Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION THIRD QUARTER 2001 

FDIC
 

San Francisco
 

Region
 

Division of
 

Insurance
 

Catherine I.
 

Phillips-Olsen,
 

Regional Manager
 

Phillip E. Vincent,
 

Regional Economist
 

Judy H. Plock,
 

Senior Financial
 

Analyst
 

John A. Roberts,
 

Economic Analyst
 

Shayna M. Olesiuk,
 

Economic Analyst
 

A Message to Our Readers 

The FDIC community extends its deepest sympathy to the families, friends, and 

co-workers of the victims of the attacks on September 11, 2001. 

The articles in this edition of the Regional Outlook were prepared before the 

tragic events of September 11. We will assess the implications of these events in 

future issues of the Regional Outlook. The public can rest assured that deposit 

insurance is in full force—money is safe in an FDIC-insured account. 

Regional Perspectives 

◆ Although the Region’s economy slowed through second quarter 2001, employment 

growth continued to outpace the national average. See page 3. 

◆ Should the economy continue to slow, revenues and employment could be further 

adversely affected in three of the Region’s key industries: high-tech manufacturing, 

lumber, and tourism. See page 3. 

◆ In addition to potential slowing in these three sectors, commercial and industrial 

loan quality could also be pressured by past weak underwriting standards, increasing concentration levels, and tighter staff ratios. See page 5. 

By the San Francisco Region Staff 

In Focus This Quarter 

◆ Slowing Economy Reduces Demand for U.S. Office Space—A slowing economy has contributed to softening in many U.S. office markets during the first half 

of 2001. The office vacancy rate has recorded the largest six-month increase in the 

past 20 years. A combination of trends—a substantial drop in demand for office 

space and an uptick in construction activity in some markets—has led to this 

slackening. 

This article reviews recent developments in U.S. office markets and describes 

demand-side and supply-side trends that have contributed to the recent weakness. 

It notes the role played by the changing fortunes of high-tech firms in a number of 

U.S. metro areas and how this situation has contributed to large increases in the 

volume of space available for sublease. Finally, the article focuses on the local 

construction and commercial real estate loan exposures of FDIC-insured banks 

and thrifts that have the task of managing their risks under changing market 

conditions. See page 9. 

By Thomas A. Murray 

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, AS, AZ, CA, 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 San Francisco Region’s 

Regional Outlook, please call Catherine I. Phillips-Olsen at (415) 808-8158 or send an e-mail to 

cphillips-olsen@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 Donald E. Powell 

Director, Division of Insurance Arthur J. Murton 

Executive Editor George E. French 

Writer/Editor Kim E. Lowry 

Editors Lynn A. Nejezchleb 

Maureen E. Sweeney 

Richard A. Brown 

Ronald L. Spieker 

Publications Manager Teresa J. Franks 
Regional Perspectives
 

Regional Perspectives
 

•	 Although the Region’s economy slowed through second quarter 2001, employment growth continued to outpace the national average. 

•	 Should the economy continue to slow, revenues and employment could be further adversely affected in three 

of the Region’s key industries: high-tech manufacturing, lumber, and tourism. 

•	 In addition to potential slowing in these three sectors, commercial and industrial loan quality could also be 

pressured by past weak underwriting standards, increasing concentration levels, and tighter staff ratios. 

The Region’s Economy Continued to Slow in Early 2001 

Despite slowing in the first five months of the year, 

particularly in the Region’s previously robust high-tech 

metropolitan areas, the San Francisco Region economy 

remains relatively strong. The Region’s nonagricultural employment grew 1.9 percent between May 2000 

and May 2001, well above the 0.4 percent growth rate 

for the nation. Going forward, however, the worldwide 

economic slowdown and rising global competition 

could pressure the Region’s already weakened technology and lumber sectors and the recession-sensitive 

tourism industry. 

These three key industries already have experienced 

slowing employment growth and credit defaults. In 

aggregate, these three sectors significantly contributed 

to the gross state products of Oregon, Nevada, 

Idaho, Arizona, Hawaii, and California in 1999 (see 

Chart 1). Consequently, problems in these sectors, 

particularly in the high-tech manufacturing and lumber 

industries, have contributed to the Region’s slowing 

nonfarm employment growth. In addition, these industries contain companies that either defaulted on their 

public obligations during 20001 or have an increasing 

probability of default.2 Any further declines in revenue and employment in these sectors could adversely 

affect commercial loan portfolios at several of the 

Region’s insured institutions. Insured institutions 

may not lend directly to these industries; however, 

1 Moody’s Investors Service. February 2001. Default and Recovery 

Rates of Corporate Bond Issuers: 2000. New York, NY. 2 Using the Expected Default FrequencyTM as measured by KMV 

LLC’s Credit Monitor®. KMV’s model uses options-pricing theory to 

derive market-based expected default probabilities or an expected 

default frequency. The model relies mainly on three pieces of information: (1) a firm’s asset market value, (2) the volatility of a firm’s 

asset market values, and (3) the firm’s capital structure or financial 

leverage. 

