased availability of information on CRE 

markets, particularly in regard to supply characteristics. 

Market transparency has been promoted in part by a 

heightened level of public ownership of CRE properties 

and the corresponding higher degree of disclosure by 

the owned entities, such as real estate investment trusts 

(REITs) and commercial mortgage-backed securities 

(CMBSs). 

Changes in demand are harder to predict. A current 

example may be the high level of demand generated by 

Internet start-up companies that rely heavily on financing provided by venture capital funds and initial public 

stock offerings. Because many of these start-ups depend 

so heavily on cash inflows from investors as opposed to 

operating revenues, their viability as tenants and their 

continued demand for high volumes of office space may 

depend more on capital market conditions than on their 

own business performance. While demand may appear 

strong under robust business conditions, it is prone to 

decline rather suddenly in the event of an economic 

downturn. Given these attributes of CRE markets, the 

process of gauging the success for lease-up of a proposed project involves not only looking at new supplies 

of competitive space coming onto the market, but also 

evaluating how vulnerable the market is to a downturn 

in demand for space. 

Recent Developments 

Following a lull in commercial construction activity that 

resulted from adverse market conditions in the early 

1990s, construction activity has gradually accelerated 

during the current economic expansion. The increased 

pace of construction occurred first in industrial and 

retail markets, where growth in net new completions of 

space picked up starting in 1993. The pace of multifamily construction accelerated in 1995, followed by 

increasing levels of office and hotel construction in 

1997. Regionally, commercial construction activity 

recovered first in the Southeast and Northwest, where 

the effects of the previous overbuilding had been the 

least pronounced. Only later did the pace of construction increase in California, the Southwest, and the 

Northeast. As the U.S. economic expansion endures into 

its tenth year, construction activity continues to pick 

up steam across most property types. In the 54 major 

Atlanta Regional Outlook 14 Third Quarter 2000 
In Focus This Quarter
 

metropolitan areas tracked by Torto Wheaton Research, 

total annual office space completions rose from just 

over 3 million square feet in 1994 to 78.7 million square 

feet in 1999. 

National private expenditures on hotel and retail construction for 1999 exceeded all prior years on both a 

current-dollar and an inflation-adjusted dollar basis. 

Similarly, national private construction expenditures 

on office space in 1999 were at an all-time high on a 

current-dollar basis. On an inflation-adjusted dollar 

basis, office construction expenditures in 1999 were 

still not as high as they were during the mid-1980s. 

A new characteristic of the CRE industry in the current 

expansion has been the marked increase in capital availability through the financial markets. Annual issuance 

of CMBSs has grown from negligible amounts in 1990 

to over $67 billion in 1999. Financing made available 

through REITs has been the other link to the capital 

markets. REIT market capitalization increased from 

approximately $10 billion in 1994 to nearly $145 billion 

in 1999. 

While the availability of market-based sources of capital has helped to facilitate growth in construction during 

this expansion, the financial market turmoil of late 1998 

cast a cloud over the CMBS market that has yet to lift 

fully. Significant events in the global capital markets in 

1997 and 1998, including the Asian economic crisis and 

the Russian government bond default, significantly curtailed the ability of major CMBS issuers to go to the 

market for financing. Significant liquidity problems 

resulted for a number of commercial mortgage firms. 

Nomura, Lehman Brothers, CS First Boston, and others 

incurred losses, while Criimi Mae, Inc., was forced to 

declare bankruptcy. 

As the capital markets pulled back from CRE investments, insured banks and thrifts stepped in to fill the 

void. Chart 1 shows that the total volume of C&D loans 

on the balance sheets of FDIC-insured institutions rose 

by more than 20 percent per year in both 1998 and 

1999, even as growth in U.S. private construction 

expenditures slowed to a crawl.6 

In terms of overall construction market activity, the 

current situation appears to be one of cyclically high 

6 U.S. private construction expenditures, as calculated by the Bureau 

of the Census, include multifamily (two or more units), industrial, 

office, hotel, and retail space. 

CHART 1 

’86 

Growth Rates (%) 

Growth Rates of Private Construction 

Expenditures and C&D Loans Diverge 

during the Past Two Years 

–30 

–20 

–10 

0 

10 

20 

30 

40 

50 

60 

C&D = construction and development loans 

Sources: Bureau of the Census (Haver Analytics), Bank and Thrift Call Reports 

(Research Information System) 

’85 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 

C&D Loans 

Priv. Const. 

levels of supply and demand. Because significant 

growth in net new space is forecast for many markets 

and property types during 2000 and 2001, a drop in 

demand for space could impair absorption rates and 

lead to higher vacancies and lower rents. Most analysts 

feel that future trends in real estate demand will be 

closely linked to national and regional economic conditions. 

Identification of Markets at Risk 

for Overbuilding 

Previous FDIC studies have identified CRE markets at 

risk for broad-based overbuilding on the basis of comparative rankings in the rates of growth in commercial 

space. In a 1998 study, U.S. metropolitan areas were 

ranked according to 1997 new construction activity as a 

percentage of existing stock for the five main property 

types: office, industrial, retail, multifamily, and hotel.7, 8 

In that study, any metro area that appeared in the top 15 

for any two of the commercial property types was 

labeled “at risk.” Nine cities were identified as being at 

risk for overbuilding: Atlanta, Charlotte, Dallas, Las 

Vegas, Nashville, Orlando, Phoenix, Portland 

(Oregon), and Salt Lake City. 

7 Federal Deposit Insurance Corporation. October 1998. Ranking the 

Risk of Overbuilding in Commercial Real Estate Markets, Bank 

Trends. 

8 Construction activity is measured in square feet and includes projects completed during the year, plus projects still under construction 

as of year-end. This figure is then divided by the total stock of space 

to obtain a construction activity percentage for use in comparative 

rankings. 

Atlanta Regional Outlook 15 Third Quarter 2000 
In Focus This Quarter
 

This study updates the previous results using year-end 

1999 data.9 In doing so, it applies more restrictive criteria to identify at-risk metropolitan real estate markets. 

As before, the metro areas are ranked according to new 

construction as a percentage of existing stock in each of 

the five main commercial property types. However, in 

this analysis, to be considered at risk, a metro area must 

rank in the top ten for any two of the property types. 

Despite the fact that it was harder for individual markets 

to qualify as being at risk, all but one of the previously 

identified nine markets remain on the at-risk list. Moreover, they are joined by five additional metropolitan 

areas: Denver, Fort Worth, Jacksonville, Sacramento, 

and Seattle. It is evident that more metropolitan areas 

are emerging with vigorous CRE construction and 

development across multiple property sectors. 

Most Active Construction Markets 

Charts 2 through 6 represent the property sectors of 

office, industrial, retail, multifamily, and hotel. They 

also list, for each property sector, the metropolitan 

areas having the highest levels of construction activity, 

relative to existing stock, for the year ending December 

31, 1999. The overall national construction activity rate 

is also shown for comparative purposes for each of the 

property sectors. Each metropolitan area is ranked 

from the highest to lowest for levels of construction 

activity. 

