Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION THIRD QUARTER 2000 

FDIC
 

Dallas
 

Region
 

Division of
 

Insurance
 

Alan C. Bush,
 

Regional Manager
 

Adrian R. Sanchez,
 

Regional Economist
 

Jeffrey A. Ayres,
 

Senior Financial
 

Analyst
 

Stephen L. Kiser,
 

Economic Analyst
 

Regional Perspectives 

◆ Rapid Growth of the High-Tech Sector during the 1990s Contributed Significantly to 

Strong Employment and Economic Growth in the Region’s Leading High-Tech MSAs— 

Five Dallas Region metropolitan statistical areas (MSAs) are among the top 25 hightech centers in the nation, outperforming the United States in almost every economic 

category during the 1990s. However, recent high-tech stock price volatility suggests that 

this sector, like other sectors of the economy, is vulnerable to economic fluctuations. The 

nature and health of individual high-tech industries within a metropolitan area play a 

significant role in the relative vulnerability of a particular MSA to a national or hightech recession. See page 3. 

◆ Small Banks and Thrifts in High-Tech Metropolitan Areas Have Reported Rapid Loan 

and Deposit Growth; However, These Institutions Also Have Experienced Increased Competition from Large Banks—This increased competition may contribute to lower returns 

on assets and declining levels of profitability. Overall, these trends may heighten the vulnerability of small insured institutions in these high-tech MSAs to a slowdown in the 

high-tech sector or in the national economy. See page 11. 

◆ Profitability of the Region’s Banks during First Quarter 2000 Lagged That of U.S. Banks; 

Securities Losses at One Large Bank Holding Company Contributed to the Decline in 

Earnings. See page 13. 

By the Dallas 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 amid falling vacancy rates and growing demand for new space. 

Insured depository institutions have reasserted their role as primary sources of capital for 

this construction boom, particularly in the wake of the 1998 financial markets crisis that 

left some important market-based lenders on the sidelines. Recent data for some metropolitan areas 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 15. 

By Thomas A. Murray, Senior Financial Analyst 

◆ Dallas Region Markets Most Vulnerable to Overbuilding—On the basis of the preceding information, the following three markets are considered to be most at risk for 

broad-based overbuilding: Dallas, Denver, and Fort Worth. See page 22. 

By Dallas 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 26. 

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 Dallas Region’s Regional 

Outlook, please call Alan Bush at (972) 761-2072 or send an e-mail to abush@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
 

• Rapid growth of the high-tech sector during the 1990s contributed greatly to strong employment and economic growth in the Region’s leading high-tech centers. 

•	 Small banks and thrifts located in high-tech metropolitan areas have reported rapid growth in loans and 

deposits as well as increased competition from large banks. 

•	 The Region’s profitability for first quarter 2000 lagged the U.S. average; securities losses at one large bank 

holding company in the Region contributed to the decline in earnings. 

Growing Reliance on the High-Tech Sector Could Pose Risks to Banks in MSAs
 

with Large Concentrations of High-Tech Industries
 

Overview: The rapid expansion of high-tech industries1 

during the 1990s was a major driver of economic 

growth in the Dallas Region.2 In recent months, however, the volatility of technology stock prices, typified by 

wide swings in the NASDAQ, suggests that the high-tech 

sector, like other sectors of the economy, is susceptible 

to business fluctuations. More important for purposes of 

this article is how a downturn in the high-tech sector 

could affect local economies and insured financial institutions in areas with large concentrations of high-tech 

industries. 

Since the 1990–91 recession, output growth in the hightech sector has grown at four times the real U.S. gross 

domestic product (GDP) growth.3 Chart 1 (next page) 

compares real output growth of the U.S. economy with 

that of the information technology (IT) subsector, an 

important component of the high-tech sector.4 In the 

past ten years, IT’s share of total U.S. output tripled as a 

result of double-digit growth in this sector. Many econ1 The definition of a high-tech industry varies considerably depending 

upon the source. This article uses the Milken Institute definition 

(“America’s High-Tech Economy,” July 1999, p. 34), Santa Monica, 

California. This definition includes the following 14 SIC categories: 

computers & office equipment; aircraft & parts; guided missile, space 

vehicles & parts; engineering & architectural services; search & navigation equipment; electronic components & accessories; measuring 

& controlling devices; communications equipment; telecommunication services; motion pictures; computer & data processing services; 

drugs; medical equipment, instruments & supplies; and research & 

testing services. 

2 The Federal Reserve Bank of Dallas; January/February 2000, “The 

Unsinkable Texas Economy.” The Southwest Economy. State of Colorado. December 1999. “Focus Colorado: Economic & Revenue 

Forecast, 1999–2005.” Colorado Legislative Council Staff Report. 

3 “America’s High-Tech Economy,” p. 2. 

4 Defined here as information processing equipment and software. 

omists attribute the U.S. economy’s recent strong 

growth, increased productivity, and low inflation to diffusion of technology throughout the economy.5 A study 

conducted by the U.S. Conference of Mayors and The 

National Association of Counties earlier this year supports this argument. The following quote from this 

study addresses the link between growth in the hightech sector and gains in productivity: 

Although it is still too early to identify all of the factors responsible for rising productivity, it is likely 

that investments in high-tech capital goods, especially information technology such as computers and 

telecommunications equipment, are boosting the rate 

at which workers are able to increase their production of goods and services. Investment in high-tech 

equipment, especially technologies used to increase 

the exchange of information (e.g., the Internet, computers, and wireless telephones), are reducing the 

costs of economic transactions, and, as a result, are 

boosting productivity and GDP growth. Furthermore, because many information technologies 

reduce transaction costs, increasing high-tech 

investment may be restraining price inflation.6 

At the same time, however, technology stocks’ rollercoaster ride in April 2000 underscores a major concern: 

Could a high-tech recession result in a downturn in the 

economies of states with high concentrations of hightech industries? This question is more difficult to 

answer than it appears. High-tech industries tend to be 

5 Federal Reserve Bank of Dallas, “The New Paradigm,” 1999 Annual 

Report. 

6 May 2000. “U.S. Metro Economies: The Engines of America’s 

Growth.” Washington, D.C. U.S. Conference of Mayors and the 

National Association of Counties, pp. 4–5. 

