Kansas 

City 

San Francisco 

Dallas 

Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION	 THIRD QUARTER 2000 

In Focus This Quarter 

FDIC ◆ Ranking Metropolitan Areas at Risk for Commercial Real Estate Over- National building—Commercial real estate construction has boomed in a number of U.S. metEdition	 ropolitan markets during recent years. Insured depository institutions have 

reasserted their role as primary sources of capital for this construction boom in the 

wake of the 1998 financial markets crisis. Recent data show that on-balance-sheet Boston exposures of FDIC-insured institutions are by some measures higher now than at the 

Chicago peak of the last commercial real estate cycle during the late 1980s. This article 

New reassesses major U.S. metropolitan real estate markets in search of possible signs of York 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 con- Atlanta struction activity across multiple property types. See page 3. 

Memphis 

By Thomas A. Murray, Senior Financial Analyst 

◆ Rising Home Values and New Lending Programs Are Reshaping the Outlook for Residential Real Estate—Rising home prices and high levels of activity in Division of the single-family housing market have been supported by excellent economic conInsurance	 ditions 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 24. 

By Alan Deaton, Financial Economist 

Regional Perspectives 

◆ Atlanta—The expansion of the high- ◆ Kansas City—The farm bill of 2002 

tech industry represents a key com- will mark a crossroads in U.S. farm polponent of the economic momentum in icy, and could have far-reaching implimanyAtlanta Region metropolitan areas. cations for farmers and the bankers 

See page 30. who lend to them. See page 34. 

◆ Boston—The trend of declining capi- ◆ Memphis—Although real estate martal ratios in many of the Region’s insured kets have begun to slow, construction loan 

institutions bears watching, given that exposure at the Region’s insured institusome indicators of risk are increasing tions continues to rise. See page 35. 

and new risks are emerging. See page 31. ◆ New York—Despite limited office 

◆ Chicago—Broad liquidity measures construction and strong demand 

point to heightened liquidity risk among throughout the Region, the percentage 

the Region’s insured institutions and of banks that specialize in commercial 

emphasize the need for careful funds real estate lending modestly exceeds levmanagement. See page 32. els of the early 1990s. See page 36. 

◆ Dallas—Small insured institutions ◆ San Francisco—The high-tech sector 

in the Region’s economically robust boosted economic growth in several of the 

high-tech MSAs have reported rapid Region’s MSAs. However, insured finangrowth, but also increased competition. cial institutions may have increased expoSee page 33. sure to more volatile assets. See page 37. 

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 National Edition of Regional 

Outlook, please call Lynn Nejezchleb at (202) 898-3898 or send an e-mail to lnejezchleb@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 
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. 

Regional Outlook—National Edition 3	 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 metRegional Outlook—National Edition 4 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. 

Regional Outlook—National Edition 5 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 

Regional Outlook—National Edition 6 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) 

Regional Outlook—National Edition 7 Third Quarter 2000 
In Focus This Quarter
 

concentrated workforce of all metropolitan areas in the 

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. 

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 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 9 

CHART 10 

CHART 11 

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 

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 

Regional Outlook—National Edition 8 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.
 

Regional Outlook—National Edition 9 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 

13 markets are considered to be most at risk for broadbased overbuilding: Atlanta, Charlotte, Dallas, Denver, 

Fort Worth, Jacksonville, Las Vegas, Orlando, Phoenix, 

Portland, Sacramento, Salt Lake City, and Seattle. See 

page 11. 

Thomas A. Murray, Senior Financial Analyst 

Regional Outlook—National Edition 10 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

Markets Most Vulnerable to Overbuilding 

Atlanta 

Atlanta has enjoyed rapid economic growth for several 

years and is among the top economic metropolitan area 

performers in the nation. The essential driver of the 

growth is the service sector, accounting for half of the 

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

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

for most active construction retail sectors. 

The Atlanta metropolitan market added 8.8 million 

square feet (or 4.8 percent) to retail inventory during 

1999, according to F.W. Dodge.28 With two new regional malls coming on line, the increase was the largest 

since the 1980s. Although substantial space remains 

under construction, F.W. Dodge reports that starts in the 

first quarter of 2000 were down from one year earlier. 

Rapid population and income growth can help support 

demand for retail space development. Evidence for this 

can be seen in Atlanta, where population growth averaged 3.0 percent annually during the 1990s. In 1999, the 

U.S. Bureau of the Census estimated that Atlanta’s population increased by 113,000—the largest increase in a 

metropolitan area in the nation. Similarly, since 1993, 

per capita income growth in Atlanta has exceeded the 

national average. Fueled by the metropolitan area’s continued strong growth, retail space absorption in 1999 

reached a level last exceeded in 1991 (see chart). 

Although Atlanta’s retail market continues to expand, 

new space construction has outpaced absorption (see 

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

1999, may see lower gains this year. Unanticipated 

weakening in consumer demand, economic growth, or 

net in-migration could adversely affect absorption rates 

and result in higher vacancy rates. 

Many of the 88 community banks (those with assets less 

than $1 billion) headquartered in Atlanta are actively 

engaged in local CRE lending. According to first 

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

accounted for 13.5 percent of this peer group’s total 

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

reported C&D exposures in excess of 20 percent of 

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

economic downturn. A retrenchment in Atlanta’s real 

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

Atlanta Region Staff 

Square Feet (000’s) 

Atlanta Retail: Completions, Absorptions, and Vacancy Rates 

–2,000 

0 

2,000 

4,000 

6,000 

8,000 

10,000 

12,000 

14,000 

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

Year-Ends 

0 

2 

4 

6 

8 

10 

12 

14 

16 

Source: F. W. Dodge 

Actual Projected 

Vacancy 

Completions Absorptions 

Vacancy Rate (%) 

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

Precis: Metro 2000. 

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

Regional Outlook—National Edition 11 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

Charlotte 

Banking is a critical component of Charlotte’s economy 

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

service industries account for 50 percent of office 

space in the uptown market area. Since 1993, strong 

absorption due to growth at these two financial institutions helped support increased office space development. The Charlotte metropolitan area ranks in the top 

ten for most active construction in the office sector. In 

1999, a near-record 2.3 million square feet of office 

space was completed in Charlotte (see chart). However, 

given the recent decreases in the financial sector’s job 

growth, absorption is expected to decline this year. 

Recently announced planned cost-cutting and workforce-cutting in the financial sector may exacerbate the 

threat of weaker absorption and could create the potential for office market oversupply. 