As shown in these charts, Las Vegas, Orlando, and 

Phoenix are standouts, with each placing among the top 

ten metropolitan areas in the country for construction 

activity in at least four of the five different property sectors. Las Vegas is among the top ten in construction 

activity for all five property sectors except for hotel 

construction, where it ranks twenty-sixth.10 Las Vegas 

ranks first in retail construction and second in industrial construction. Orlando is first in both office and multifamily construction. Phoenix is among the top ten for 

each of the five property sectors except hotel construction, where it ranks sixteenth. 

9 For the five property sectors reviewed in this report, data sources 

were Torto Wheaton Research for office and industrial and F.W. 

Dodge for retail, multifamily, and hotel. Torto Wheaton Research’s 

data for office and industrial encompass 54 and 53 metropolitan statistical areas (MSAs), respectively. F.W. Dodge’s data for retail, multifamily, and hotel encompass 58 MSAs. 

10 Las Vegas has the most hotel rooms in the country, with slightly 

fewer than 124,000 rooms as of year-end 1999. During 1999, Las 

Vegas experienced the greatest addition of rooms (in absolute numbers) of any market. With over 13,000 new rooms added during 1999, 

Las Vegas had nearly twice the level of the next highest metropolitan 

area, which was Orlando, with an additional 7,000 rooms. 

CHART 2 

CHART 3 

CHART 4 

Top 15 Office Development Markets—Construction 

Activity in 1999 as a Percentage of Stock 

(Square Footage) 

Orlando 

Phoenix 

Seattle 

Salt Lake City 

Charlotte 

Columbus 

Jacksonville 

Austin 

Las Vegas Completions Wilmington 

West Palm Beach Under 

Construction Nashville 

Oakland
 

Sacramento
 

Minneapolis
 

National 

0% 5% 10% 15% 20% 25% 

Source: Torto Wheaton Research 

Top 15 Industrial Development Markets— 

Construction Activity in 1999 as a Percentage 

of Stock (Square Footage) 

Riverside 

Las Vegas 

Ventura County 

Fort Lauderdale 

Phoenix 

Sacramento
 

San Diego
 

Fort Worth
 

Cincinnati Completions Atlanta
 

Austin
 Under 

Dallas Construction 

Fresno 

Jacksonville
 

Orlando
 

National
 

0% 2% 4% 6% 8% 10% 12% 14% 16% 

Source: Torto Wheaton Research 

Top 15 Retail Development Markets— 

Construction Activity in 1999 as a Percentage 

of Stock (Square Footage) 

Source: F.W. Dodge 

National 

Greensboro 

Jacksonville 

Denver 

Greenville 

Tampa 

Richmond 

West Palm Beach 

Sacramento 

Atlanta 

Fort Worth 

Nashville 

Phoenix 

Orlando 

Dallas 

Las Vegas 

0% 5% 10% 15% 20% 25% 30% 35% 40% 

Under 

Construction 

Completions 

Atlanta Regional Outlook 16 Third Quarter 2000 
In Focus This Quarter
 

Other markets deserve notice for their high or moderately high levels of construction activity in one or more 

property sectors. Columbus, Ohio, ranks sixth in the 

nation for its high level of office construction and 

twelfth for both multifamily and hotel construction. 

Greenville is tenth in the nation for hotel construction 

and twelfth for retail. West Palm Beach is ninth for 

retail and eleventh for office. Austin is eighth for 

office, eleventh for both multifamily and industrial, and 

thirteenth for hotel. 

C&D Loan Concentrations 

Concentrations of C&D loans at community banks in 

the at-risk markets are generally higher now than they 

were at the peak of the last cycle in the 1980s.11 As 

shown in Chart 7, the median ratio of C&D loans to 

total assets as of March 31, 2000, was higher than the 

median ratio as of December 31, 1988, in ten of the thirteen at-risk markets.12 The median C&D loan concentration is currently higher than the national average in 

all 13 at-risk markets.13 

At present, overall loan performance remains very good 

for the C&D portfolios of insured institutions. Reported 

delinquent and nonaccrual C&D loans remain at nominal levels as a percentage of total loans, although the 

ratio for both measures increased marginally during the 

first quarter of 2000. 

Construction Employment Concentrations 

The percentage of a metropolitan area’s workforce 

employed in construction is an indicator of the sensitivity of the local economy to construction. Six of the 

13 metropolitan areas at risk for overbuilding are 

found among the top 12 most concentrated construction 

employment markets (see Chart 8, next page).14 In addition, all of the 13 have construction concentration levels exceeding the national average. With slightly under 

10 percent of its nonfarm workforce employed in construction, Las Vegas has the highest construction11 Community banks are FDIC-insured institutions with assets less 

than $1 billion. 

12 For community banks that have C&D loans. 

13 Since 1992, the aggregate C&D-to-asset ratio for the nation’s community banks has been higher than the C&D-to-asset ratio for institutions larger than $1 billion. This is a reversal of the condition from 

1984 through 1991 when the aggregate C&D-to-asset ratio for institutions larger than $1 billion exceeded the C&D-to-asset ratio for 

community banks. 

14 Construction concentrations are the percentage of construction 

employees relative to the nonfarm workforce. 

CHART 5 

Top 15 Multifamily Development Markets—
 

Construction Activity in 1999 as
 

a Percentage of Stock (Units)
 

Orlando
 

Charlotte
 

Raleigh
 

Portland
 

Dallas
 

Las Vegas
 

Denver
 

Seattle
 

Atlanta
 Completions Phoenix
 

Austin
 Under
 

Columbus
 Construction
 

Tampa
 

Jacksonville
 

Nashville
 

National
 

0% 2% 4% 6% 8% 10% 12% 

Source: F.W. Dodge 

CHART 6 

Top 15 Hotel Development Markets— 

Construction Activity in 1999 as a Percentage 

of Stock (Square Footage) 

Fort Worth
 

Jacksonville
 

Portland
 

Orlando
 

Salt Lake City
 

Denver
 

Charlotte
 

Dallas
 

Seattle
 Completions Greenville
 

Oakland
 Under 

Columbus, OH Construction 

Austin 

Greensboro 

San Jose 

National 

0 5% 10% 15% 20% 25% 30% 

Source: F.W. Dodge 

CHART 7 

Most of the At-Risk Markets’ Community Banks 

Have Higher Median C&D Loan-to-Asset Ratios 

at 3/31/00 than at Peak of Last Cycle (12/31/88) 

Salt Lake City
 

Atlanta
 

Portland
 

Las Vegas
 

Sacramento
 

Phoenix
 

Seattle
 

Fort Worth
 

Dallas
 3/31/00 

Orlando 12/31/88
 

Charlotte
 

Denver
 

Jacksonville
 

National
 

0 2 4 6 8 10 12 14 16 18 

Median C&D Loan-to-Asset Ratios (%) 

C&D = construction and development 

Source: Bank and Thrift Call Reports (Research Information System) 

Atlanta Regional Outlook 17 Third Quarter 2000 
In Focus This Quarter
 

concentrated workforce of all metropolitan areas in the CHART 9 

United States and is slightly over twice the national 

rate of 4.8 percent. 