Dallas Regional Outlook 3	 Third Quarter 2000 
Regional Perspectives
 

CHART 1 

-10 

-5 

0 

5 

10 

15 

20 

25 

30 

35 

40 

’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 

0 

1 

2 

3 

4 

5 

6 

7 

Technology Investments’ Share of GDP; Right Axis 

Real GDP (1996 $); Left Axis 

Information Technology Investment (1996 $); Left Axis 

GDP=gross domestic product 

Sources: U.S. Bureau of Economic Analysis (Haver Analytics); FDIC 

The Rapid Growth in Information Technology Investment Far Outpaces the Overall 

U.S. Economy, Tripling Its Share of U.S. Output in Just Ten Years 

Seasonally Adjusted Annual Rates

Percent of GDP 

March 

clustered in a few major metropolitan areas in the 

Region. As a result, business fluctuations in high tech 

are more likely to be felt locally than statewide. In addition, high tech covers a wide range of industries in the 

manufacturing and services sectors, so the degree of 

vulnerability to a downturn in the high-tech sector will 

vary depending on the types of industries located in a 

particular metropolitan statistical area (MSA). 

The degree of vulnerability that MSAs with large concentrations of high-tech industries possess can be traced 

to the cyclicality inherent in high-tech manufacturing 

and service industries and their close ties to capital 

markets as a funding source. A study by the Milken 

Institute entitled “America’s High-Tech Economy” concluded, on the basis of a simulation of a mild U.S. recession, that high-tech manufacturing industries are likely 

to experience a substantially more severe decline in output than the overall economy. The same simulation 

found that although high-tech service industries would 

continue to expand during an economic downturn, they 

would do so at a substantially slower pace. This situation could be attributed to the fact that much of high-tech 

production and services is tied to capital investment 

spending, which historically has been more sensitive to 

changes in the overall economy than the household sector. Such spending is typically the first item in capital 

budgets to be targeted for cost reductions when the 

economy enters a downturn. In addition, many hightech firms, particularly small start-ups, depend heavily 

on capital market funding for day-to-day operations and 

future expansion. The stock market, venture capital, and 

initial public offerings (IPOs) are critical sources of 

funding for many high-tech companies. A major correction in the stock market or increased volatility because 

of a contagion effect at home or abroad could dry up 

available capital to many of these firms, particularly 

Internet dot-coms and e-commerce companies. 

Another characteristic of the high-tech sector that will 

affect an MSA’s vulnerability is the fact that high tech is 

neither a true nor a monolithic industry, such as the oil 

and gas industry. Rather, it is a blend of many industries 

that share common characteristics (e.g., high levels of 

research and development spending, a high percentage 

of scientists and engineers); each industry experiences 

its own cycle. For example, after peaking in late 1997, 

the semiconductor industry plunged into a protracted 

downturn brought on by the “Asian financial crisis and 

severe overcapacity in many parts of the chip market 

constraining new capital investment.”7 At the same time, 

however, the market for communications equipment 

was booming, spurred by the explosion in Internet 

usage, wireless communications, and cable services. 

Thus, the single greatest threat to any particular MSA 

may not be its large concentration of high-tech industries, but rather the lack of diversification among those 

industries and the MSA’s other major non-high-tech 

industries. Consequently, an MSA could be affected 

adversely by a downturn in either those few industries 

or in the national economy. 

7 Standard & Poor’s Industry Surveys. February 3, 2000. “Semiconductor Equipment.” 

Dallas Regional Outlook 4 Third Quarter 2000 
Regional Perspectives
 

What Constitutes a High-Tech Center? 

The Dallas Region employed more than 600,000 hightech workers with a total payroll of $36 billion in 

1998, and exported over $32 billion of high-tech 

goods in 1999.8 Numbers such as these illustrate the 

significance of the high-tech sector for the Region’s 

economy and prompt a closer look at this sector. This 

article focuses on five MSAs that have been identified 

by the Milken Institute study as the leading high-tech 

centers in the Dallas Region: Dallas, Albuquerque, 

Denver, Austin, and Houston. The Milken Institute 

ranked these MSAs among the top 25 high-tech cenTABLE 1 

ters in the nation based on concentrations and relative 

growth rates of high-tech industries. Table 1 compares 

these MSAs by high-tech output and employment. 

Generally, the Region’s high-tech centers have location 

quotients (a measure of concentration relative to the 

nation)9 above 1, produce more than 1 percent of the 

nation’s high-tech output (while usually accounting for 

more than 10 percent of an MSA’s total output), and 

account for a significant portion of the area’s total 

employment. Table 2 shows that these five high-tech 

MSAs outperformed the United States according to 

almost every economic indictor going back five and 

ten years. 

The Dallas region Is Home to Five of the Top 25 High-Tech Centers in the Nation 

RANK MSA 

LOCATION 

QUOTIENT 

OUTPUT 

(BILLIONS, 

1992 $) 

PERCENT 

OF MSA 

TOTAL OUTPUT 

PERCENT OF 

U.S. INDUSTRY 

TOTAL 

HIGH-TECH 

EMPLOYMENT 

PERCENT OF 

MSA TOTAL 

EMPLOYMENT 

2 DALLAS 1.92 25.21 17.49 3.67 210,180 11.4 

7 ALBUQUERQUE 3.55 9.62 32.30 1.40 35,730 10.6 

19 DENVER 1.39 8.93 12.66 1.30 90,550 8.3 

21 AUSTIN 1.56 7.83 14.16 1.14 74,190 12.6 

23 HOUSTON 0.90 12.62 8.00 1.84 123,000 6.3 

MSA= metropolitan statistical area 

Sources: The Milken Institute; Regional Financial Associates 

TABLE 2 

High-Technology MSAs in the Dallas Region Outperform the U.S. 

in Almost Every Economic Measurement 

UNITED 

AUSTIN DALLAS HOUSTON DENVER ALBUQUERQUE STATES 

AVERAGE ANNUAL FIVE- TEN- FIVE- TEN- FIVE- TEN- FIVE- TEN- FIVE- TEN- FIVE- TEN­ GROWTH RATES YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR 