CHART 1 

Note: Gross state product shares for the San Francisco Region (SFR) represent 

the sum of the Region’s states. 

Source: Bureau of Economic Analysis, 1999

 Several States in the Region Are Exposed to 

Downturns in the High-Tech, Lumber, and 

Lodging Sectors 

Industry as a Share of Gross

State Produce (Percent) 

US SFR OR NV ID AZ HI CA MT WA UT WY AK 

Electronic Equipment 

Lumber and Wood 

Hotels and Lodging 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

they may lend to suppliers or surrounding businesses 

indirectly tied to these sectors. As a result, these institutions’ commercial credit quality could be adversely 

affected as well. 

High-Tech Manufacturing Has Suffered from 

Capital Expenditure Reductions 

The high-tech manufacturing industry has slowed considerably since September 2000. Sluggish demand for 

computers, telecommunications, and other capital 

equipment weakened output and revenues in the hightech manufacturing industry. In particular, industrial 

production fell in the semiconductor sector, which represents a significant component of the Region’s hightech manufacturing in Oregon, Idaho, Arizona, and 

Northern California (see Chart 2, next page). As a 

result, many semiconductor manufacturers announced 

layoffs and disappointing results during the first half of 

San Francisco Regional Outlook 3	 Third Quarter 2001 
Regional Perspectives
 

2001. According to Gartner Dataquest, semiconductor 

sales are expected to remain depressed through 2002.3 

The Lumber Industry Faces Price 

Uncertainties and Rising Energy Costs 

The lumber industry in Idaho, Montana, Oregon, and 

Washington (“the Northwest”) has experienced commodity price and employment declines in the past few 

years (see Chart 3). Weak Asian demand, competition 

from Canadian imports, and higher energy costs have 

contributed to this trend, and a slowing global economy 

could further dampen lumber industry revenues and 

employment. Northwest lumber-related exports to Japan, 

which first declined during the 1998 Asian crisis, are not 

expected to increase substantially given Japan’s continued 

slow economic growth. Furthermore, Canadian lumber 

imports into the United States, aided by a strong dollar, 

pressured prices for domestic softwood lumber through 

first quarter 2001. Expiration in March 2001 of the fiveyear U.S.-Canadian Softwood Lumber Agreement, which 

previously limited lumber imports from Canada, is another factor that may depress lumber prices. Additionally, 

higher electricity costs throughout the Western states have 

negatively affected lumber producers, because energy is a 

significant production input. Finally, a slowing U.S. economy could contribute to a decline in housing construction 

growth, which would constrain the construction industry’s demand for framing lumber. 

Tourism-Dependent Economies 

Could Also Experience Slowing 

Although tourism in the San Francisco Region has generally been strong during the past several years, a slowing economy could dampen this important sector. 

Historically, flagging consumer confidence and corporate spending cuts have adversely affected leisure and 

business travel budgets during economic downturns. A 

decline in this business sector could hurt several states 

in the San Francisco Region, particularly Hawaii and 

Nevada, where the hotel industry alone accounts for 

16 percent of employment. Visitor prospects in these 

states have shown some signs of weakness recently (see 

Chart 4). As of May 2001, Hawaii’s year-to-date visitor 

arrivals by air declined over prior year volumes, and the 

Asian visitor counts have not yet fully recovered since 

3 Gartner Dataquest. Spring 2001. Worldwide Semiconductor Revenue 

Forecast. 

Semiconductor Production Slowed 

Significantly over the Past 12 Months 

Note: Semiconductor industrial production = semiconductors and related 

electronic components, seasonally adjusted. 

Source: Federal Reserve Board Monthly Percentage Change

–5 

0 

5 

10 

1995 1997 1999 2001 

CHART 2 

CHART 3 

CHART 4 

Lumber Prices Have Been Volatile and 

Employment Has Declined 

Note: The Northwest includes Idaho, Montana, Oregon, and Washington. 

* Random Lengths Framing Lumber Composite ($/1,000 bd ft). 