High Construction Activity and High 

Vacancy Levels 

Newly constructed, speculative space competes directly 

for tenants against already-built and vacant space. To 

assess at-risk markets fully, it is useful to compare the 

levels of construction activity for each metropolitan 

area’s property sector against its associated vacancy 

levels.15 

Charts 9 through 13 show, by property sector, each 

city’s level of construction activity plotted against the 

corresponding vacancy rate. It is axiomatic that a metropolitan area with high vacancies and high construction is cause for concern for builders and lenders alike. 

Many of the 13 At-Risk Markets Report 

High Office Construction Activity and High Office 

Vacancy Rates 

0 

5 

10 

15 

20 

25 

0% 5% 10% 15% 20% 25% Vacancy Rate 

Note: Capitalized cities are among the 13 markets identified as at risk for 

overbuilding. 

Source: Torto Wheaton Research Construction Activity as Percentage of Stock

SEATTLE 

ORLANDO 

CHARLOTTE 

PHOENIX 

Austin 

Wilmington 

SACRAMENTO 

West Palm Beach 

DALLAS 

LAS VEGAS 

SALT LAKE CITY 

JACKSONVILLE 

Riverside Oklahoma City 

Bakersfield 

Columbus 

Nation 

CHART 10 

It follows for metropolitan areas with high construction 

and high vacancy that newly arriving CRE projects will 

face significant competitive pressures in obtaining tenants. Consequentially, barring any preleasing or any 

fundamental upward shifts in demand, rental concessions may be needed to obtain tenants, and property 

values may be depressed. 

CHART 8 

Many of the 13 At-Risk Markets Are among the
 

Nation’s Metropolitan Statistical Areas Having the
 

Highest Construction Employment Levels as of
 

First Quarter 2000
 

LAS VEGAS 

Riverside 

Houston 

PHOENIX 

DENVER 

Greenville 

SALT LAKE CITY 

CHARLOTTE 

Birmingham 

Albuquerque 

Richmond Note: Capitalized cities 

SACRAMENTO are among the 13 

Norfolk markets identified as at 

Oakland risk for overbuilding. 

Raleigh 

National 

0% 2% 4% 6% 8% 10% 12% 

Construction Employees as a Percentage of the Nonfarm Workforce 

Source: Bureau of Labor Statistics (Haver Analytics) 

15 The data vendors do not provide category breakdowns for construction activity into speculative versus nonspeculative (preleased) 

properties. 

Many of the 13 At-Risk Markets Report High 

Industrial Construction Activity and High Industrial 

Vacancy Rates 

0 

2 

4 

6 

8 

10 

12 

14 

16 

Construction Activity as a Percentage of Stock 

0% 2% 4% 6% 8% 10% 12% Vacancy Rate 

Source: Torto Wheaton Research 

Austin Cincinnati 

JACKSONVILLE Fresno 

ORLANDO DALLAS Washington, 

D.C. 

Hartford 

Long Island 

Westchester 

ATLANTA 

FORT 

WORTH 

PHOENIX 

San Diego 

SACRAMENTO 

Ft. Lauderdale 

LAS VEGAS 

Riverside 

Ventura 

Note: Capitalized cities are among 

the 13 markets identified as at risk 

for overbuilding. 

Nation 

CHART 11 

Many of the 13 At-Risk Markets Report High 

Retail Construction Activity and High Retail 

Vacancy Rates 

0 

5 

10 

15 

20 

25 

30 

35 

40 

0% 2% 4% 6% 8% 10% 12% 14% 16% 

Source: F.W. Dodge 

Vacancy Rate 

Construction Activity as a Percentage of Stock

Note: Capitalized cities 

are among the 13 

markets identified as at 

risk for overbuilding. 

LAS VEGAS 

ORLANDO DALLAS 

PHOENIX 

ATLANTA SACRAMENTO 

Tampa DENVER 

JACKSONVILLE 

Greensboro 

FORT 

WORTH 

W. Palm Beach 

Greenville 

Nation 

Nashville 

Atlanta Regional Outlook 18 Third Quarter 2000 
In Focus This Quarter
 

What Market Analysts Are Saying 

Views of industry analysts provide additional perspective on the risks pertaining to each of the five property 

sectors and the individual metropolitan areas. 

Office 

Newly constructed nationwide office supply will outpace demand in 2000 and beyond, according to Torto 

Wheaton Research.16 Some 65 million square feet of 

space is scheduled for completion in 2000. However, net 

absorption is projected to be only 58 million square feet 

in 2000, resulting in an excess supply of 7 million square 

feet. Torto Wheaton Research predicts that office completions will outpace absorptions for all projected yearends through 2005, and corresponding vacancy rates will 

climb to slightly more than 14 percent at year-end 2005. 

Overall office fundamentals are in equilibrium, according to Donaldson Lufkin & Jenrette (DLJ), thanks to 

preleasing and sufficient demand.17 Still, DLJ identifies 

a number of markets as being at greater risk for excess 

new supply. DLJ’s markets to watch for possible overbuilding are Charlotte, Fort Lauderdale, Minneapolis, 

and Sacramento. More than 9 percent in new supply is 

projected for Sacramento over the next 18 months, with 

only a 3 percent increase in demand. DLJ identifies the 

Sacramento suburbs as the major center of construction 

activity and notes with concern the existing 13 percent 

suburban vacancy rate for this metropolitan area. 

Overall office construction levels will peak this year, 

according to the Urban Land Institute (ULI).18 Increases 

in suburban office vacancy rates to nearly 11 percent by 

the end of 2000 are projected, with downtown rates falling 

to slightly over 8 percent. ULI notes the possibility of a 

rash of space returns by Internet companies and others in 

the technology sector as a significant going-forward risk. 

Many analysts caution about the ability of new office 

construction to be absorbed in certain markets where 

labor supplies remain tight. In recent Wall Street Journal articles, Dallas and Seattle are reported to be actively recruiting high-tech engineers through immigrants 

from India and China to fill in the gaps in their tight 

labor-market pool for high-technology jobs.19, 20 

16 Torto Wheaton Research. Spring 2000. Office Outlook.
 17 Thierry Perrein, Donaldson, Lufkin & Jenrette. April 2000. DLJ
 

REIT Corporate Handbook, “Cautious Optimism.”
 

18 Urban Land Institute. ULI 2000 Real Estate Forecast.
 19 Templin, Neal. June 7, 2000. Economic Focus: Houston, Dallas
 

Are Draw for Immigrants. The Wall Street Journal.
 20 Barnes, Brooks. June 7, 2000. Economic Focus: Seattle Enjoys
 

Influx of Foreign Workers. The Wall Street Journal.
 

In a recent office market report by Moody’s Investors 

Service, three metropolitan areas (Jacksonville, 

Nashville, and Phoenix) are coded as “red”—indicating 

danger for high supply and declining demand factors.21 

Charlotte is coded as “yellow,” and its office demand is 

projected to grow by only 5 percent this year, while supply will increase by over 11 percent. 

Multifamily 

Recent mortgage rate increases will slow purchases of 

single-family homes, thereby increasing the demand for 

multifamily properties, according to a recent article by 

PaineWebber.22 Nevertheless, concerns are raised for 

oversupply conditions for multifamily construction in 

Atlanta, Dallas, Houston, and Las Vegas—cities characterized as “low barrier-to-entry markets.” 