GROSS METRO PRODUCT1 11.4 9.3 7.4 5.6 5.5 4.5 7.7 5.1 6.3 9.1 3.8 3.0 

EMPLOYMENT2 5.5 5.4 4.5 3.3 3.5 2.9 3.8 3.3 2.3 2.9 2.4 1.8 

POPULATION3 3.5 3.3 2.5 2.2 1.9 2.1 2.0 2.1 1.0 1.5 0.9 1.0 

PERSONAL INCOME4 9.8 9.1 8.8 7.4 7.6 7.5 7.9 7.5 5.8 6.7 5.8 5.4 

SINGLE FAMILY PERMITS5 14.9 22.3 7.9 10.1 11.2 10.5 6.6 17.0 1.2 13.6 4.1 2.7 

HOME PRICES APPRECIATION6 4.4 5.5 4.1 2.8 3.9 3.4 7.3 6.8 2.8 3.8 4.6 3.6 

AVERAGE ANNUAL RATES 

UNEMPLOYMENT7 2.8 3.4 3.7 4.8 4.9 5.6 3.2 3.9 4.4 5.0 4.9 5.8 

BANKRUPTCY RATE8 3.6 3.6 3.8 3.6 2.6 2.5 4.7 4.8 4.2 3.7 4.5 4.0 

Sources: 1Economy.com Inc.—Average Growth Rate in Real Dollars and U.S. Figure GDP: Bureau of Economic Analysis; 

2Bureau of Labor Statistics (Haver Analytics); 3Census (Haver Analytics): 4Bureau of Economic Analysis (Haver Analytics)—Data Series 1990–1997; 5Census (Haver Analytics); 6Freddie Mac; 7Bureau of Labor Statistics (Haver Analytics); 

8Administrative Office of U.S. District Courts & Census 

9 A location quotient is the ratio of the share of an industry’s output to 

a particular region divided by the share of that industry’s total output 

to the nation. Thus, a hypothetical location quotient of 1.50 for indus­ 8 American Electronics Association. May 2000. “Cyberstates v4.0.” try A in region B means that region B has a 50 percent greater conSanta Clara, California. centration of industry A’s output than the nation. 

Dallas Regional Outlook 5 Third Quarter 2000 
Regional Perspectives
 

CHART 2 

110 

120 

130 

140 

150 

160 

170 

Austin Denver Dallas Albuquerque Houston U.S. 

Index 1Q91 = 100.0 

The Five Metropolitan Areas in the Dallas Region with Large High-Tech Concentrations 

Reported Faster Employment Growth than the United States in the 1990s 

Note: Period from first quarter 1991 to first quarter 2000. 

Sources: U.S. Bureau of Labor Statistics (Haver Analytics); FDIC 

163 

138 136 132 

127 

120 

Chart 2 compares employment growth for these five 

MSAs with that of the United States since the 1991 

recession trough. Employment growth in all five MSAs 

outpaced growth nationwide for the ten-year period 

ending first quarter 2000. Chart 3 shows annual average 

growth rates in real output for the five MSAs and 

United States over the course of the 1990s. Once again, 

not only did all five MSAs outpace the United States, 

but the growth rates ranged from greater than 50 percent, 

in the case of Houston, to greater than three times in 

both Albuquerque and Austin. Emphasizing the link 

between the high-tech sector and gains in productivity, 

the Milken Institute study concluded that the relative 

growth and concentration of high-tech industries could 

explain almost two-thirds of the growth differential in 

output among metropolitan areas during the 1990s.10 

CHART 3 

With these general trends in mind, we now look at the 

relative vulnerability of these five high-tech centers to a 

U.S. or high-tech recession. 

Albuquerque is perhaps the most vulnerable of the five 

metropolitan areas to an industry downturn because of 

its large concentration of IT industries. According to 

Economy.com, Inc., about 15 percent of Albuquerque’s 

employment is in IT industries, with more than a fifth 

of IT employment concentrated in engineering and 

testing services.11 Many of Albuquerque’s high-tech 

industries are related to national defense (Albuquerque 

is home to Sandia National Laboratories and Kirtland 

Air Force Base) and the semiconductor industry (Intel 

and Philips Semiconductors are two of the MSA’s 

largest private sector employers). New Mexico ranked 

Annual Average Growth Rates,

1990–99 (%) 

Sources: Bureau of Economic Analysis (Haver Analytics); Regional Financial Associates; FDIC 

The Region’s High-Tech Metropolitan Areas All Outpaced the United States 

in Real Output Growth during the 1990s 

9.1 9.3 

5.6 5.1 

4.5 

3.0 

0 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

Albuquerque Austin Dallas Denver Houston U.S. 

11 December 1999. Economy.com, Inc. Precís: Metro Edition. Albu­ 10 “America’s High-Tech Economy,” p. 5. querque, NM. 

Dallas Regional Outlook 6 Third Quarter 2000 
 

Regional Perspectives
 

third in the nation in per capita research and development 

spending in 1997, largely because of the federal government’s huge presence in and around Albuquerque.12 

According to the Milken Institute study, Albuquerque’s 

rapid growth in high-tech output is “almost entirely 

attributable to Intel’s investments in electronic components and accessories production,” accounting for only 

10.6 percent of nonfarm employment yet approximately one-third of the area’s gross metropolitan product. 

According to Economy.com, Inc., electronic equipment 

manufacturing accounts for 33 percent and 90 percent 

of manufacturing employment and output, respectively, 

in this MSA. 

Albuquerque is also highly dependent on the volume of 

foreign trade and currency exchange rates, which is 

another key factor in assessing the MSA’s potential vulnerability to a high-tech downturn. In 1999, approximately 92 percent of New Mexico’s merchandise 

exports were high-tech in nature, according to the 

American Electronics Association’s (AEA) Cyberstates 

report the highest percentage for any state in the nation. 

The vast majority of these exports originate in Albuquerque and are destined primarily for Asian countries.13 

Albuquerque’s lack of diversification in the high-tech 

sector and heavy reliance on a cyclically sensitive hightech manufacturing industry and export sector increase 

its vulnerability in the event of a national or high-tech 

recession. The area also is exposed highly to global 

demand for semiconductor chips and, as a result, is 

dependent on the health of several Asian economies. 

Despite these vulnerabilities, the high-tech sector continues to grow, as evidenced by Intel’s recent decision to 

expand its Rio Rancho facility, a $2 billion plan expected to generate 2,000 construction jobs and 500 to 1,000 

permanent jobs. The facility is scheduled for completion 

in 2001 and could result in another brief spurt of economic activity for the area.14 Nevertheless, a high-tech 

downturn could result in a broader recession in the 

Albuquerque MSA’s overall economy. 