Community bank exposure in commercial real estate 

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

percent of total assets in first quarter 2000, according to 

bank and thrift call reports. Of the 22 banks comprising 

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

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

low as well. Local bank asset quality may be affected 

more by the indirect economic effects of cost-cutting 

and job losses in the financial sector. 

Atlanta Region Staff 

Charlotte Office: Completions, Absorptions, and Vacancy Rates 

Vacancy 

Actual 

Absorptions 

Completions 

Projected 

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

Year-Ends 

’00 ’01 ’02 ’03 ’04 ’05 

3,000 25

2,500 

20 

2,000 

15 1,500
 

1,000
 10 

500 

5 

0
 

–500
 0 

Source: Torto Wheaton Research 

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

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

Vacancy Rate (%) 

Regional Outlook—National Edition 12 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

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 three 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 

Regional Outlook—National Edition 13 Third Quarter 2000 
In Focus This Quarter 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 

Regional Outlook—National Edition 14 Third Quarter 2000 
In Focus This Quarter 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 inmigration 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 (%) 

Regional Outlook—National Edition 15 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

Jacksonville 

The Jacksonville metropolitan area ranks in the top 14 

most active construction markets for all five property 

sectors. It ranks second and seventh highest for hotel 

and office construction. At the same time, Jacksonville 

has moderately high vacancy levels for office (see 

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

rental rates fell 3.2 percent between year-end 1998 and 

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

vacancy rate jumped from 8 percent to 15.3 percent. 

One of the greatest concerns in the metropolitan area’s 

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

of the closing of a naval base and employee relocations. 

Analysts report the hospitality sector as having a static 

occupancy level as a result of a large number of new 

properties, and report that more are in the pipeline. 

Jacksonville’s 13 community banks have limited exposure to CRE development lending. In first quarter 2000, 

construction and development loans accounted for 2.2 

percent of this group’s total assets. 

Atlanta Region Staff 

Jacksonville Office: Completions, Absorptions, and Vacancy Rates 

–200 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1,600 

1,800 

Year-Ends 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20 

Vacancy Rate (%) 

Absorptions 

Completions 

Actual Projected

Vacancy 

Source: Torto Wheaton Research 

0 

Square Feet (000’s) 

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

Regional Outlook—National Edition 16 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

Las Vegas 

Las Vegas ranks among the top ten metropolitan areas 

for new construction in four of the five property types. 

With 10 percent of its workforce employed in construction, Las Vegas is the most construction-concentrated metropolitan area in the country. In addition to 

its popularity as a gaming resort, the area also has 

become a popular site for business startups and relocations because of its low cost of living, businessfriendly tax structure, and telecommunications 

infrastructure. Of the property types for which Las 

Vegas has been identified to be at risk, office (see 

chart), industrial, and retail seem to be the most vulnerable. Without strong in-migration, the resulting 

constriction in the labor market would damage the 

gaming industry and associated economies, particularly construction and retail. Gaming continues to be the 

most significant driver of Las Vegas’ economy, and 

while the gaming industry is currently strong, the 

effect of just-approved gambling on Indian land in 

California has yet to be felt. 

As a group, the 17 community banks in the Las Vegas 

metropolitan area report slightly higher concentrations 

in construction and CRE than the San Francisco Region 

as a whole. Since March 1998, these concentrations 

have roughly doubled in magnitude. As of March 2000, 

average construction and commercial real estate loans 

stood at 9.8 percent and 33.0 percent of assets, respectively. Reported past-due ratios of all Las Vegas community banks do not differ significantly from those of 

the Region as a whole. 

Stephanie Galloway, Financial Analyst 

Las Vegas Office: Completions, Absorptions, and Vacancy Rates 

Source: Torto Wheaton Research Square Feet (000’s)

Vacancy Rate (%) 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1,600 

1,800 

2,000 

Year-Ends 

0 

5 

10 

15 

20 

25 

30 

Absorptions 

Completions 

Actual Projected

Vacancy 

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

Regional Outlook—National Edition 17 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

Orlando 

High levels of in-migration and a rapidly expanding 

economy have helped foster a favorable environment for 

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

It is first in both office and multifamily construction 

and third and fourth, respectively, for retail and hotel 

construction. Office construction has increased over the 

past three years, and 1999 saw a record 3.16 million 

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

market as completions could rise to nearly 3.5 million 

square feet. 

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

growth to generate sufficient demand to absorb the 

large supply of new construction products. However, net 

absorption is expected to moderate this year, while 

completions continue to increase substantially. 

The majority of Orlando’s 26 community banks have 

limited exposure to local CRE lending. According to 

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

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

assets. 

Atlanta Region Staff 

Orlando Office: Completions, Absorptions, and Vacancy Rates 

Square Feet (000’s)

Vacancy Rate (%) 

–500 

0 

500 

1,000 

1,500 

2,000 

2,500 

3,000 

3,500 

Year-Ends 

0 

5 

10 

15 

20 

25 

30 

Absorptions 

Completions 

Actual Projected

Vacancy 

Source: Torto Wheaton Research 

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

30 Torto Wheaton Research. Spring 2000. Office Outlook. 

Regional Outlook—National Edition 18 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

Phoenix 

Phoenix ranks among the top ten metropolitan statistical areas (MSAs) for new construction activity for each 

property sector except the hotel sector. It ranks second 

in construction activity for office and fourth for retail. 

The Phoenix MSA has relatively high vacancy levels in 

each of the five property sectors. In contrast to the rapid 

pace of construction activity, the office employment 

growth rate for Phoenix was a relatively low 3.4 percent 

for 1999, placing it thirty-third in the nation for this category. Corresponding to the low office growth rate and 

the new supply coming forward in this market, office 

rental rates remained nearly flat between year-end 1998 

and 1999, with a growth rate of only 0.54 percent. At 

the same time, office vacancies jumped from 9.7 percent to 13.2 percent (see chart). The preliminary, unaudited Torto Wheaton Research31 first quarter office 

vacancy rate for Phoenix showed a further increase to 

14 percent. Much of the recent economic development 

in Phoenix has been driven by an expansion among its 

computer chip manufacturers, along with communications companies and Internet startups. Torto Wheaton 

Research forecasts that the vacancy rate in the MSA’s 

office market will continue to rise through 2005. After 

remaining nearly equal to the national level during most 

of 1997, vacancy rates in the MSA’s industrial markets 

increased rapidly and now exceed the national level by 

nearly 4 percent. 