Markets appearing weak to DLJ for the multifamily 

property sector include Charlotte, Denver, Jacksonville, 

Orlando, Portland, Raleigh, Salt Lake City, and Seattle.23 

Industrial 

Atlanta and Dallas are weaker for the industrial property 

sector, according to DLJ, because of significant new supply levels.24 A 7 percent supply growth is projected for 

Phoenix in 2000, with only a 4 percent increase in demand. 

Retail 

For retail properties, DLJ believes a number of markets 

have excess supply; the standouts are Austin, Las Vegas, 

Orlando, Phoenix, and Sacramento.25 

Hotel 

Analysts point to specific concerns for a “glut” of limited-service hotels in certain markets and note many hotel 

developers taking advantage of low barriers to entry for 

hotel construction. In response, many developers argue 

that “product differentiation” within different hotel sectors justifies further development. 

Growth in expenditures on hotel construction has been 

above 7 percent for each of the past several years, while 

room revenues grew at a more moderate pace, according 

to PaineWebber.26 The poor growth in room revenue is 

attributed to supply exceeding demand. 

21 Gordon, Sally. June 2, 2000. Moody’s Investors Service, Special
 

Report—CMBS: Red-Yellow-Green Update, Second Quarter
 

2000, Quarterly Assessment of U.S. Property Markets.
 

22 PaineWebber. June 6, 2000. Real Estate Investment Trust—
 

Initiating Coverage on the REIT Industry.
 

23 Ibid.
 

24 Ibid.
 

25 Ibid.
 

26 PaineWebber. June 1, 2000. Industry Outlook Lodging, U.S.
 

Hotel Construction Update—First Quarter 2000.
 

Atlanta Regional Outlook 19 Third Quarter 2000 
In Focus This Quarter
 

CHART 12 CHART 13 

Many of the 13 At-Risk Markets Report High 

Hotel Construction Activity and High Room 

Availability (Vacancy) Rates 

0 

5 

10 

15 

20 

25 

30 

15% 20% 25% 30% 35% 40% 45% 

Vacancy Rate 

Source: F.W. Dodge Construction Activity as a Percentage of Stock

Note: Capitalized cities 

are among the 13 

markets identified as at 

risk for overbuilding. 

FORT WORTH 

JACKSONVILLE 

ORLANDO 

PORTLAND 

DENVER 

SALT LAKE CITY 

Oakland SEATTLE CHARLOTTE 

Nation 

DALLAS 

Austin Columbus Greenville 

Greensboro 

Many of the 13 At-Risk Markets Report High 

Multifamily Construction Activity and High 

Multifamily Vacancy Rates 

0 

2 

4 

6 

8 

10 

12 

3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 

Source: F.W. Dodge Vacancy Rate Construction Activity as a Percentage of Stock

Note: Capitalized cities 

are among the 13 

markets identified as at 

risk for overbuilding. 

ORLANDO 

CHARLOTTE 

PORTLAND Raleigh DALLAS 

DENVER LAS VEGAS SEATTLE 

PHOENIX 

ATLANTA 

Nation 

JACKSONVILLE Columbus 

Tampa Austin 

Indianapolis Houston 

Birmingham 

As shown in the referenced charts, multiple cities are 

experiencing high volumes of construction activity concurrent with high vacancy rates. Seven of the 13 at-risk 

cities show up in the upper-right quadrants, exhibiting 

both high rates of construction and vacancy: Atlanta 

for industrial and multifamily; Dallas for office and 

retail; Fort Worth for retail and hotel; Jacksonville for 

office and hotel; Las Vegas for office and industrial; 

Orlando for office and multifamily; and Salt Lake 

City for office and hotel. 

Other metropolitan areas beyond these 13 are precariously situated at the furthermost positions on the charts 

for high vacancy and high construction levels: Austin 

and Houston for multifamily; Greensboro for hotel; 

Greenville for retail and hotel; and West Palm Beach 

for office and retail. 

Conclusion 

Since 1997, responding to a void left by the departure of 

other capital market lenders, community banks have 

stepped up their CRE lending activity. At the same time, 

more metropolitan areas are emerging with vigorous 

CRE construction and development across multiple 

property sectors. In the 1998 and 1999 FDIC analyses, 

nine metropolitan areas were identified as being at risk 

for overbuilding across multiple property types. In the 

present analysis, 13 metropolitan areas, including eight 

of the nine from the prior analyses, receive this designation. Given strong levels of CRE completions, these 

metropolitan areas are particularly sensitive to any 

decline in real estate demand that could result from a 

slowdown in the national or regional economy. 

On the basis of the preceding information, the following 

four markets are considered to be most at risk for broadbased overbuilding: Atlanta, Charlotte, Jacksonville, 

and Orlando. (See page 21.) 

Thomas A. Murray, Senior Financial Analyst 

Atlanta Regional Outlook 20 Third Quarter 2000 
In Focus This Quarter
 

Atlanta Region Markets Most Vulnerable to Overbuilding 

Atlanta 

Atlanta has enjoyed rapid economic growth for several 

years and is among the top economic metropolitan area 

performers in the nation. The essential driver of the 

growth is the service sector, accounting for half of the 

jobs created. Atlanta is rapidly becoming a hub for Internet companies. Economy.com, Inc.,27 estimates the 

Atlanta high-tech employment at 3.7 percent of the workforce. The Atlanta metropolitan area ranks in the top ten 

for most active construction retail sectors. 

The Atlanta metropolitan market added 8.8 million 

square feet (or 4.8 percent) to retail inventory during 

1999, according to F.W. Dodge.28 With two new 

regional malls coming on line, the increase was the 

largest since the 1980s. Although substantial space 

remains under construction, F.W. Dodge reports that 

starts in the first quarter of 2000 were down from one 

year earlier. 

Rapid population and income growth can help support 

demand for retail space development. Evidence for this 

can be seen in Atlanta, where population growth averaged 

3.0 percent annually during the 1990s. In 1999, the U.S. 

Bureau of the Census estimated that Atlanta’s population 

increased by 113,000—the largest increase in a metropolitan area in the nation. Similarly, since 1993, per capita income growth in Atlanta has exceeded the national 

average. Fueled by the metropolitan area’s continued 

strong growth, retail space absorption in 1999 reached a 

level last exceeded in 1991 (see chart). 

Although Atlanta’s retail market continues to expand, 

new space construction has outpaced absorption (see 

chart). Consequently, vacancy rates may increase slightly and effective rents, which increased by 3.4 percent in 

1999, may see lower gains this year. Unanticipated 

weakening in consumer demand, economic growth, or 

net in-migration could adversely affect absorption rates 

and result in higher vacancy rates. 

Many of the 88 community banks (those with assets less 

than $1 billion) headquartered in Atlanta are actively 

engaged in local CRE lending. According to first 

quarter 2000 bank and thrift call report data, C&D loans 

accounted for 13.5 percent of this peer group’s total 

assets, the highest among the Atlanta Region’s metropolitan areas. Nearly one-third of these institutions 

reported C&D exposures in excess of 20 percent of 

assets, and several have not been tested by a market or 

economic downturn. A retrenchment in Atlanta’s real 

estate market could compromise the viability of development projects and consequently affect these institutions’ asset quality. 