12 “Cyberstates, v4.0,” p. C-11.
 

13 “Exporter Location Series,” U.S. Census Bureau, prepared by the
 

Office of Trade and Economic Analysis, International Trade Administration, U.S. Department of Commerce.
 

14 Intel’s website, www.intel.com/intel/community/nm/index.htm.
 

Austin also has a large concentration of high-tech 

industries, although it is perhaps not as vulnerable as the 

Albuquerque MSA is to a downturn in either the hightech sector or the U.S. economy. Austin’s overall 

employment grew more rapidly than that of the other 

four MSAs in the 1990s; this growth was attributed 

largely to tremendous growth in computers and electronics production. In recent years, the rapid growth of 

e-commerce and dot-com firms also has fueled Austin’s 

economy. Venture capital has stimulated much of this 

growth. Economy.com, Inc. estimates that since 1995, 

“investment in Austin’s software and information 

industries has been three times greater than similar 

investments in Dallas and five times greater than similar 

investments in Houston, strengthening the metro area’s 

competitive advantage in the Internet economy.” 

According to a survey conducted by PricewaterhouseCoopers, more than $800 million in venture capital 

flowed into Austin in 1999, three times more than the 

year before.15 As stated previously, venture capital is one 

form of financing that is vital to the start-up of many 

high-tech companies. 

According to the Milken Institute study, Austin’s share 

of high-tech employment—12.6 percent or nearly 

75,000 workers (1998)—is the highest of the five 

MSAs. While impressive, these figures understate the 

extent to which high tech is driving the Austin economy. Angelou Economic Advisors Inc., a consulting 

firm that follows the Austin economy, estimates 

Austin’s technology employment closer to 125,000 

(1999), or 20 percent of total employment. In addition 

to the 14 standard industrial classification (SIC) industries included in the Milken Institute definition, 

Angelou Economic Advisors adds employment from 

software development, e-commerce, and Internet services—all major industries in Austin’s high-tech economy. Clearly, the employment share represented by the 

high-tech sector in Austin is significant. On the basis of 

employment projections by Angelou Economic Advisors, Austin is expected to add 65,000 jobs by year-end 

2001, of which 24,600 will be in the high-tech sector. 

Foreign trade is also a critical component of Austin’s 

high-tech industries. In 1998, the MSA exported $3.8 

15 March 19, 2000. “Dallas, Austin, Vie for Texas High-Tech Title.” 

Dallas Morning News, p. 1A. 

Dallas Regional Outlook 7 Third Quarter 2000 
Regional Perspectives
 

CHART 4 

Approximately 94 Percent of Austin’s Merchandise Exports in 1998
 

Were in Industries with Large Concentrations of High-Tech Goods
 

Electric & Electronic Equipment 

Industrial Machinery & Computers 

Scientific & Measuring Instruments 

Transportation Equipment 

Chemical & Petroleum Products 

All Other Exports 

60% 

29% 

5% High-Technology Industries
 

1%
 

1%
 

3%
 

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 

$ Thousands 

Note: All figures show sales by exporters of record located in the indicated area. The sales location may or may not coincide with the location of production. 

Sources: Office of Trade and Economic Analysis; International Trade Administration; Department of Commerce 

billion in merchandise, of which nearly $3.6 billion 

was concentrated in three sectors traditionally dominated by high-tech industries: electric and electronic 

equipment; industrial machinery and computers; and 

scientific and measuring instruments (see Chart 4). 

About half of Austin’s exports are shipped to Asia, with 

another 40 percent destined for Canada and Europe. 

Surprisingly, only 4 percent of its total exports go to 

Mexico. Like Albuquerque’s, Austin’s high-tech 

industries have a stake in a growing global economy, 

particularly the continued recovery in Asia. 

Austin’s economy appears vulnerable to a downturn in 

the high-tech sector on several fronts. Venture capital 

can dry up rather quickly, as evidenced by the events of 

this past spring when tech stocks fell precipitously.16 A 

lack of venture capital funding could adversely affect 

start-up companies in the Austin area, many of which 

are small and depend on venture capital for growth and 

day-to-day operations. The stock market and IPO market are also critical components of Austin’s high-tech 

economy. Market capitalization of Austin’s top 25 companies increased a remarkable 1,841 percent between 

1995 and 1999.17 As a result, a sustained correction in 

the stock market could hurt the area’s Internet and software industries. Already, newspapers are running stories about layoffs and cash-strapped dot-coms,18 and 

16 May 25, 2000. “Reality Bites Hard as String of Dot-Coms Sees
 

Funding Dry Up—Venture Capitalists Get Tougher on E-Losers;
 

Operative Term Is Triage—Hanging by a Green Thread.” Wall Street
 

Journal, p. A1.
 17 January 13, 2000. “2000-2001 Economic & Technology Forecast.”
 

Austin, Texas. Angelou Economic Advisors Inc.
 

18 May 23, 2000. “Another Texas Dot.com Announces Layoffs.” Dallas Morning News, p. 1D.
 

reports of Austin losing its “sense of computer-andInternet invincibility” are becoming more common.19 

Austin, like Albuquerque, has a large concentration of 

computer- and semiconductor-related industries that are 

highly cyclical and sensitive to fluctuations in the overall economy. Moreover, because high-tech workers tend 

to be highly compensated (see Chart 5), ripple effects of 

layoffs and production cutbacks in these industries 

would manifest themselves in consumer spending, residential and commercial real estate markets, and, consequently, the banking industry. Indeed, the rapid growth 

of bonuses and stock options among high-tech workers 

have helped fuel Austin’s strong housing market, causing home prices to soar and raising concerns about the 

potential for speculation in the single-family housing 

market. Despite the presence of one of the best-regarded high-tech-oriented universities in the country—University of Texas, Austin—and a large and stable state 

government sector, a downturn in Austin’s high-tech 

sector would likely result in a rapid deceleration in its 

overall employment and economic growth. 

Denver’s fast-growing IT industries contributed to its 

stellar performance throughout much of the 1990s. 