Source: Journal of Commerce and Bureau of Labor and Statistics Seasonally Adjusted, Thousands

Framing Lumber* ($/1,000 Board Feet) 

Northwest Lumber Employment 

(Left Axis) 

’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

105 

115 

125 

75 

85 

95 

250 

300 

350 

400 

450 

500 

Price of Framing Lumber 

(Right Axis) 

Visitor Growth Has Slowed 

Note: Las Vegas data are based on visitor volume, whereas Hawaii’s are based 

on visitor arrivals by air. 

Sources: Las Vegas Convention and Visitors Authority and the Department of 

Business, Economic Development and Tourism of Hawaii Annual Percentage Change of the Three-Month Moving Average

Las Vegas 

Hawaii 

–10 

–5 

0 

5 

10 

15 

20 

25 

30 

’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

San Francisco Regional Outlook 4 Third Quarter 2001 
Regional Perspectives
 

the Asian crisis, making the state more reliant on 

domestic visitors and the condition of the U.S. economy. 

Las Vegas, Nevada’s most important tourist destination, 

recorded positive but slower visitor growth through the 

first five months of 2001. Furthermore, Las Vegas faces 

the uncertainties of rising energy costs and increasing 

competition from Native American-owned casinos and 

Internet gambling. 

Commercial and Industrial Credit 

Risk Exposure Is on the Rise 

The commercial loan quality at the Region’s insured 

institutions was generally strong in the second half of 

the 1990s; however, concurrent with the 2000 to 2001 

economic slowdown, signs of commercial and industrial (C&I) credit quality softening began to emerge. 

Specifically, C&I delinquency and loss rates increased 

at many insured institutions, particularly large banks. 

Between year-end 1999 and March 31, 2001, delinquent C&I loan ratios climbed from 1.5 to 2.7 percent 

at the Region’s large commercial lenders—well above 

the 2.1 percent delinquency ratio for similar-sized 

institutions nationally.4 Although C&I deterioration 

was most notable among large institutions, nearly half 

of the Region’s established community lenders also 

CHART 5 

60 

50 

40 

30 

20 

10 

0

Median Gross C&I Charge-Offs to

Overall Gross Charge-Offs (Percent)

reported a year-over-year increase in C&I delinquency 

ratios as of March 31, 2001.5 

Similarly, year-end 2000 C&I loss ratios increased at 

many of the Region’s established commercial lenders, 

and gross C&I losses represented an increasing share of 

gross loan losses within the Region (see Chart 5). Overall, commercial loan delinquency and loss rates remain 

low by historical standards for most insured institutions; 

nevertheless, rising delinquency and loss trends are of 

concern, given that C&I lending contributes significantly to the loan portfolios and incomes of many institutions. Current C&I delinquency and loss trends are 

explained in part by the well-publicized increase in 

problem syndicated6 C&I loans to troubled industries 

(see San Francisco Regional Outlook, first quarter 

2001). In addition to aggressive C&I loan growth, previously lax underwriting standards, larger transaction 

sizes, and smaller staffing bases could heighten the level 

of credit risk. 

Competition Has Driven Aggressive 

Underwriting at Some Institutions 

Strong loan growth and relaxed underwriting standards 

at some institutions, driven by increased competition, 

Commercial and Industrial Loan Losses Account for a Significant 

and Increasing Share of Gross Loan Losses 

TA < $1 Billion 

TA > $1 Billion 

Dec: ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 

Notes: C&I = commercial and industrial; TA = total assets. Includes institutions more than three years old, with C&I loans greater than zero, that are not specialty consumer 

credit card lenders.
 

Source: San Francisco Region Bank and Thrift Call Reports
 

4 Delinquency rates include C&I loans past due 30 days or more or on 

nonaccrual status as a percentage of total C&I loans. Large commercial lenders include insured institutions with total assets of at least 

$1 billion that reported C&I credit exposures; specialty credit card 

lenders are excluded. 

5 Includes only insured institutions that have C&I loans, that have less 

than $1 billion in total assets, and that were open for more than three 

years in both reporting periods. Because of Call Report limitations, 

delinquent C&I volumes might include past-due agricultural loans for 

certain institutions with less than $300 million in total assets. 

6 As defined under the interagency Shared National Credit review 

program, syndicated loans are defined as credits in excess of $20 million that are shared by at least three institutions. 