Atlanta Region Staff 

Square Feet (000’s) 

Atlanta Retail: Completions, Absorptions, and Vacancy Rates 

–2,000 

0 

2,000 

4,000 

6,000 

8,000 

10,000 

12,000 

14,000 

’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 

Year-Ends 

0 

2 

4 

6 

8 

10 

12 

14 

16 

Source: F. W. Dodge 

Actual Projected 

Vacancy 

Completions Absorptions 

Vacancy Rate (%) 

27 Economy.com, Inc. (formerly RFA, Dismal Science), July 2000. 

Precis: Metro 2000. 

28 F.W. Dodge. REAPS. Fourth Quarter 1999. 

Atlanta Regional Outlook 21 Third Quarter 2000 
In Focus This Quarter
 

Charlotte 

Banking is a critical component of Charlotte’s economy 

and its office real estate market. According to Economy.com, Inc.,29 the two large bank companies headquartered in the metropolitan area and associated 

service industries account for 50 percent of office space 

in the uptown market area. Since 1993, strong absorption due to growth at these two financial institutions 

helped support increased office space development. The 

Charlotte metropolitan area ranks in the top ten for most 

active construction in the office sector. In 1999, a nearrecord 2.3 million square feet of office space was completed in Charlotte (see chart). However, given the 

recent decreases in the financial sector’s job growth, 

absorption is expected to decline this year. Recently 

announced planned cost-cutting and workforce-cutting 

in the financial sector may exacerbate the threat of 

weaker absorption and could create the potential for 

office market oversupply. 

Community bank exposure in commercial real estate 

lending is limited, with C&D loans accounting for 5.5 

percent of total assets in first-quarter 2000, according to 

bank and thrift call reports. Of the 22 banks comprising 

this peer group, only two have C&D loan exposure in 

excess of 10 percent. Reported past-due C&D loans are 

low as well. Local bank asset quality may be affected 

more by the indirect economic effects of cost-cutting 

and job losses in the financial sector. 

Atlanta Region Staff 

Charlotte Office: Completions, Absorptions, and Vacancy Rates 

Vacancy 

Actual 

Absorptions 

Completions 

Projected 

’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 

Year-Ends 

’00 ’01 ’02 ’03 ’04 ’05 

25 

2,500 

3,000 

20 

2,000 

15 1,500
 

1,000
 10 

500 

5 

0
 

–500
 0 

Source: Torto Wheaton Research 

29 Economy.com, Inc. (formerly RFA, Dismal Science). July 2000. 

Precis: Metro 2000. Square Feet (000’s) 

Vacancy Rate (%) 

Atlanta Regional Outlook 22 Third Quarter 2000 
In Focus This Quarter
 

Jacksonville 

The Jacksonville metropolitan area ranks in the top 14 

most active construction markets for all five property 

sectors. It ranks second and seventh highest for hotel 

and office construction. At the same time, Jacksonville 

has moderately high vacancy levels for office (see 

chart), retail, and hotel spaces. Jacksonville’s office 

rental rates fell 3.2 percent between year-end 1998 and 

year-end 1999 at the same time as the suburban office 

vacancy rate jumped from 8 percent to 15.3 percent. 

One of the greatest concerns in the metropolitan area’s 

CRE market is too much new office supply coming online. Population growth has slowed, primarily because 

of the closing of a naval base and employee relocations. 

Analysts report the hospitality sector as having a static 

occupancy level as a result of a large number of new 

properties, and report that more are in the pipeline. 

Jacksonville’s 13 community banks have limited exposure to CRE development lending. In first quarter 

2000, construction and development loans accounted 

for 2.2 percent of this group’s total assets. 

Atlanta Region Staff 

Jacksonville Office: Completions, Absorptions, and Vacancy Rates 

–200 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1,600 

1,800 

Year-Ends 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20 

Vacancy Rate (%) 

Absorptions 

Completions 

Actual Projected

Vacancy 

Source: Torto Wheaton Research 

0 

Square Feet (000’s) 

’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 

Atlanta Regional Outlook 23 Third Quarter 2000 
In Focus This Quarter
 

Orlando 

High levels of in-migration and a rapidly expanding 

economy have helped foster a favorable environment for 

CRE development. Orlando has the most active construction market in the nation as a percentage of stock. 

It is first in both office and multifamily construction 

and third and fourth, respectively, for retail and hotel 

construction. Office construction has increased over the 

past three years, and 1999 saw a record 3.16 million 

square feet in completions delivered to market, according to Torto Wheaton Research30 (see chart). Many analysts expect 2000 to be a pivotal year in Orlando’s office 

market as completions could rise to nearly 3.5 million 

square feet. 

Orlando is more dependent than perhaps any other metropolitan area on continued high levels of economic 

growth to generate sufficient demand to absorb the 

large supply of new construction products. However, net 

absorption is expected to moderate this year, while 

completions continue to increase substantially. 

The majority of Orlando’s 26 community banks have 

limited exposure to local CRE lending. According to 

first quarter 2000 bank and thrift call report data, C&D 

loans accounted for 6.8 percent of this peer group’s total 

assets. 

Atlanta Region Staff 

Orlando Office: Completions, Absorptions, and Vacancy Rates 

Square Feet (000’s)

Vacancy Rate (%) 

–500 

0 

500 

1,000 

1,500 

2,000 

2,500 

3,000 

3,500 

Year-Ends 

0 

5 

10 

15 

20 

25 

30 

Absorptions 

Completions 

Actual Projected

Vacancy 

Source: Torto Wheaton Research 

’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 

30 Torto Wheaton Research. Spring 2000. Office Outlook. 

Atlanta Regional Outlook 24 Third Quarter 2000 
In Focus This Quarter
 

Rising Home Values and New Lending Programs Are 


Reshaping the Outlook for Residential Real Estate
 

•	 Home prices have risen rapidly in several major 

U.S. metropolitan areas. 

•	 The credit quality of residential real estate loan 

portfolios traditionally has been solid. 

•	 New lending programs such as subprime and high 

loan-to-value lending could change the historical 

loss experience associated with residential real 

estate. 

Introduction 

The median price of an existing single-family home has 

been rising rapidly in several U.S. metropolitan areas. 

After a prolonged period of stagnant or slowly rising 

resale prices in many of these markets throughout most 

of the 1990s, prices have rebounded strongly, reaching 

double-digit rates of growth in some areas. Not surprisingly, these markets have also experienced relatively 

robust job growth, particularly in high-tech sectors that 

have been the catalyst for growth in the New Economy.1 

However, as existing home prices in some markets have 

been rising rapidly, new building activity has recently 

begun to slow because of rising interest rates. After 

reaching a 19 percent year-over-year growth rate in the 

fourth quarter of 1998, single-family housing starts 

declined by 2.8 percent in the second quarter of 2000. 

Similarly, year-over-year growth in single-family housing permits declined by 8.4 percent in the second quarter of 2000. Higher home mortgage rates, along with the 

prospect for more moderate job growth, have dampened 

market activity. 