Denver’s high-tech employment is concentrated largely 

in telephone communication services and computer and 

data processing, both major high-tech service industries. According to the AEA, Colorado reported the 

highest concentration of high-tech workers in the nation 

in 1998: 84 high-tech workers per 1,000 private sector 

19 May 31, 2000. “Silicon Chills: Austin Is Coming Down Off Its High 

Tech as Nasdaq Takes Roller Coaster Ride.” Dallas Morning News, 

p. 1D. 

Dallas Regional Outlook 8 Third Quarter 2000 
Regional Perspectives
 

employees. Denver’s high-tech industries employ more 

than 90,000 workers, or about 8 percent of nonfarm 

employment (1998), producing $8.9 billion in output in 

1992 dollars, nearly 13 percent of the MSA’s total output.20 Leading high-tech employers include Qwest 

Communications International, Inc., Lucent Technologies, Lockheed Martin Aeronautics, AT&T, EchoStar 

Communications, Tele-Communications, and IBM. 

As in most high-tech centers, global trade plays a key 

role in the Denver economy; high-tech goods represented three-fifths of Colorado’s total exports in 1999. In 

1998 Denver’s merchandise exports totaled $1.8 billion, 

the majority of which were shipped to Europe. The 

metro area’s top three exports are computer equipment 

and industrial/commercial machinery; electronic and 

electrical equipment; and measuring, analyzing, and 

controlling instrumentation goods. 

Denver’s vulnerability to a high-tech downturn is similar to Austin’s in several respects. Many of Denver’s 

small high-tech companies are extremely sensitive to 

swings in the stock market and private capital funding 

sources. PricewaterhouseCoopers ranked Colorado 

fifth in the nation in venture capital investment, $1.3 

billion in 1999, much of which was funneled to Denverarea companies. Denver is also home to a thriving 

financial services industry (e.g., investment firms, 

mutual fund companies), which is closely linked to 

CHART 5 

20 “America’s High-Tech Economy,” Table 3.3, p. 56. 

financial market conditions, increasing the vulnerability of the Denver MSA. Denver’s finance, insurance, and 

real estate (FIRE) sector accounted for 8.1 percent of 

the MSA’s total employment in 1998, compared with 

6.6 percent and 5.8 percent, respectively, for Colorado 

and the United States.21 Thus, the Denver economy 

would be more susceptible to a protracted recession 

from a high-tech downturn accompanied by a prolonged 

bear market, because of its heavy reliance on FIRE and 

the high-tech sector. 

In addition, a stock market decline would have implications for the broader Denver economy as a result of 

a negative wealth effect. Denver residents have the 

highest per capita income of the five metropolitan 

areas, 22 percent above the national average as of 1997. 

A significant portion of this income is derived from 

stock options, bonuses, and capital gains, income 

sources that are driving consumer spending in the 

Denver economy.22 A recent study by The Nelson A. 

Rockefeller Institute of Government determined that 

“capital gains are about 74 percent more important to 

Colorado’s state finances than they are to the average 

state.” 

Since 1995, Denver has outpaced the United States in 

retail sales growth on an annualized basis, 8 percent 

versus 6 percent, respectively. Moreover, both a burgeoning high-tech sector and a booming stock market 

21 Economy.com, Inc. December 1999. Precís: Metro Edition. Denver,
 

CO.
 

22 Denver’s wage and salary earnings per job were 11 percent higher than
 

the U.S. average in 1997; per capita dividends, interest, and rent were
 

19 percent above the U.S. average (U.S. Bureau of Economic Analysis).
 

$0 

$10,000 

$20,000 

$30,000 

$40,000 

$50,000 

$60,000 

$70,000 

Colorado Texas New Mexico Oklahoma 

Source: American Electronics Associations Cyberstates Report (Version 4) 

High-Tech Annual Average Wage 

Private Sector Annual Average Wage 

High-Tech Workers in the Dallas Region Are Well Compensated 

Compared with Their Non-High-Tech Counterparts 

Annual Average Wages, 1998 

$60,418 $60,265 

$43,875 $39,059 

$32,210 $32,090 

$24,697 $24,871 

Dallas Regional Outlook 9 Third Quarter 2000 
Regional Perspectives
 

CHART 6 

–10 

–5 

0 

5 

10 

15 

20 

25 

’80 ’81 ’82 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00

Year-to-Year Percent Change (Quarterly)

MSA Housing Costs 

MSA Median Household Income 

MSA = metropolitan statistical area 

Source: Housing costs from Freddie Mac; median household income from Economy.com, Inc. 

Denver Housing Prices Are Outpacing Median Household Income 

First Quarter 

have led to strong gains in Denver’s real estate values. 

Since first quarter 1995, Denver home prices have 

grown at a compounded average annual rate of 7.9 

percent, compared with 5.2 percent for the nation.23 

According to a recent U.S. Housing and Urban 

Development study, “hot high-tech markets are among 

the highest-cost housing markets.” 24 The rapid appreciation of home prices in the Denver MSA is cause for 

concern, as the gap between median housing prices 

and median household incomes has widened in recent 

quarters (see Chart 6). Thus, in the event of a high-tech 

or stock-market-induced recession, the Denver economy 

would have to contend with a negative wealth effect that 

is likely to affect this MSA more than other metropolitan 

areas. 

Houston, traditionally known as a major energy, medical, and space center, is also home to a rapidly growing 

high-tech sector, particularly in the areas of personal 

computer production and engineering and architectural 

services. Although Houston has the second largest hightech employment in the Region (123,000 in 1998), the 

relative concentration of high-tech output is quite low 

compared with the other four MSAs. This can be attributed to the fact that Houston’s economy continues to be 

dominated by the oil and gas industry. Moreover, the 

Milken Institute’s decision to include engineering and 

architectural services in its definition of high-tech 

captures a large segment of professionals engaged in the 

oil and gas industry. However, Houston accounted for 

23 Federal Home Loan Mortgage Corporation (FHLMC), 

http://www.freddiemac.com/finance/cmhpi/release.htm. 24 U.S. Department of Housing and Urban Development. June 2000. 

“The State of the Cities 2000.” Washington, DC, p. viii. 

over $12.6 billion (1992 dollars) in high-tech output in 

1998, more than any MSA in the Region except Dallas. 

The combination of a low concentration of high-tech 

industries, and high levels of high-tech output and 

employment are the result of Houston’s huge economy, 

ranked seventh in the nation with a gross metropolitan 

product of $142 billion in 1998.25 Leading high-tech 

employers are Compaq Computers, SBC Communications, and the Lockheed Martin Corporation. 