San Francisco Regional Outlook 5 Third Quarter 2001 
Regional Perspectives
 

could pressure C&I credit quality in the future. Between CHART 6 

December 1990 and December 2000, the volume of The Region’s Annual Commercial funded C&I loans grew by 54 percent among the Loan Growth Has Remained High Region’s insured institutions (see Chart 6). Concurrent since Dipping in the Early 1990s Year-Over-Year Growth (Percent)

with C&I portfolio growth during the late 1990s, loan 30 

C&I Loan Growth 

Total Loan Growth 

–30 

officer and examiner surveys suggest that underwriting 

standards loosened. As seen in Chart 7, senior loan officers at the nation’s largest institutions reported some 

easing of underwriting standards from 1996 through 

1998, followed by a more recent period of tightening.7 

Underwriting surveys conducted by FDIC examiners at 

community banks suggest that underwriting standards at 

smaller institutions did not change significantly over 

this time period and that many community banks con20 

10 

0 

–10 

–20 

’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 

tinue to engage in relatively risky credit risk management practices.8 For instance, more than 20 percent of 

insured institutions surveyed either “frequently” or 

“commonly” made business loans to borrowers who 

lacked documented strength to support the loans. A similar share also “frequently” or “commonly” failed to 

monitor the collateral pledged on asset-based loans. 

Both banker and examiner surveys commonly cite competition and growth targets as driving the decision to 

loosen standards. Competition for C&I loans was particularly brisk during the 1990s because of the development of small business credit scoring, narrowing net 

interest margins at savings institutions, and relatively 

high rates of new bank formation. 

CHART 7 

Notes: C&I = commercial and industrial. Data are adjusted for mergers in and 

out of the Region. 

Source: San Francisco Region Bank and Thrift Call Reports 

During the past decade, increased computer memory 

and processing speed made credit modeling and small 

business loan credit scoring more cost-effective. 

Although small business lending has historically been 

the niche of community banks, the increased use of 

credit scoring made the lending category more costefficient for larger institutions. Consequently, small to 

medium-sized institutions have faced increased competition for small business loans from large institutions 

in recent years. 

C&I Underwriting Has Tightened Appreciably over the Past Year 

Net Share Reporting Tightening

(Percent) 

Notes: C&I = commercial and industrial. 1Q = first quarter. 

Source: Federal Reserve Senior Loan Officer Surveys 

C&I Loans to Large Firms 

C&I Loans to Small Firms 

1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 

–20 

–10 

0 

10 

20 

30 

40 

50 

60 

70 

7 Federal Reserve Board. May 1997 through May 2001. Senior Loan
 

Officer Opinion Surveys on Bank Lending Practices. http://www
 

.federalreserve.gov/boarddocs/SnLoanSurvey/
 

8 Federal Deposit Insurance Corporation. October 2000 through
 

March 2001. Report on Underwriting Practices, http://www.fdic.gov/
 

bank/analytical/report/2001mar/uw0103.pdf.
 

San Francisco Regional Outlook 6 Third Quarter 2001 
Regional Perspectives
 

Community institutions are also facing increased competition from several new market entrants. For instance, 

net interest margin pressures at savings institutions 

prompted thrifts to expand their presence in the higher 

yielding commercial loan market. Between December 

1998 and December 2000, C&I loans grew 35 percent at 

the Region’s thrifts on a merger-adjusted basis. By 

March 31, 2001, three-quarters of the Region’s 103 savings institutions reported some volume of C&I loans. 

Among these commercial lenders, the median C&I 

loans-to-Tier 1 capital ratio was 18 percent as of March 

31, 2001, up from only 6 percent in 1990. Furthermore, 

to avoid commercial loan exposures in excess of regulatory limits, some thrifts have switched to commercial 

bank charters. Nationwide, 165 thrifts became commercial banks between 1990 and 1999. In contrast, only 42 

commercial banks converted to thrift charters over the 

same period. 

Increasing rates of new bank formation have also 

spurred C&I loan competition. Newly chartered institutions face core deposit challenges and extreme profit 

pressures, making C&I loan yields attractive. As of 

March 31, 2001, 86 percent of the Region’s 105 de novo 

institutions9 reported funded C&I loan balances, with a 

median C&I loans-to-total loans ratio of 26 percent. 

Unfortunately, many of the competitive forces that have 

driven underwriting standards have several downside 

risks. In particular, some of the major small businessscoring models have been developed since the last 

recession, using a fairly narrow window of historical 

data.10 Given the newness of these models in the commercial lending area and the limited historical data 

behind them, it is unclear how well this method of evaluating creditworthiness will compare with more traditional methods over the business cycle. As with credit 

scoring, other changes driving competition are largely 

not recession-tested. Specifically, many de novo management teams and traditionally consumer-oriented 

lenders entering the C&I business line have not experienced underwriting, monitoring, and managing larger 

C&I portfolios during an economic downturn. 