Single-family mortgages have traditionally been associated with low loss rates compared with other, higherrisk lending lines at insured institutions. However, the 

real estate market is still susceptible to boom and bust 

cycles, which could pose a risk to institutions with 

exposures to residential real estate. This risk would be 

heightened by the formation of asset price bubbles in 

local markets. Furthermore, as the competition among 

1 For a discussion on what is meant by the term “New Economy,” see 

“Banking Risk in the New Economy,” Regional Outlook, second 

quarter 2000; http://www.fdic.gov/bank/analytical/regional/ro20002q/ 

na/t2q2000.pdf. 

mortgage lenders becomes more intense, insured institutions are increasingly participating in new, higher-risk 

types of mortgage lending, such as high loan-to-value 

(LTV) lending and subprime lending. These new lending practices—still largely untested in a recession— 

raise some concerns about the future credit quality of 

residential loan portfolios. 

Home Prices in Some Local Markets 

Are Soaring 

Home prices have been soaring recently in a number of 

large U.S. metropolitan markets. Rapid price increases 

in some of these areas have come on the heels of a period of slow or stagnant growth (see Chart 1). Table 1 

(next page) identifies the top 20 metropolitan markets 

based on the median price of an existing single-family 

home. Many of the areas identified in the table are also 

places where home prices are increasing most rapidly. 

Healthy job growth, tight labor market conditions, and 

a tight supply of available homes have contributed to 

price increases in these areas. 

Some of the same metropolitan areas that are experiencing significant home price appreciation are also 

highly dependent on the high-tech sector. The shaded 

areas in Table 1 highlight the metro markets that not 

only have the highest median home prices in the nation 

but also have a concentration of high-tech employees in 

the workforce greater than 5 percent. Explosive growth 

CHART 1 

–10% 

–5% 

0% 

5% 

10% 

15% 

20% 

25% 

’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 

Some Large U.S. Metropolitan Areas Have 

Seen the Return of Soaring Home Prices 

Source: National Association of Realtors (Haver Analytics) 

Year-over-Year Growth of the Median Existing Single-Family 

Home Price 

San Francisco 

Boston 

Atlanta Regional Outlook 25	 Third Quarter 2000 
In Focus This Quarter
 

TABLE 1 

Of the 20 U.S. Cities with the Most Expensive Housing, 

More than Half Have a Concentration in High-Tech Employment 

THE SHADED AREAS INDICATE MARKETS WHERE HIGH-TECH EMPLOYEES CONSTITUTE AT LEAST 

5 PERCENT OF THE TOTAL PAYROLL EMPLOYMENT (SEE NOTE). 

METROPOLITAN STATISTICAL AREA 

RANKING BY MEDIAN HOME PRICE 

MEDIAN PRICE OF AN EXISTING 

SINGLE-FAMILY HOME 

MARCH 2000 

PERCENT CHANGE 

FROM ONE YEAR AGO 

1 SAN FRANCISCO, CA $418,600 25.0% 

2 ORANGE COUNTY, CA $300,800 10.3% 

3 HONOLULU, HI $289,000 –2.0% 

4 BOSTON, MA* $255,000 8.4% 

5 SAN DIEGO, CA $251,400 16.1% 

6 BERGEN-PASSAIC, NJ $250,200 9.8% 

7 NEWARK, NJ $229,500 18.8% 

8 SEATTLE, WA $226,100 8.3% 

9 NEW YORK, NY $221,500 14.3% 

10 NASSAU-SUFFOLK, NY $209,200 12.8% 

11 LOS ANGELES, CA $202,900 5.6% 

12 MIDDLESEX, NJ $198,500 8.6% 

13 MONMOUTH-OCEAN, NJ $186,200 19.4% 

14 DENVER, CO $181,500 12.9% 

15 WASHINGTON, DC-MD-VA $177,500 5.6% 

16 PORTLAND, OR $166,700 0.8% 

17 CHICAGO, IL $166,700 0.4% 

18 LAKE COUNTY, IL $162,600 –2.2% 

19 AURORA-ELGIN, IL $158,200 7.5% 

20 RALEIGH-DURHAM, NC $156,300 –4.2% 

NATION $133,533 2.7% 

* Ranking based on the latest data available (third quarter 1999). 

Note: High-tech, as defined by Dismal Sciences, Inc., includes industries such as pharmaceuticals, computers, 

electronic components, communications equipment, and communications services. 

Sources: National Association of Realtors (Haver Analytics); Dismal Sciences, Inc. 

in technology industries during this expansion has created new job opportunities in many metropolitan areas 

where high-tech companies and employment tend to be 

concentrated. The influx of highly skilled, and often 

highly compensated, high-tech workers into these areas 

has boosted the demand for both new and existing 

homes, pushing up home prices. For example, in San 

Francisco, where high-tech employees now comprise 

7.1 percent of the total workforce, home prices rose by 

22 percent in calendar year 1999 and are expected to 

rise another 14 percent in 2000.2 

2 July 21, 2000. Your Money Matters: Turning Down the Heat on 

Home Prices—Forecasters Find More Evidence That the Market Is 

Cooling; San Francisco Still Rocks. The Wall Street Journal. 

Soaring home prices in these metro areas have created 

the possibility of speculative price bubbles that could 

cause problems for mortgage lenders. If a decline in 

high-tech employment or company earnings were to 

cause a deterioration in home values in these markets, 

the credit quality of mortgage portfolios at insured institutions could be jeopardized. 

Favorable Economic Conditions Have Sustained 

Consumer Spending Patterns 

As the current U.S. expansion entered its 113th month 

in July 2000, consumer spending continued along a path 

of rapid growth. In the second quarter of 2000, personAtlanta Regional Outlook 26 Third Quarter 2000 
In Focus This Quarter
 

al consumption expenditures increased by 8 percent 

over the previous year. Nearly ideal conditions for consumers have contributed to high levels of spending. The 

unemployment rate remains near the record low of 3.9 

percent set in April 2000, and consumer confidence 

remains near the record high set in January 2000. Moreover, consumer buying power has been boosted by real 

wage gains, generally low interest rates, and stock market earnings. 

One of the only negative aspects for consumers has 

been the recent rise in interest rates, which has 

increased the cost of borrowing. From the end of 1998 

to June 2000, both the bank prime lending rate and the 

average mortgage contract rate for purchase of a previously occupied home rose by more than 100 basis 

points. However, the flexibility offered by adjustablerate mortgages (ARMs) has helped consumers shield 

themselves from the full effects of interest rate increases. As of the second quarter of 2000, the share of ARMs 

as a percentage of all loans closed had risen from 10 

percent in the fourth quarter of 1998 to 30 percent (see 

Chart 2). 

Nonetheless, as interest rates have risen, overall activity 

in the single-family housing market has slowed noticeably. After reaching an annualized rate of 1.4 million 

units in December 1999, monthly starts of single-family 

homes have declined by more than 15 percent to 1.2 

million units in June 2000. Similarly, the annualized 

rate of single-family permits issued in June 2000 was 

down 14 percent from January 2000 levels. The National Association of Realtors (NAR) reports that, despite 

current high levels of activity, deteriorating affordability conditions are expected to slow the resale housing 

market over the course of the year.3 In June 2000, NAR’s 

composite Housing Affordability Index fell to its lowest 

point since September 1996. To the extent that any 

decline in economic conditions would produce a less 

favorable environment for consumers, the housing market would likely slow even further. 