While community banks in Phoenix, as a group, report 

less exposure to construction and CRE loans than the 

average for metropolitan areas in the San Francisco 

Region, new institutions may be more vulnerable. In 

first quarter 1999 and 2000, de novo institutions in 

Phoenix reported higher concentrations of construction 

and CRE loans as a share of assets than the Region’s 

average for new banks in the other MSAs. During the 

same periods, total past-due construction and CRE 

loans at Phoenix’s de novo institutions exceeded the 

Region’s average for new banks. 

Shayna Olesiuk, Economic Analyst 

0 

5 

10 

15 

20 

25 

30 

Source: Torto Wheaton Research Square Feet (000’s)

Vacancy Rate (%) 

Phoenix Office: Completions, Absorptions, and Vacancy Rates 

Year-Ends 

0 

1,000 

2,000 

3,000 

4,000 

5,000 

6,000 Vacancy Projected

Completions 

Absorptions 

Actual 

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

31 Torto Wheaton Research. July 2000. 2nd Quarter 2000 TWR 

Pre-audit Office Vacancy Index. 

Regional Outlook—National Edition 19 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

Portland 

The Portland metropolitan statistical area (MSA) ranks 

third and fourth, respectively, for most active new construction in the hotel and multifamily sectors. At the 

same time, it is experiencing high vacancy rates in its 

hotel sector (see chart). Portland has experienced a 

falling employment rate for the past four year-end 

periods. The office vacancy rate jumped from 5.9 percent to 8.7 percent between year-end 1998 and 1999. 

While actively constructing new multifamily units, 

Portland is facing declining population growth, and net 

in-migration is at its lowest levels since U.S. Census 

reports began showing this figure in 1991, according to 

Economy.com, Inc.32 

With recently improved demand from Asia, job gains in 

Portland’s high-tech sectors have offset the slowing 

employment growth in the services and lumber sectors. 

Payrolls in high-tech subsectors, such as the electronic 

and electrical equipment industry, saw significant 

growth during first quarter 2000. Furthermore, Portland’s high-technology firms continue to grow at a 

faster rate than their counterparts nationally. 

With construction loans comprising 15 percent of total 

assets in Portland’s community banks, rising vacancy 

rates give cause for concern. This level of exposure is 

twice the regional and three times the national peer levels of 7 percent and 5 percent, respectively. Portland’s 

insured institutions also have higher concentrations of 

CRE lending. More than half the community banks in 

the MSA report CRE loans totaling more than one-third 

of total assets as of first quarter 2000, while three report 

concentration levels in excess of 50 percent of assets. 

Asset quality indicators for both construction and CRE 

also have deteriorated at some area banks; reported 

past-dues in construction and CRE loans were more 

than triple the regional average. 

Stefani Rose, Research Assistant 

Robert Burns, Senior Financial Analyst 

Portland Hotel: Completions, Absorptions, and Vacancy Rates 

Source: F. W. Dodge 

Year-Ends 

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

Square Feet (000’s)

Vacancy Rate (%) 

Actual Projected 

Vacancy 

Completions Absorptions 

–500 

0 

500 

1,000 

1,500 

2,000 

0 

5 

10 

15 

20 

25 

30 

35 

40 

45 

50 

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

Precis: Metro 2000. 

Regional Outlook—National Edition 20 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

Sacramento 

The Sacramento metropolitan statistical area (MSA) 

ranks sixth and eighth, respectively, for most active 

new construction in the industrial and retail sectors. At 

the same time, it is experiencing high vacancy rates in 

both of those sectors, along with its hotel sector. During the past five years, California’s nonfarm employment expanded by 15.9 percent, while the increase for 

Sacramento was 21.1 percent. A detracting factor 

for Sacramento’s economy over the past several years 

has been military base closures. In line with the rest of 

northern California, however, base closures appear to 

be at an end. Rapid growth in high-tech manufacturing 

in recent years has been an important positive driver of 

Sacramento’s economy. Electronic and computer 

equipment manufacturing jobs expanded 37.7 percent 

in the past five years to approximately 17,000, a 

spillover from booming Silicon Valley 100 miles to the 

west. 

The number of retail, office, and industrial building permits each have tripled from 1996 to 1999. F.W. 

Dodge’s33 forecasts indicate that retail space completions will outpace absorptions and result in the vacancy 

rate rising from approximately 9 percent in 1999 to 

between 11 and 12 percent over the next five years (see 

chart). Similarly, Torto Wheaton Research34 forecasts 

that construction of industrial space will keep industrial 

vacancy rates at around 10 percent for the next several 

years and that the office vacancy rate will rise from 

around 8 percent currently to over 12 percent within the 

next two years. 

Community banks headquartered in Sacramento exhibit 

increasing exposure to CRE loans. Aggregate exposure 

levels to construction loans and total CRE loans are higher than averages reported by community banks headquartered in other MSAs in the Region and the nation. 

Phil Vincent, Regional Economist 

Year-Ends 

Sacramento Retail: Completions, Absorptions, and Vacancy Rates 

Source: F. W. Dodge 

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

Square Feet (000’s)

Vacancy Rate (%) 

–1,500 

–1000 

–500 

0 

500 

1,000 

1,500 

2,000 

2,500 

3,000 

3,500 

0 

2 

4 

6 

8 

10 

12 

14 

16 Vacancy Actual Projected

Completions Absorptions 

33 F.W. Dodge. REAPS. Fourth Quarter 1999.
 34 Torto Wheaton Research. Spring 2000. Office Outlook.
 

Regional Outlook—National Edition 21 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

Salt Lake City 

The Salt Lake City metropolitan statistical area (MSA) 

ranks in the top ten for active construction in both the 

office and hotel sectors. It is currently experiencing 

moderately high vacancy rates in the office and industrial sectors and high vacancy rates in the hotel sector as 

newly completed hotels to accommodate the Winter 

Olympics 2002 population are completed. The Salt 

Lake City construction employment level as a percentage of the total workforce is now the seventh highest in 

the country, and construction employment grew 5.65 

percent in 1999. Office vacancies rose sharply for the 

past two year-end periods, from 8.1 percent at year-end 

1998 to 12.5 percent at year-end 1999 (see chart). Rent 

growth was flat over the past two years. Although most 

new construction is occurring in the suburbs, office 

vacancy levels have risen in both the downtown and 

suburban sections of the Salt Lake City MSA. The suburbs were able to absorb only 58 percent of last year’s 

newly created office space. Salt Lake’s hotel occupancy 

slipped 4 percent in 1999 to approximately 60.5 percent, while average room rates fell 3 percent. Two new 

hotel properties with a total of 1,147 rooms are scheduled to open in November 2000. 