Although Houston’s future will become increasingly 

reliant on high-tech industries, its economy today 

remains tied to the volatile energy industry. Houston’s 

energy industry continues to dominate the manufacturing sector (refining and petrochemicals), engineering 

and management services, and exports (oil, chemicals, 

and petroleum products). Consequently, a prolonged 

downturn in the national economy or in oil prices is 

likely to have a greater negative effect on Houston’s 

economy than a high-tech recession. Nevertheless, the 

Milken Institute simulation did identify a significant 

degree of cyclicality in two industries in which Houston 

holds a large concentration: computer production and 

engineering and architectural services. One cannot rule 

out the significant effect that a high-tech recession 

might have on these two industries, even if the result 

does not drag down Houston’s overall economy. 

Dallas was ranked second to Northern California’s 

Silicon Valley in terms of high-tech sector output, 

according to the Milken Institute study. Dallas surpassed 

25 U.S. Conference of Mayors and the National Association of Counties, 1998; Standard & Poor’s Data Resources, Incorporated (DRI). 

Dallas Regional Outlook 10 Third Quarter 2000 
Regional Perspectives
 

the other four MSAs in the Region in high-tech output 

(over $25 billion in 1992 dollars) and employment 

(about 210,000 jobs) in 1998. Dallas holds an aboveaverage concentration (location quotients greater than 

one) in seven of the 14 high-tech industry categories 

examined by the Milken Institute, making it the most 

diversified high-tech base in the Region. At the core of 

Dallas’s high-tech industries are computer and semiconductor production, a growing telecommunications 

equipment industry, and telephone communication services. Although Dallas accounts for only 1.2 percent of 

the U.S. population and 1.5 percent of U.S. employment, its share of U.S. high-tech output is 3.7 percent. 

High-tech output accounts for over 17 percent of the 

MSA’s total output. Ironically, 17 percent of Texas’s 

output was tied directly to the oil and gas industry in 

1980, several years before Texas suffered a series of 

debilitating recessions started by a collapse in oil prices. 

Nevertheless, the high-tech concentration represents a 

more diverse industry base. This increased diversity 

makes the probability of a high-tech recession alone 

pulling down the Dallas economy somewhat remote. 

However, a U.S. recession could result in a sharper and 

more protracted recession for the Dallas metropolitan 

area because of the increased sensitivity of high-tech 

output to declines in national output. 

Implications for Insured Institutions in High-Tech Markets
 

What are the implications of significant growth in the 

high-tech sector for banks located in these MSAs? To 

answer this question, we looked at loan growth rates, 

summary of deposit data trends, and insured institution 

profitability for each of the five high-tech MSAs. 

Loan Growth 

Two hundred forty-one banks and thrifts, each with less 

than $1 billion in assets, were headquartered in the five 

high-tech MSAs as of December 31, 1999. This section 

focuses on community banks because loan growth at 

TABLE 3 

these institutions is more likely to be related to economic activity in the individual MSA. These insured 

institutions, with combined assets of $35 billion, sustained rapid asset and loan growth during the preceding 

five-year period, as shown by Table 3. Not only did 

banks and thrifts in these MSAs exceed the national 

averages for these loan categories, but in some cases 

they did so significantly. These data indicate that robust 

activity in the high-tech sector is contributing to substantial loan growth for smaller banks. In addition, 

smaller banks’ portfolios are shifting into higher levels 

of construction and commercial real estate loans, traditionally higher-risk forms of lending. This rapid loan 

Institutions Under $1 Billion in High-Tech MSAs Experienced 

Rapid Loan Growth during Past Five Years 

GROWTH RATE 1994 

THROUGH 1999 U.S. ALBUQUERQUE AUSTIN DALLAS DENVER HOUSTON 

NUMBER OF BANKS AS 

OF DECEMBER 31, 1999 10,220 11 26 84 55 65 

TOTAL LOANS (%) 42 243 106 115 130 135 

REAL ESTATE LOANS (%) 36 250 105 122 137 169 

COMMERCIAL REAL 

ESTATE LOANS (%) 40 206 160 152 167 207 

REAL ESTATE 

CONSTRUCTION LOANS (%) 95 163 182 266 269 286 

COMMERCIAL AND 

INDUSTRIAL LOANS (%) 67 236 177 153 157 141 

ASSETS (%) 37 364 69 75 113 37 

Note: Data are for all banks and thrifts with assets less than $1 billion headquartered in their respective metropolitan statistical areas (MSAs) at December 31, 1999. Growth rates are merger adjusted. 

Source: Bank and Thrift Call Reports 

Dallas Regional Outlook 11 Third Quarter 2000 
Regional Perspectives
 

growth and greater exposure to historically riskier areas 

of lending could elevate the overall credit risk profile of 

these institutions, particularly in the event of a high-tech 

downturn or a slowing of the economy. 

Deposit Data Trends 

In June of each year, the FDIC collects Summary of 

Deposit (SOD) data from insured institutions. While 

Call Report information attributes deposit and loan data 

to a bank’s headquarters location only, SOD data reflect 

the deposits held by each office (branch) of a multioffice insured institution. Thus, SOD data for an MSA 

include deposit data for all offices of insured institutions located in a particular MSA, regardless of headquarters location. These data can be used to analyze 

total deposit growth in an MSA or the market share of 

locally headquartered institutions versus out-of-area 

institutions. 

We analyzed data for the period June 30, 1994, through 

June 30, 1999. During this five-year period, deposits 

nationwide by grew 20 percent (see Table 4). With the 

exception of Albuquerque, insured institutions in all 

high-tech MSAs in the Dallas Region met or exceeded 

the national deposit growth rate. 

In looking at market share, we split SOD data into three 

institution groupings: large local banks with $1 billion 

or more in assets; small local banks with less than $1 

billion in assets; and institutions with headquarters out 

of area. During the period under review, the deposit 

market share for small banks and thrifts located in these 

institutions in the Albuquerque and Dallas MSAs grew 

slightly, while market share for those in the Denver 

MSA fell. Small institutions in the Austin and Houston 

MSAs showed the greatest change, declining 10 percentage points or more during this period. Large banks 

headquartered in these MSAs experienced the greatest 

decline in market share, primarily as a result of mergers 

and acquisitions. 