Overall Credit Quality of Residential 

Mortgages Has Been Solid 

Historical losses from residential real estate exposures 

at insured institutions are well documented. In the 

1980s, areas such as Texas, California, and New Eng3 National Association of Realtors Press Release. August 1, 2000. 

Housing Affordability Drops to Eight-Year Low, NAR Reports. 

CHART 2 

6.5% 

7.0% 

7.5% 

8.0% 

8.5% 

9.0% 

Jan-97 Sep-97 May-98 Jan-99 Sep-99 May-00 

5% 

10% 

15% 

20% 

25% 

30% 

35% 

More Consumers Have Chosen ARMs 

as Mortgage Rates Have Risen 

Sources: Federal Reserve Board; Federal Housing Finance Board (Haver 

Analytics) 

Contract Rate on Conventional 

30-Year Mortgage 

Commitments 

Adjustable-Rate Home 

Mortgage Loans as a 

Percentage of All Loans Closed 

land experienced strong economic growth, rapid residential development, and sharp home price appreciation 

that created asset price inflation. Coastal California 

markets, in particular, experienced double-digit growth 

rates that propelled the median home price in California 

to more than double the national average.4 

Regional recessions in many of these areas took a toll 

on residential real estate markets. Home values either 

stagnated or declined precipitously, and the foreclosure 

rate on residential real estate began to rise rapidly. Nevertheless, very few bank failures can be attributed solely to losses on residential mortgages. Loss rates on 

residential loans have traditionally been low compared 

with other loan categories. 

The credit quality of conventional single-family mortgage portfolios has generally been good throughout this 

economic expansion. The percentage of conventional 

loans past due during this expansion has averaged 2.8 

percent, compared with 3.5 percent during the last 

expansion from 1982 to 1990.5 Moreover, past-due conventional loans fell for the sixth consecutive quarter in 

the first quarter of 2000 to 2.3 percent (see Chart 3, next 

page). Foreclosures started, while slightly higher on 

average than the previous expansion, remain at a 

healthy level well below 1 percent of loans (see Chart 4, 

next page). 

4 Federal Deposit Insurance Corporation, Division of Research and 

Statistics. 1997. History of the Eighties: Lessons for the Future. Vol. 

1, An Examination of the Banking Crises of the 1980s and Early 

1990s. http://www.fdic.gov/bank/historical/history/contents.html. 5 “Past due” refers to loans that are 30 or more days past due. 

Atlanta Regional Outlook 27 Third Quarter 2000 
In Focus This Quarter
 

By contrast, Veterans Administration (VA) and Federal 

Housing Administration (FHA) loans have performed 

less well during this expansion. These loan types are 

both designed to aid less creditworthy borrowers in 

securing a home loan. VA and FHA loans, which 

include a portion of the higher-risk high-LTV and subprime loans, have historically experienced higher pastdue and foreclosure rates than other classes of mortgage 

loans (see Charts 3 and 4). 

The overall performance of 1–4 family residential mortgages at insured institutions has been solid. As of March 

2000, delinquent 1–4 family loans remained well under 

1 percent of total 1–4 family loans, and the percentage 

of charge-offs was nearly zero. Charge-offs may have 

reached the bottom of the credit cycle in 1998, however, after peaking at a record high in 1993 (see Chart 5). 

CHART 3 

Past-Due Rates on FHA and VA Loans Have
 

Historically Been Higher than
 

on Conventional Loans
 

Loans Past Due as a Percentage of All Loans 

10.0 Federal Housing Administration 

8.0 

6.0 

Veterans Administration Loans 

Loans 

4.0 

2.0
 

Conventional Loans
 

0.0
 

4Q82 3Q85 2Q88 1Q91 4Q93 3Q96 2Q99 

Source: Mortgage Bankers Association (Haver Analytics) 

CHART 4 

Foreclosure Rates on FHA and VA Loans
 

Remain Higher than on Conventional Loans
 

Foreclosures Started as a Percentage of All Loans 

0.8 

0.7 Federal Housing Administration 

Loans 

0.6 

0.5 

0.4 

0.3 

0.2 

0.1 

Veterans Administration Loans 

Conventional Loans 

0.0 

4Q82 3Q85 2Q88 1Q91 4Q93 3Q96 2Q99 

Source: Mortgage Bankers Association (Haver Analytics) 

A trend toward higher charge-off rates might be cause 

for concern at a time when conditions in the consumer 

sector seem to be excellent. Moreover, as with regional 

problems that surfaced in the late 1980s and early 

1990s, the aggregate data may still mask evolving submarket residential real estate problems associated with 

local economic and business conditions or new, higherrisk lending lines of business. 

Concerns have arisen recently about the future of residential loan credit quality and consumer credit quality 

in general. The Board of Governors of the Federal 

Reserve System warned that, although the consumer 

sector seems healthy by most measurable standards, 

“[consumer] delinquency rates may be held down, to 

some extent, by the surge in new loan originations in 

recent quarters because newly originated loans are less 

likely to be delinquent than seasoned ones.”6 Consumer 

credit outstanding grew by nearly 8 percent in the second quarter of 2000, the highest growth rate in the past 

three years. At the same time, 1–4 family loans at 

insured institutions expanded by 11 percent from March 

1999 to March 2000, the highest year-over-year growth 

rate since 1997. 

High growth rates are not the only concern regarding 

the future credit quality of residential loan portfolios. 

Rising interest rates have raised the cost of borrowing 

for consumers at a time when consumer credit has been 

expanding rapidly. Mortgage debt service payments as a 

percentage of disposable personal income rose to nearly 6 percent in the first quarter of 2000, continuing an 

CHART 5 

1–4 Family Loan Charge-Offs May Have 

Reached the Bottom of the Credit Cycle 

1–4 Family Loan Charge-Offs as a Percentage 

of All 1–4 Family Loans 

0.30 

0.25 

0.20 

0.15 

0.10 

0.05 

0.00 

’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 

Fourth Quarter 

Source: Bank and Thrift Call Report Data (Research Information System) 

6 Board of Governors of the Federal Reserve System. July 20, 2000. 

Monetary Policy Report to the Congress. p. 7. 

Atlanta Regional Outlook 28 Third Quarter 2000 
In Focus This Quarter
 

upward trend since mid-1994. This level was last 

reached in 1991, when the economy was emerging from 

an economic recession and some local residential markets were in turmoil. Further increases in interest rates 

would push mortgage debt service payments higher, 

which could impair the ability of mortgage holders to 

service both mortgage debt and other consumer debt. 

Moreover, other consumer loans would likely enter 

delinquency before mortgage loans, as consumers are 

more likely to pay their mortgages before other consumer debt. 

New Residential Lending Programs May 

Heighten the Risk Exposure of Insured 

Institutions 

Recent trends in high-LTV and subprime lending have 

heightened the risk exposure of insured institutions. 

Intense competitive pressure in the banking industry has 

narrowed the margins of traditional lending lines, 

inducing banks to seek more profitable lines of business. Both high-LTV and subprime lending offer wider 

margins, but at the price of increased risk to the lender. 