Although Salt Lake City’s office and hotel sectors have 

deteriorated in the past few years, community banks 

have been relatively unaffected. Salt Lake City’s established community banks report high levels of exposure 

to CRE loans, compared to the Region average. In first 

quarter 2000, the MSA’s community banks that have 

CRE loans and have been in existence more than 3 years 

reported a median level of CRE loans as a share of 

assets at 41 percent, higher than the region median of 33 

percent. In the event of a downturn in the area’s economy, the MSA’s established community banks may be 

more vulnerable than other community banks in the 

Region. 

Shayna Olesiuk, Economic Analyst 

Year-Ends 

Square Feet (000’s)

Vacancy Rate (%) 

Salt Lake City Office: Completions, Absorptions, and Vacancy Rates 

Source: Torto Wheaton Research 

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

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1,600 

1,800 

0 

5 

10 

15 

20 

25 

30 Actual Projected Vacancy 

Completions Absorptions 

Regional Outlook—National Edition 22 Third Quarter 2000 
In Focus This Quarter In Focus This Quarter
 

Seattle 

Strong growth in high-technology sectors and large 

amounts of venture capital have contributed to Seattle’s 

rank among the top ten metropolitan areas for new construction as a percentage of stock in the office, hotel, and 

multifamily sectors. The emergence of the high-technology industry, specifically software (Microsoft being a 

prime example), has fueled high employment and personal income growth in recent years. In addition, Seattle 

has gained popularity as a location for venture capital 

investing. Recent volatility in the stock market, coupled 

with continued layoffs by Boeing, the state’s largest 

employer, has begun to slow the MSA’s employment 

growth. Office absorption rates, which are closely tied to 

business expansion, could decrease if companies 

become constrained by labor shortages or choose to slow 

their growth in the face of more volatile capital markets. 

The vacancy levels for all five property sectors in Seattle are below national averages. The downtown Seattle 

office market has an enviable vacancy rate of only 1.4 

percent and over 100 percent absorption for the past 

four years. A recent study by Torto Wheaton 

Research,35 however, predicts much lower absorption 

levels in the coming years. With slower business 

growth, office vacancy rates in the Seattle MSA are 

expected to reach levels as high as 10 percent in three 

years (see chart). 

As a group, community banks in the Seattle metropolitan area have higher levels of exposure to construction 

and development and CRE loans than those in other 

metropolitan areas in the Region or the nation. In the 

first quarter of 2000, Seattle community banks reported 

CRE loans at 36.6 percent of total assets. Reported asset 

quality for the area’s community banks, however, 

remains strong. 

Sara Zachary, Research Assistant 

Robert Burns, Senior Financial Analyst 

Seattle Office: Completions, Absorptions, and Vacancy Rates 

Source: Torto Wheaton Research 

Year-Ends 

Square Feet (000's) 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20 

Vacancy Rate (%) 

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

Actual Projected Vacancy 

Completions 

Absorptions 

0 

1,000 

2,000 

3,000 

4,000 

5,000 

6,000 

7,000 

35 Torto Wheaton Research. Spring 2000. Office Outlook. 

Regional Outlook—National Edition 23 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 

Regional Outlook—National Edition 24	 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, personRegional Outlook—National Edition 25 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. 

Regional Outlook—National Edition 26 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. 

Regional Outlook—National Edition 27 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. 

Regional Outlook—National Edition 28 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 

Regional Outlook—National Edition 29 Third Quarter 2000 
Regional Perspectives
 

Atlanta Regional Perspectives
 

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

in many Atlanta Region metropolitan areas. A perception that high-tech growth is the key to guaranteed, 

rapid, and sustained economic development may be 

emerging. The addition of over one-quarter million new, 

high-paying, high-tech jobs to the Atlanta Region during the 1990s has undoubtedly helped fuel economic 

growth. The higher incomes have helped boost demand 

for local goods and services, including real estate development, generating a positive spillover effect in the rest 

of the economy. However, factors could coalesce and 

make it problematic for the high-tech industry to continue its strong performance. Slower economic growth 

could result in declining real estate absorption or weakening credit quality if layoffs occurred. Lenders should 

be aware that, as growth becomes more dependent on 

high-tech development, setbacks in the industry could 

reverberate throughout the rest of the economy and 

potentially affect insured institutions’ asset quality. 

De novo bank activity in the Southwest Florida market increases. The analysis presented in Atlanta 

Regional Outlook, first quarter 2000, suggested that 

economic and demographic growth and industry mergers and acquisitions (M&As) are correlated with the 

incidence of new bank charters. Southwest Florida’s 

population increased significantly with the addition of 

approximately 300,000 new residents during the 1990s. 

The area’s average annual population growth of 2.2 percent from 1990 to 1999 was one-half percentage point 

above the average for Florida and over twice that of the 

nation. M&A activity has been robust, as 27 of the 41 

insured institutions headquartered in the area in 1991 

have been acquired. A majority—22 institutions—have 

been acquired by out-of-state banking organizations. 

During the 1990s, 25 new institutions were chartered in 

Southwest Florida, including six in 1999. As of fourth 

quarter 1999, a total of 39 community institutions, each 

with assets less than $1 billion, were headquartered in 

Southwest Florida. Over 60 percent of these insured 

financial institutions, accounting for 33 percent or $1.7 

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

an economic downturn. 

The rapid pace of new institution openings and the large 

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

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

holding more than 73 percent of deposits in Southwest 

Florida, compared with only 42 percent in 1991. The 

preponderance of out-of-state institutions may affect 

competitive aspects of the local market through the 

types of services and products offered and differences 

in corporate cultures. 

In general, the new entrants to the market have pursued 

different lending strategies than have established players. The differences may result because established 

firms may have long-standing customer relationships, 

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

the local lending market. Alternatively, differences in 

loan portfolio structure could derive from new 

Southwest Florida because of intense lending 

establishing loan production offices outside 

firms trying to reach the break-even point 

more quickly by focusing on originating 

larger or higher-yielding loans. For example, a majority of the non-recessiontested institutions are engaged 

more heavily in construction 

and development lending. 

Anecdotal reports also suggest 

that new entrants are engaging 

in out-of-territory lending by 

purchasing loan participations or 

competition. 