Banks headquartered outside these high-tech MSAs 

now hold a higher percentage of deposits than ever 

before. A review of the market share data indicates that 

most of these out-of-area institutions are large banks. 

These trends have implications for the risk exposure of 

insured institutions doing business in these high-tech 

MSAs. Generally, the loan portfolios of larger institutions tend to be more geographically diversified than 

TABLE 4 

Most Dallas Region High-Tech MSAs 

Experienced Rapid Deposit Growth 

over the Past Five Years 

PERCENTAGE OF 

DEPOSIT INCREASES 

FROM JUNE 1994 

MSA TO JUNE 1999 

ALBUQUERQUE 8.5 

AUSTIN-SAN MARCOS 32.9 

DALLAS 20.1 

DENVER 25.8 

HOUSTON 32.3 

ALL U.S. MSAS 20.2 

MSA= metropolitan statistical area 

Source: FDIC Summary of Deposits high-tech MSAs did not exhibit a clear trend. As shown 

in Table 5, market share for small insured financial 

TABLE 5 

Market Share of Banks Headquartered Outside High-Tech MSAs 

Increased Substantially 

LOCAL INSTITUTIONS’ 

PERCENTAGE OF 

SOD MARKET SHARE 

BANKS UNDER 

$1 BILLION 

JUN-94 JUN-99 

BANKS OVER 

$1 BILLION 

JUN-94 JUN-99 

BANKS NOT 

HQ IN MSA 

JUN-94 JUN-99 

ALBUQUERQUE 12 17 68 46 20 37 

AUSTIN 26 13 67 3 7 84 

DALLAS 18 20 78 31 4 49 

DENVER 32 30 52 30 16 40 

HOUSTON 25 15 68 46 7 39 

MSA= metropolitan statistical area; SOD= Summary of Deposit; HQ= headquartered 

Source: Summary of Deposit data 

Dallas Regional Outlook 12 Third Quarter 2000 
Regional Perspectives
 

Banking Overview
 

Dallas Region banks and thrifts reported net operating 

income of $1.07 billion for a combined ROA of 1.03 

percent for first quarter 2000, down from 1.11 percent 

a year ago. The Region’s ROA lagged the nation’s 1.31 

percent ROA. Securities losses at four large institutions contributed to this profitability decline; however, the number of banks reporting securities losses 

continued to grow, as shown by Table 6. Dallas 

Region insured financial institutions tend to hold a 

higher percentage of securities-to-assets and a higher 

proportion of longer-term securities than institutions 

in other FDIC Regions, thus making many Dallas 

Region institutions more sensitive to interest rate 

changes.26 Excluding the four large banks, the Region 

TABLE 6 

would have earned an adjusted ROA of 1.23 percent, 

more in line with the rest of the country. 

In addition to an overall decline in profitability, the 

Dallas Region’s allowance for loan and lease loss 

(ALLL)-to-noncurrent loans ratio is significantly 

below the national average.27 The ALLL-to-gross 

loans ratio is the lowest of the eight FDIC Regions 

and lower than levels reported since March 1985. 

Benefiting from a relatively low charge-off rate, the 

ALLL-to-charge-off ratio remains strong, averaging 

220 percent as of March 31, 2000, compared with 

116 percent for the nation. However, should the 

economy weaken, the Region’s banks may need to 

build reserves, which could further constrain profitability. 

TABLE 6Rising Interest Rates Increase the Number of Dallas Region Banks 

and Thrifts Reporting Securities Losses 

1Q00 4Q99 3Q99 2Q99 1Q99 

NUMBER OF BANKS 163 155 105 83 

DOLLAR AMOUNT OF 

LOSSES ($ MILLIONS) $ 276,410 $ 114,410 $ 9,613 $ 2,880 $ 4,988 

Source: Bank and Thrift Call Reports 

26 Dallas Regional Outlook, second quarter 2000, “Dallas Region 27 The Dallas Region’s loan loss reserve-to-noncurrent loans ratio 

Insured Financial Institutions Benefit from Low Cost of Funds, was 138.8 percent at March 31, 2000, compared with a national 

but Face Challenges in Rising Interest Rate Environment.” ratio of 166.8 percent. 

those of small, locally based institutions. Large institutions also tend to have greater access to other sources of 

income, which might help diversify an institution’s 

earnings stream during periods of economic stress. 

Overall, these characteristics may mitigate some of the 

risk to larger institutions associated with a downturn in 

the high-tech sector of the economy or an economic 

shock to a particular MSA or employer. 

Smaller institutions are facing increased competition as 

a result of the growing presence of these large institutions. As large banks gain market share, competitive 

pressure may increase on small institutions’ balance 

sheets. Larger banks’ economies of scale enable them 

to charge lower interest rates and fees, offer higher 

deposit rates, or offer additional services (e.g., Internet 

banking and ATM locations). As large, out-of-area 

institutions become more prominent in high-tech 

MSAs, small banks and thrifts are experiencing 

increased competition, which has implications for profitability levels. 

Profitability 

Only small institutions in the Denver and Dallas MSAs 

reported returns on assets (ROAs) at year-end 1999 

above that of the Region and at or above the regional 

average for the previous five-year period. It is interesting to note that small banks and thrifts in the Dallas and 

Denver MSAs also retained the highest deposit (SOD 

data) market share among the five high-tech MSAs. In 

contrast, small institutions that lost market share exhibited lower profitability, suggesting that increased competition from large institutions is pressuring the 

earnings of small banks and thrifts. 

Dallas Regional Outlook 13 Third Quarter 2000 

43 
Regional Perspectives
 

In conclusion, there appears to be a close connection 

between the robust economic activity within the 

Region’s high-tech MSAs and insured institutions’ balance sheet growth. Insured financial institutions (with 

assets less than $1 billion) headquartered in these 

MSAs showed substantial loan growth rates over the 

past five years. Loan portfolios at these institutions also 

placed greater emphasis on historically higher-risk 

forms of lending such as construction and development 

and commercial real estate. SOD data also show that 

larger out-of-area banks are capturing greater market 

share, likely applying increased competitive pressure on 

smaller institutions. This increased competition may 

lead to lower ROAs and declining levels of profitability 

among these institutions. Overall, these trends may 

increase the vulnerability of small banks and thrifts in 

these high-tech MSAs to a slowdown in the high-tech 

sector or a downturn in the national economy. 