High-LTV loans represent greater risk to lending institutions when collateral values decline. If a home loan is 

underwritten on the basis of an inflated home value, 

there is a greater possibility of default if the value of the 

home declines. Furthermore, a decline in the value of 

the home could reduce the possibility of recovering the 

loan in the event of default and foreclosure. 

The share of high-LTV loan originations is growing.7 

The percentage of loans with an LTV ratio greater than 

90 percent has risen from around 5 percent to more than 

20 percent over the past ten years.8 Table 2 identifies the 

metropolitan areas where more than 30 percent of the 

conventional home loans underwritten in 1999 carried 

an LTV ratio greater than 90 percent. Given that the historical cycles of boom and bust in residential real estate 

have often been geographically isolated, both regional 

and national trends in high-LTV lending should be carefully monitored. 

7 See also Diane Ellis. “High Loan-to-Value Lending: A New Frontier in Home Equity Lending.” Regional Outlook, first quarter
 

1999; http://www.fdic.gov/bank/analytical/regional/ro19991q/na/
 

t1q1999.pdf.
 

8 Federal Housing Finance Board.
 

Subprime lending is a term commonly used to refer to 

loans that are extended to borrowers who are perceived 

as less creditworthy.9 As insured institutions have 

increased their involvement, the subprime lending 

market has presented banks with new growth opportunities and new risks. Subprime loans represent a small 

but growing share of total mortgage originations (see 

Chart 6, next page). To be sure, higher pricing on subprime loans promises wider margins and higher revenues for lenders, but the credit risk associated with 

less-than-prime borrowers requires ongoing oversight 

and management to prevent credit losses from eroding 

margins. Some financial institutions that have either 

grown subprime portfolios or acquired subprime affiliates are now scaling back their involvement in subprime 

TABLE 2 

Pockets of Risk May Be Forming 

Where the LTV Is Highest 

PERCENTAGE 

METROPOLITAN STATISTICAL OF LOANS 

AREA (MSA) OR CONSOLIDATED WITH LTV 

MSA RANKED BY PERCENTAGE OVER 90 OF LOANS WITH LTV GREATER PERCENT 

THAN 90 PERCENT 1999 

1 GREENVILLE-SPARTANBURGANDERSON, SC
 50% 

2 HONOLULU, HI 42% 

3 MEMPHIS, TN 38% 

4 CHARLOTTE-GASTONIAROCK HILL, NC-SC 37% 

5 BIRMINGHAM, AL 35% 

6 HOUSTON-GALVESTONBRAZORIA, TX 35% 

7 ATLANTA, GA 32% 

8 JACKSONVILLE, FL 32% 

9 NASHVILLE, TN 32% 

10 OKLAHOMA CITY, OK 32% 

11 TULSA, OK 32% 

12 GREENSBORO–WINSTONSALEM–HIGH POINT, NC 31% 

13 KANSAS CITY, MO-KS 30% 

14 LAS VEGAS, NV-AZ 30% 

LTV = loan-to-value 

Source: Federal Housing Finance Board 

9 See also Kathy R. Kalser and Debra L. Novak. “Subprime Lending: A Time for Caution.” Regional Outlook, third quarter 1997; 

http://www.fdic.gov/bank/analytical/regional/ro19973q/pdf/roa1997. 

pdf. 

Atlanta Regional Outlook 29 Third Quarter 2000 
In Focus This Quarter
 

lending activities to limit projected losses.10 In some 

cases, excessive losses related to the business of underwriting subprime loans have contributed to the failure 

of insured institutions. 

A recent report from Inside Mortgage Finance states 

that subprime portfolios are showing evidence of weakness.11 According to this report, the serious delinquency 

rate in the overall subprime market rose from 6.5 percent in 1998 to 6.9 percent in 1999.12 Furthermore, the 

percentage of A-rated borrowers in the subprime market 

fell from 59 percent to 53 percent during the same period. The implication is that both subprime and prime 

mortgages originated this year could likely underperform relative to prior years, adversely affecting credit 

quality at insured institutions. 

The potential for higher future losses related to subprime lending is of particular concern. The delinquency rate on subprime mortgages has traditionally been 

much higher than that of prime mortgages. As of 

December 1999, seriously delinquent prime mortgage 

loans comprised only 0.5 percent of total mortgage 

loans, compared with 3.2 percent of the best-rated subprime loans. Subprime mortgage loan seasoning analysis shows that 1999 vintage subprime loans have so far 

outperformed both 1997 and 1998 vintage loans (see 

Chart 7). However, there is a concern that adverse 

CHART 6 

Subprime Mortgage Loans Are Growing as a
 

Percentage of Total Mortgage Originations
 

Subprime Mortgage Subprime Mortgage Loans as a
 

Loan Originations, Percentage of Total Originations
 

200 

in Billions of Dollars 

20% 

150 15% 

100 10% 

50 5% 

0 0% 

’94 ’95 ’96 ’97 ’98 ’99 1Q00 

Sources: The Mortgage Market Statistical Annual for 1999; Inside B&C Lending 

10 Subprime Mortgage Market Faces More Challenges in Second Half 

of Turbulent 2000. Inside Mortgage Finance. July 7, 2000. 11 Mortgage Delinquency Rates Decline in Early 2000 But Industry 

Braces for Shift in the Wind. Inside Mortgage Finance. July 14, 2000. 12 Seriously delinquent loans are defined as loans at least 90 days 

delinquent or in foreclosure. 

changes in economic conditions and the health of the 

consumer sector could cause the foreclosure rate on 

subprime mortgage loans to increase more steeply than 

in prior years. 

Conclusion 

Rising home prices in some U.S. metropolitan areas 

may be a warning sign that asset price bubbles may be 

forming in some areas. A number of these areas also 

contain concentrations of employment in the high-tech 

sector, placing them at higher risk in the event of a 

downturn in that sector. Mortgage lenders in these areas 

should carefully monitor developments that could 

adversely affect home prices and collateral values. 

Nationally, single-family housing market activity 

appears to be slowing after a period of rapid growth 

supported by a long economic expansion and generally 

favorable interest rates. 

Historically, mortgage loans at insured institutions 

have been one of the best-performing asset classes. As 

1–4 family loan charge-offs have approached zero, it 

appears as if the credit cycle may have bottomed out, 

implying that loss rates may be rising. Moreover, as 

insured institutions increase involvement with subprime and high-LTV lending, the potential for higher 

future losses on residential real estate also increases. It 

will be important to keep an eye on developments in 

the economy and the consumer sector that could affect 

the future credit quality of residential real estate at 

insured institutions. 

Alan Deaton, Financial Economist 

CHART 7 

1999 Vintage Subprime Residential Loans Have 

Outperformed Earlier Vintages 

Foreclosure Rate on the Dollar Volume of B&C Grade 

Subprime Single-Family Residence 

7.0% 

6.0% 

5.0% 

4.0% 

3.0% 

2.0% 

1.0% 

0.0% 

1997 Vintage 

1998 Vintage 

1999 Vintage 

6 9 12 15 18 21 24 27 30 33 36 39 

Months of Seasoning 

Source: Mortgage Information Corporation 

Atlanta Regional Outlook 30 Third Quarter 2000 
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