Given the preponderance of real estate-related lending 

among new entrants, continued expansion and absorption in local real estate markets may be critical to the 

prospects of Southwest Florida’s non-recession-tested 

banks. Despite recent strong performance, Southwest 

Florida’s economy and, consequently, real estate markets are not without risk. A weaker real estate market 

combined with greater competition in the local banking 

industry, as new entrants increase, could affect institution earnings. 

In addition to the risks facing the Southwest Florida real 

estate market, the local banking industry may face challenges simply by virtue of the pace of new institution 

chartering activity—is the market deep enough for these 

new entrants to gain market share at reasonable costs? 

Regional Outlook—National Edition 30 Third Quarter 2000 
Regional Perspectives
 

Boston Regional Perspectives
 

The Boston Region continued to experience healthy 

job growth through the first six months of 2000. 

Labor markets generally continued to tighten. The 

Region’s 1999 per capita income growth again exceeded the nation’s. 

The Region’s insured institutions continue to report 

stable conditions. Excluding credit card specialists, the 

aggregate return on assets for the Region’s banks in first 

quarter 2000 was up modestly from the prior year. Net 

interest margins of larger institutions (assets greater 

than 

cial and industrial lending contin­

$1 billion) continued to 

decline, while margins at smaller institutions remained relatively flat. Core deposits as 

a percentage of assets continued to decline for all asset 

categories in the Region’s 

insured institutions. Commerues to be brisk and widespread. 

The Region’s insured institutions 

report relatively high levels of 

capital; however, aggregate capital ratios have been declining in publicly held institutions. The trend of declining capital 

ratios bears watching given that some indicators of 

risk are increasing and new risks are emerging. 

One indicator of heightened credit risk is the increase in 

the ratio of risk-weighted assets to assets. Two factors 

appear to contribute to the higher level of risk-weighted 

assets. First, the mix of assets that insured institutions 

maintain on the balance sheet is evolving away from 

lower-risk residential loans and U.S. Treasury and government agency securities. Second, growth in two offbalance-sheet items may be raising the level of riskweighted assets. These items are increases in unfunded 

commitments and increasing levels of asset securitization. 

Other factors affecting capital adequacy include rising 

interest rate risk; funding pressures; regulatory changes; 

certain advancements in technology that may jeopardize 

future earnings growth; shrinking loan loss reserve levels; 

and the expansion into new business ventures, such as 

insurance and securities underwriting and sales. 

In the past few years, large public institutions have 

adopted a greater degree of operating leverage to 

improve shareholder returns. This strategy has improved 

short-term equity returns during the current period of 

prosperity but may exacerbate poor returns during a 

period of financial hardship. 

In New England the general surge in equity valuations in the latter half of the 1990s most likely significantly boosted household income, wealth, and 

business hiring and investment. This linkage could 

pose a risk to the Region’s economic growth in the 

event of a significant, sustained market correction. 

Many U.S. households have enjoyed increased employment opportunities, income (through higher pay, bonuses, and stock options), and investment gains thanks to 

the rising stock market. Appreciation in home equity 

has also benefited household wealth. These factors likely have led to increased consumer spending. The strong 

stock market also has boosted business spending and 

investment by providing many firms with a lower cost 

of capital, decreased pension funding costs, and 

increased product demand. For example, certain industries, such as securities/asset management, usually 

increase employment and pay concurrent with any escalation in equity markets. Others, such as information 

technology, rely to a great extent on equity gains or venture capital funding to support ongoing operations. 

Growth at these companies is also financed primarily 

through equity. 

Most insured institutions in the Region have very modest exposure to highly valued equity markets, either in 

terms of directly held equities or through merchant 

banking operations. However, should the Region’s 

economy falter because of weakness in the stock market, consumer and business credit lines could be negatively affected. Yet any such weakness would likely 

need to be severe, prolonged, and accompanied by 

other significant factors (such as a national recession) 

in order to result in an outright recession in the 

Region’s economy. 

Also of concern is that some homes and commercial 

properties currently may be experiencing levels of valuation that are sustainable only under a scenario of strong 

equity markets. Thus, property values could fall abruptly should a severe correction in equity markets occur 

that results in significant job or income losses by 

employees at area financial services or information 

technology firms. 

Regional Outlook—National Edition 31 Third Quarter 2000 
Regional Perspectives
 

Chicago Regional Perspectives
 

Despite rising interest rates, economic conditions 

remained healthy at midyear 2000, and activity in 

some industries strengthened in the past year. 

Growth in the Midwest Manufacturing Index1 accelerated after mid-1999 despite rising interest rates. Meanwhile, the Region’s 3.7 percent unemployment rate 

hovered near its record low. Banks and thrifts in the 

Region reported median loan growth of 11 percent during the year ending March 31, 2000. 

Recent conditions, however, do not mean that the 

Region’s economy has become noticeably less sensitive 

to interest rates. Rather, other factors apparently tempered the effect of rising interest rates through mid-2000: 

•	 About half of the recent increase in interest rates 

merely reversed the 1998 decline during a period of 

financial market turmoil. 

•	 The results of tighter monetary policy may be slow 

to manifest themselves. The economy’s strength in 

early 2000 may reflect the tail end of stimulus from 

interest rate reductions in 1998. Conversely, the 

effect of a 50-basis-point increase in short-term rates 

in mid-May 2000 may not yet be evident. 

•	 Interest rates are not the sole driver of economic 

growth. To date, for example, the dampening effect 

of rising interest rates may have been mitigated by 

continuing job growth and reviving foreign demand 

for the Region’s output. 

•	 Consumer confidence in the Region has continued to 

rise, suggesting that interest rate increases have not 

seriously crimped households’ purchasing power or 

attitudes. 

Although the Region weathered rising interest rates without slowing significantly through mid-2000, it remains 

more vulnerable than elsewhere in the country to manufacturing sector weakness, which could be triggered by 

rising rates and financing costs. The Region is more 

diversified than it was 15 years ago, but the manufacturing sector remains relatively more dominant in the Chicago Region than in other parts of the nation. 

1 The Midwest Manufacturing Index is compiled by the Federal 

Reserve Bank of Chicago to reflect activity in manufacturing industries important in the Region’s economy. 

Liquidity management is becoming increasingly 

important in the Chicago Region. Aggregate loan-toasset levels and noncore funding are increasing, leading 

to declining liquidity trends. Insured institutions are 

reporting lower levels of marketable and short-term 

securities, while time deposits have trended toward 

shorter maturities. Borrowings and brokered deposits 

have increased, and unused commitment levels have 

risen. Profitability declines may continue to pressure 

institutions to operate with lower liquidity levels. 