Dallas Region Staff 

Dallas Regional Outlook 14 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. 

Dallas Regional Outlook 15	 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 metDallas Regional Outlook 16 Third Quarter 2000 
In Focus This Quarter
 

ropolitan 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. 

Dallas Regional Outlook 17 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 

Dallas Regional Outlook 18 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) 

Dallas Regional Outlook 19 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 

Dallas Regional Outlook 20 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.
 

Dallas Regional Outlook 21 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 

three markets are considered to be most at risk for 

broad-based overbuilding: Dallas, Denver, and Fort 

Worth. (See page 23.) 

Thomas A. Murray, Senior Financial Analyst 

Dallas Regional Outlook 22 Third Quarter 2000 
In Focus This Quarter
 

Dallas Region Markets Most Vulnerable to Overbuilding 

Dallas 

The Dallas metropolitan statistical area (MSA) is active 

in all commercial property sectors and ranks in the top 

ten most-active construction markets in four sectors and 

twelfth in the industrial sector. Dallas has high vacancy 

rates in the office sector and moderately high rates in 

the industrial, retail, and hotel sectors. Office vacancy 

rates increased from 14.4 percent to 18 percent from 

year-end 1998 to 1999 (see chart). Rents increased over 

the period but followed a continued three-year declining 

growth trend. As of year-end 1999, downtown Dallas 

had a 29 percent office vacancy rate; its suburban rate 

was 9.2 percent. 

In 1999, Dallas posted its lowest employment growth 

rate since 1994. Net in-migration in 1999 has also 

slowed from the previous year. The Dallas MSA boasts 

an unemployment rate of 3.1 percent, lower than the 

national rate of 4.2 percent. 

Although the Dallas MSA ranks fifth in overall apartment construction, current demand is strong. A number 

of factors support high levels of demand for apartments. 

Most notably, rising interest rates made home purchases 

less attractive for some renters, and employment growth 

in Dallas regained the momentum that it had lost in the 

second half of 1999. 

Of the 81 community banks in the Dallas MSA at March 

31, 2000, over half have CRE portfolios in excess of 100 

percent of Tier 1 capital. Reported asset quality for institutions in the Dallas MSA remains strong. 

Dallas Region Staff 

Dallas Office: Completions, Absorptions, and Vacancy Rates 

–2,000 

0 

2,000 

4,000 

6,000 

8,000 

10,000 

12,000 

14,000 

16,000 

18,000 

Year-Ends 

Square Feet (000’s) 

0 

5 

10 

15 

20 

25 

30 

Vacancy Rate (%) 

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 

Dallas Regional Outlook 23 Third Quarter 2000 
In Focus This Quarter
 

Denver 

The Denver metropolitan statistical area (MSA) ranks 

in the top ten most active for construction for the retail, 

hotel (see chart), and multifamily sectors. Denver has 

relatively moderate vacancy levels for each property 

sector. Analysts have raised concern about the rapidly 

growing construction in the Denver MSA. The past two 

years’ double-digit growth parallels the growth level 

last achieved in Denver in the early 1980s, which was 

followed by a prolonged downturn in its real estate 

market. 

Employment growth in Denver has outpaced the national average since 1991. In 1991, for the second year in a 

row, Denver posted 3.8 percent growth in total employment, mainly because of the growing telecommunications and construction industries. The boom in Denver 

employment has been made possible in part by increasing net in-migration levels. Continued employment 

expansion has pushed 1999 unemployment to a rate of 

2.4 percent, with forecasts suggesting a lower rate of 2.1 

percent for 2000, creating labor shortages especially in 

retail businesses. 

Of the 54 community banks headquartered in the Denver MSA at March 31, 2000, 36 have CRE portfolios in 

excess of 100 percent of Tier 1 capital. CRE loans grew 

150 percent between December 31, 1995, and March 

31, 2000. Reported asset quality for institutions in the 

Denver MSA remains strong. 

Dallas Region Staff 

’94 

Denver Hotel: Completions, Absorptions, and Vacancy Rates 

Source: F. W. Dodge Square Feet (000’s)

Vacancy Rate (%) 

–200 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1,600 

1,800 

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

Year-Ends 0 

5 

10 

15 

20 

25 

30 

35 

40 

45 

50 

Actual Projected 

Vacancy 

Completions 

Absorptions 

Dallas Regional Outlook 24 Third Quarter 2000 
In Focus This Quarter
 

Fort Worth 

The Fort Worth metropolitan statistical area (MSA) 

ranks among the ten most active markets in construction 

for industrial, retail, and hotel properties. Employment 

growth in Fort Worth has outperformed the national 

average since 1993. The robust job market and a favorable cost of living continue to draw high in-migration 

levels. For year-end 1999, Fort Worth was first in the 

country for construction activity for new hotels as measured by new rooms as a percentage of existing stock. 

Fort Worth has made a significant effort to develop a 

stock of entertainment and tourist attractions, while 

manufacturing and distribution remain the economy’s 

strongest drivers. Fort Worth’s 1999 employment growth 

was the ninth highest of the country’s metropolitan areas. 

Hotel occupancy rates have fallen steadily in this MSA 

since 1995 because of an abundance of limited-service 

and extended-stay hotels (see chart). A 1,500-room 

Opryland-Grapevine Hotel is scheduled to open in 2002. 

Of the 38 community banks located in the Fort Worth 

MSA at March 31, 2000, 33 have CRE portfolios in 

excess of 100 percent of Tier 1 capital. Reported asset 

quality for institutions in the Fort Worth MSA remains 

strong. 

Dallas Region Staff 

’87 ’89 

Fort Worth Hotel: Completions, Absorptions, and Vacancy Rates 

–400 

–200 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1,600 

1,800 

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

Year-Ends 0 

5 

10 

15 

20 

25 

30 

35 

40 

45 

50 

Source: F. W. Dodge 

Vacancy 

Completions 

Absorptions 

Actual Projected 

Square Feet (000’s)

Vacancy Rate (%) 

Dallas Regional Outlook 25 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 

Dallas Regional Outlook 26	 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, personDallas Regional Outlook 27 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. 

Dallas Regional Outlook 28 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. 

Dallas Regional Outlook 29 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. 

Dallas Regional Outlook 30 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 

Dallas Regional Outlook 31 Third Quarter 2000 
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