Although the number remains historically low, 

recent examination information has shown an 

increase in the number of institutions with weak liquidity ratings. The number of relatively new institutions that have weak liquidity ratings has risen as well. 

Institutions that are maintaining less liquidity are 

exposed to the possibility that potential financial difficulties, such as asset quality or earnings problems, will 

be exacerbated. There is now an increasing likelihood 

that liquidity problems may move to the forefront. 

In light of recent liquidity 

trends, maintenance of unencumbered liquid assets and communication with funding sources 

are becoming more important. 

Institutions that rely on noncore funding should be aware of the potential for heightened reputation risk because many noncore funding sources are 

volatile and susceptible to withdrawal when signals 

point to financial difficulties. If a bank’s reputation is 

tarnished, the availability of unpledged securities or 

other marketable assets will become increasingly 

important. These “name neutral” assets may prove an 

important source of funds for institutions with liquidity 

problems. 

Federal Home Loan Bank (FHLB) advances have 

grown at a rapid rate in the Region and appear poised 

for continued strong growth. The Gramm-Leach-Bliley 

Act broadened access to the 

FHLB system for institutions with less than $500 

million in assets. As a 

result, nearly all institutions in the Region will be 

eligible for membership in the 

FHLB. 

Regional Outlook—National Edition 32	 Third Quarter 2000 
 

Regional Perspectives
 

Dallas Regional Perspectives
 

The robust high-tech sector of the 1990s contributed 

significantly to strong employment and economic 

growth in the Region’s leading high-tech metropolitan statistical areas (MSAs). However, the volatility of 

technology stock prices, typified by wide swings in the 

NASDAQ earlier this spring, suggests that the high-tech 

sector, like other sectors, is vulnerable to fluctuations in 

the overall economy. 

What constitutes a high-tech center? The Milken 

Institute’s July 1999 study “America’s High-Tech Economy” identified five Dallas Region MSAs—Dallas, 

Albuquerque, Denver, Austin, and Houston—as ranking among the top 25 high-tech metropolitan areas in the nation, based on 

concentrations and relative growth rates 

of high-tech industries. 

These five high-tech metropolitan areas have outperformed the United States in 

almost every economic 

indicator going back five 

and ten years. 

Of the five MSAs, Albuquerque 

is perhaps the most vulnerable to 

a downturn in the high-tech sector because of its large 

concentration of information technology industries, the 

federal government’s huge presence in and around 

Albuquerque, and the MSA’s dependence on foreign 

trade. Austin’s economy, like Albuquerque’s, is home to 

a large concentration of high-tech industries and is also 

vulnerable to a downturn in the high-tech sector. A lack 

of venture capital funding, a sustained stock market 

correction, and the drying up of the initial public offering market could affect Austin’s high-tech economy 

adversely. 

Denver’s vulnerability to a high-tech downturn is similar to Austin’s. High-tech industries employ over 

90,000 Denver 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. A greater degree of sensitivity to swings in the 

money and capital markets, in addition to a thriving 

financial services industry that is closely linked to 

financial market conditions, increases the vulnerability 

of the Denver MSA to a high-tech downturn accompanied by a prolonged bear market. 

Although Houston is home to a rapidly growing hightech sector, the energy industry continues to dominate 

the local economy. 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 

would a high-tech recession. Dallas has the most diversified high-tech base in the Region. This diversity 

makes the probability of a high-tech recession alone 

pulling down the Dallas economy somewhat remote. 

However, a national recession could result in a sharper 

and more protracted recession for the Dallas metropolitan area because of the increased sensitivity of hightech output to declines in national output. 

Implications for insured institutions in high-tech 

markets. Bank data suggest a close connection between 

the robust economic activity within the Region’s hightech 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, 

with loan portfolios placing greater emphasis on historically riskier forms of lending (e.g., construction and 

development and commercial real estate). This rapid 

loan 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. At the 

same time, large out-of-area banks are capturing greater 

market share. As the presence of large out-of-area institutions becomes more prominent in these high-tech 

MSAs, small banks and thrifts could experience 

increased competition that would have implications for 

profitability levels. 

Regional Outlook—National Edition 33 Third Quarter 2000 
Regional Perspectives
 

Kansas City Regional Perspectives
 

U.S. farm policy: which direction after 2002? 

Bankers who participated in the FDIC’s Agricultural 

Bankers’ Roundtable in Kansas City in March 2000 

were unanimous in their opinion that federal government supplemental payments to farmers and federal 

crop insurance were crucial to maintaining the financial 

health of farm borrowers in 1998 and 1999. The United 

States Department of Agriculture’s forecast suggests 

this will be true again in 2000, as government payments 

are projected to be nearly half of net farm income. 

In 2002, the current farm policy legislation, known as the 

Federal Agriculture Improvement and Reform (FAIR) 

Act of 1996, will expire, and Congress must write a new 

farm bill. Before passage of the 1996 FAIR Act, the farm 

program included a system of deficiency payments for 

major crops. The 1996 legislation introduced a number of 

fundamental changes in farm policy, including: 

•	 decoupling program payments from most production 

decisions, thereby ending the practice of paying 

farmers deficiency payments when prices of commodities fell below target prices; 

•	 eliminating federal authority to control the supply of 

program commodities by limiting planted acreage; 

and 

•	 establishing a schedule of fixed income support payments known as “production flexibility payments,” 

based on farmers’ historical pattern of production, that 

would be phased out during the 1996–2002 period. 

If proponents of the FAIR Act saw it as a phase-out of the 

government’s support of agriculture, events since 1996 

have worked against that intention. Responding to declining farm incomes, Congress has passed emergency supplemental legislation in each of the past three years. 

While federal farm policy has often been justified as a 

means of protecting the health of small farms, the continuing significant decline in the farm population suggests that the strategy has had little long-term effect on 

the continuing out-migration from farms. The goal of 

improving farm incomes relative to urban incomes may 

no longer be as relevant as it was when income support 

programs were instituted. In the 1920s, the standard of 

living of farm people was significantly below that of 

urban dwellers. Today, however, although there is considerable disparity across farm producers, average incomes 

of farm households generally equal or exceed those of 

nonfarm households, and the wealth of farm households 

averages several times that of all households. 

International trade issues will continue to constrain 

the direction of U.S. farm policy. Trade discussions 

are complicated by conflicts 

between the stated goals of 

domestic farm policy and 

the objectives of improving 

the conditions of international trade policy. Most 

countries follow policies 

that benefit their own farmers but cause significant 

distortions in international 

agricultural markets. 

The other major issue affecting the future direction of 

U.S. farm policy is the evolving relationship between 

rural development and agricultural policy. Farmers now 

make up only a small minority of the population of rural 

areas, so some analysts see the need for a rural development policy separate from agricultural policy. 

Possible directions of U.S. farm policy. Many analysts 

believe that three scenarios are possible. Under one scenario, the market-oriented features of the FAIR Act 

would be retained, a schedule would be set for ending 

any remaining payments to export crop producers, and 

permanent farm program legislation would be repealed. 

However, if commodity prices are low during the 

2000–2002 period, a significant retreat from the framework of the 1996 FAIR Act is possible. This second 

approach could restore past techniques of intervention, 

including target prices, increased use of export subsidies, and resurrection of supply control authority. 

A third scenario would retain the core reforms of the 

FAIR Act, including the end of deficiency payments and 

supply controls, but extend or enhance a variety of 

intervention strategies. These could include increased 

reliance on crop insurance, expansion of the Conservation Reservation Program, targeting aid to farmers 

based on their incomes instead of crop production, and 

integrating agricultural policy with a broader program 

of rural development. 

Regional Outlook—National Edition 34	 Third Quarter 2000 
Regional Perspectives
 

Memphis Regional Perspectives
 

Memphis Region employment growth continues to lag 

that of the nation. Although job growth accelerated 

slightly during the first half of 2000, the Region’s 1.7 percent gain is well below the nation’s 2.4 percent annual job 

growth rate. Arkansas and Kentucky report strong 

employment growth driven by the construction and service sectors. Kentucky also benefited from growth in 

automobile industry employment, but these gains may 

have peaked as higher interest rates and high gasoline 

prices point to a potential slowing of automobile sales. 

Louisiana’s economy continues to be constrained by 

retrenchment in the oil and gas industry. Despite a sharp 

upturn in oil prices since early 1999 and an increase in 

the number of operating oil rigs in 1999, employment 

growth in Louisiana’s energy sector has remained flat 

as companies have tried to 

reduce expenses by eliminating administrative jobs. 

Although gasoline prices are 

currently high and likely will remain 

so in the near future, oil industry 

employment may continue to decline 

as cost cutting and consolidation in 

the industry persist. 

Real estate markets throughout the Region are in 

transition. Population and employment growth, increasing income and wealth levels, along with an environment 

of low interest rates, contributed to booming residential 

development in the late 1990s. Likewise, a strong economy and expanding labor markets fueled growth in commercial real estate. Although overall construction 

activity in the Region remains fairly robust by historical 

standards, development is beginning to slow as interest 

rates have risen and demand has begun to wane. 

Community bank exposure to construction and development lending at the end of the first quarter of 2000 was 

almost double the exposure levels reported by these banks 

immediately prior to the 1990–91 recession. Not surprisingly, exposure is highest among community banks headquartered in metropolitan areas. Community banks in 

Baton Rouge, Memphis, and Nashville, in particular, 

reported average aggregate construction loan exposure 

well above levels reported in other metropolitan areas in 

the nation. Exposure levels in the Memphis metropolitan 

area were the third highest among all metropolitan areas 

nationwide, behind only Atlanta and Portland. 

Although slight deterioration has occurred recently, 

construction loan credit quality remains favorable. Also, 

construction credit underwriting standards are considered much stronger than in prior periods of robust real 

estate activity, such as that preceding the 1980s real 

estate crisis. One common theme for both periods, however, is intense competition among lenders. 

Construction lending is generally considered the most 

complex and labor-intensive type of lending performed 

by most community banks and can represent the greatest degree of risk. Prudent management must evaluate 

credit standards continuously and adjust to changing 

economic and market conditions. Although asset quality indicators remain strong, the high volume of recent 

construction loan originations and growing exposure at 

community banks during a period of generally slowing 

real estate markets are cause for some concern. 

CHART 1 

Strong Construction Loan Growth Reported 

at Community Banks in the Memphis Region 

30 

Even as construction activity has begun to moderate, 

many banks and thrifts in the Memphis Region 

continue to grow construction loan portfolios aggressively. Construction loans constituted the fastest-growing segment of loan portfolios at community banks and 

thrifts (those with total assets of less than $1 billion) 

over the preceding three years. Furthermore, growth in 

Annual Growth (%) 

25 

Construction Loans 

All Other Loans 

1Q98 1Q99 1Q00 

20 

15 

10 

5 

construction loans for the 12-month period ending 

March 31, 2000, a period including 9 months of rising 0 

interest rates and slowing real estate development, was Note: Community banks are those with less than $1 billion in total assets. Growth 

higher than in either of the preceding two years (see rates are calculated on a merger-adjusted basis. 

Source: Bank Call Reports Chart 1). 

Regional Outlook—National Edition 35 Third Quarter 2000 
Regional Perspectives
 

New York Regional Perspectives
 

Buoyed by a strong economy, employment levels continued to rise as the Region entered the new millennium. Between the first quarters of 1999 and 2000, 

approximately 373,000 new jobs were created in the 

Region, an increase of 1.7 percent. The Region now has 

surpassed, by a considerable margin, the employment 

peak attained prior to the recession of the early 1990s. 

Although the nation added jobs more quickly over the 

same period, at 2.3 percent, several areas of the Region 

are experiencing tighter labor markets than the nation. 

Many of these areas, particularly suburban counties surrounding major cities, experienced unemployment rates 

below 3.5 percent, approximately a point below the 

national average of 4.4 percent during the first quarter 

of 2000.1 

The Region’s insured institutions2 reported sound 

financial conditions in the first quarter of 2000, 

exhibiting higher levels of profitability, favorable 

credit quality, and stable capital ratios, compared 

with the same period one year earlier. While the average return on assets (ROA) improved for the Region’s 

large, medium, and small institutions compared with the 

first quarter of 1999, factors contributing to improved 

profitability differed according to asset size. Large 

banks benefited from increased noninterest income, 

while small banks reported higher net interest margins. 

Commercial and industrial loan portfolios in the 

Region’s banks, however, showed modest signs of credit quality deterioration. 

The Region’s banks showed signs of strained liquidity as more institutions reported securities depreciation and deposit outflow. Furthermore, the number of 

the Region’s commercial banks that reported the combination of securities depreciation, deposit outflow, and 

yearly loan growth of greater than 5 percent also 

increased. Depending on the degree of depreciation and 

liquidity needs, banks may use alternative methods to 

offset deposit outflow while funding loan demand. 

Banks with securities depreciation may be inclined to 

counter deposit outflow by raising deposit rates or 

increasing borrowings, rather than selling securities at a 

1 For purposes of comparison, county and national unemployment
 

rates are not seasonally adjusted.
 

2 Excludes banks in operation less than three years, credit card banks,
 

and five special-purpose banks.
 

loss. As alternative funding options are considered, 

assumptions underlying banks’ asset/liability management models should reflect changes in market conditions, core deposit behavior, and funding strategies. 

In contrast to the late 1980s, the Region’s office markets are experiencing stable or declining office vacancy rates and limited new construction. In the 1980s, 

high levels of inflation stimulated a wave of speculative 

demand for commercial real estate, and the office sector 

experienced an unprecedented building boom. The recession of the early 1990s hit the Region’s real estate markets harder than other parts of the nation, in part because 

new office construction and vacancy rates were 

climbing as the Region’s economy started to 

contract. 

Despite a recent resurgence of 

office construction in the Region, 

the amount of new office space 

added in the 1990s is substantially less than the amount developed 

in the 1980s. New office construction between 1995 and 1999 

totaled only 16 percent of the construction 

between 1986 and 1990. Furthermore, vacancy rates are 

declining in most of the Region’s cities, both large and 

small. As a result, the Region’s commercial real estate 

(CRE) markets appear better positioned today to weather an economic downturn than a decade ago. 

While the Region’s banks on average reported sound 

CRE credit quality measures in the first quarter of 

2000, a larger share of banks reported a concentration in CRE loans. Small banks (with assets less than 

$500 million) represented almost three-quarters of the 

Region’s banks that reported at least 20 percent of total 

assets as CRE loans as of March 31, 2000. In some of 

the Region’s cities, small banks that specialize in CRE 

lending have increased their proportion of CRE loans to 

assets to levels above those reported prior to the 

1990–91 recession. Smaller banks with more localized 

exposure to CRE markets may be more susceptible to 

softness in local economies or problems in specific 

industry segments, such as the Internet or health care. 

As banks expand CRE portfolios, lenders should be vigilant in monitoring economic conditions that could 

affect CRE loan quality. 

Regional Outlook—National Edition 36 Third Quarter 2000 
Regional Perspectives
 

San Francisco Regional Perspectives
 

The San Francisco Region’s nonfarm payroll 

employment growth continued to outpace the 

nation’s during the first five months of 2000. However, performance of the Region’s industry sectors has 

been mixed. Construction sector employment growth 

has been strong, with most activity occurring in commercial and residential projects. High-tech manufacturing employment in the Region has slowed; many of the 

job losses have occurred in the aerospace industry. In 

Washington and California, Boeing alone laid off 

35,000 employees between midyear 1998 and midyear 

2000. While California’s agricultural sector is performing well, some of the Rocky Mountain states—particularly Montana—are experiencing very dry conditions. 

The Region’s international trade outlook is improving as 

export volume has grown recently. 

The Region’s strong economy is reflected 

in insured institutions’ robust earnings and loan growth and good 

asset quality. Combined 

annualized return on assets 

(ROA) for first quarter 2000 

was 1.35 percent, slightly 

lower than performance over 

the past four quarters. Net interest 

margins held steady or increased 

for a large majority of the Region’s 

institutions during the first quarter 

compared with one year earlier. Asset quality was strong, 

as evidenced by the total past-due loan ratio of 1.69 percent and loan charge-off levels, which were essentially 

unchanged from prior periods. Loan portfolios at the 

Region’s institutions have grown rapidly, particularly in 

the commercial real estate (CRE) category. The median 

ratio of CRE loans to total assets was almost 25 percent 

at the end of first quarter 2000, compared with less than 

20 percent one year earlier. Construction and development (C&D) lending as a share of total assets, which 

increased at all but 15 percent of the Region’s institutions, 

was a primary driver of this increase. 

The Region’s high-tech sector has created jobs, contributed to gains in the Region’s exports, and stimulated growth in commercial and residential housing 

markets. Between 1993 and 1998, the high-tech sector 

created approximately 304,000 jobs, primarily in California, Washington, Oregon, and Arizona. Several of 

the largest high-tech companies in the nation, including 

Intel, Microsoft, Hewlett-Packard, Sun Microsystems, 

and Oracle, are located in the Region. While many of 

the Region’s states are leaders in the high-tech sector, 13 

metropolitan statistical areas (MSAs) report particularly strong concentrations of high-tech activity: San 

Francisco, San Jose, Oakland, Santa Rosa, Santa 

Cruz, Sacramento, Ventura, Orange County, and San 

Diego in California as well as Phoenix, AZ; Boise, ID; 

Seattle, WA; and Portland, OR. These MSAs report 

higher levels of venture capital issuance, per capita personal income growth, and residential and commercial 

real estate activity than do other MSAs in the Region. 

The Region’s 13 high-tech MSAs accounted for 

nearly 45 percent (about $9 billion) of all high-tech 

venture capital issued nationwide from first quarter 

1999 through first quarter 2000; most of the financing is in the San Francisco Bay Area and Seattle 

MSAs. Companies receiving financing are concentrated in the software, networking, and telecommunications 

subsectors. While high levels of venture capital provide 

a means for continued growth in payrolls or business 

expansion, this situation may link the financial success 

of firms in these areas more closely with the performance of the stock market. 

Currently, economic indicators suggest that the 

Region’s high-tech MSAs are thriving. Higher-paying 

technology jobs and generous stock option compensation contributed to growth in per capita personal income 

in high-tech MSAs that has exceeded growth in nonhigh-tech MSAs since 1996. Growth in the high-tech 

sector has also affected the Region’s residential housing 

markets: median home prices and housing permit 

issuance have increased more rapidly in the 13 hightech MSAs since 1993. Commercial real estate markets 

in high-tech MSAs experienced higher rents and construction levels and lower vacancy rates in recent years 

as a result of new high-tech business growth. 

Although few of the Region’s insured institutions lend 

directly to large high-tech companies, many operate in 

at least one of the high-tech MSAs. In recent years, institutions in high-tech MSAs have increased concentrations 

in CRE and C&D lending, traditionally higher-risk forms 

of lending. Growth in these loan types has outpaced the 

national rate each year since 1997. Institutions in hightech MSAs reported lower ROA levels, in part because of 

higher premises and salary expenses. However, stronger 

reported asset quality among banks in the Region’s hightech MSAs may mitigate any heightened levels of risk. 

Regional Outlook—National Edition 37 Third Quarter 2000 
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