9 Defined as institutions in operation for three years or less. 

10 Matthews, Gordon. April 2001. “Small Biz Scoring to Face First 

Test.” US Banker. Engen, John R. Nov./Dec. 2000. “Blind Faith.” 

Banking Strategies. Chicago. 

Increasing C&I Concentration Levels and 

Staffing Issues Also Could Pressure Asset 

Quality Should the Economy Continue to Slow 

Lending concentrations could heighten risks for some 

insured institutions. Approximately half of the Region’s 

insured institutions report C&I loans-to-Tier 1 capital 

ratios exceeding 100 percent. If insured institutions with 

elevated C&I concentrations have not diversified their 

portfolios across industries or geographies, economic 

slowing in one area or sector could significantly affect 

asset quality. Similarly, if an institution has lent large 

sums to a single borrower, the default of that one customer could significantly increase problem loan volumes in a short period. For instance, the notable 

increase in delinquent C&I loans currently being experienced by several large lenders is due in part to the size 

of the syndicated loan transactions involved.11 Although 

community banks have not experienced the same degree 

of deterioration in their commercial loan portfolios, 

some appear to have increased their exposures to single 

borrowers. For instance, among the Region’s small metropolitan commercial lenders,12 the average small business loan13 has increased from 10 percent of loan loss 

reserves in 1993 to more than 18 percent in 2000 (see 

Chart 8, next page). Because C&I loans are often unsecured or are secured with less marketable collateral, 

associated loan losses can be high in relation to other 

loan types. Consequently, loan loss reserves at insured 

institutions with high average loan sizes could be vulnerable in the event of elevated credit defaults. 

Staffing levels could also prove critical in an economic 

downturn because covenant and borrower monitoring are 

key elements of commercial loan portfolio risk management. However, insured institutions have trimmed staff 

levels since the last recession. For instance, the volume of 

serviced assets14 per employee at the Region’s community institutions has risen nearly 50 percent over the past 

eight years. Additionally, the Region’s serviced assetsper-employee ratio has recently increased faster than the 

11 See Regional Outlook, first quarter 2001. 12 Defined as insured institutions with commercial loans that have less 

than $100 million in total assets. Specialty credit card institutions are 

excluded. By number, small metropolitan commercial lenders represent more than 20 percent of all insured institutions headquartered in 

the Region. 

13 A small business loan is defined as a commercial loan of less than 

$1 million. The average-sized loan was calculated by dividing the 

total volume of small business loans by the number of small business 

loans reported by institutions in June of each year. 

14 Defined to include the sum of assets, unfunded commitments, and 

mortgage loans serviced for others. 

San Francisco Regional Outlook 7 Third Quarter 2001 
Regional Perspectives
 

CHART 8 CHART 9 

Notes: Small = less than $100 million in total assets. Includes only metropolitanbased institutions with commercial loan exposures that do not specialize in 

consumer credit cards. Small business loans are defined as commercial credits 

less than $1 million. 

Source: San Francisco Region Bank and Thrift Call Reports 

Transaction Concentration Risks Have 

Risen at Small Metropolitan Institutions 

Average Small Business Loan Size

(Median, $000s)

Average Small Business Loan/ 

Loan Loss Reserve 

(Median Percent) 

Share of Loan Loss 

Reserves (Right Axis) Size (Left Axis) 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20 

0 

10 

20 

30 

40 

50 

60 

70 

Jun: ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00

Employees at Community Institutions Are 

Responsible for a Growing Volume of 

Serviced Assets 

Notes: Serviced assets = the sum of assets, unfunded commitments, and 

mortgage loans serviced for others. FTE = full-time equivalent employee. 

Excludes institutions with total assets exceeding $1 billion. 

Source: Bank and Thrift Call Reports, data as of December 31 each year Serviced Assets per FTE (Median $000s) 

San Francisco 

Region 

Nation 

1600 

2400 

3200 

’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 

national average (see Chart 9). The increase is likely 

attributable in part to improved banking technologies and 

to the decline in problem assets at insured institutions 

over the period. However, insured institutions in some 

markets have reported a shortage of commercial loan 

officers, citing the decade-long expansion in commercial 

loan business and the discontinuance of training programs at many large banks.15 Some observers consider 

inexperienced or declining staffing resources to be one of 

the top risks facing the industry today. For instance, 

Joseph May, an industry consultant and former chief 

credit officer of several large banks, voiced concern that 

“a whole generation of lenders...[has] never experienced 

[an economic] decline” and that “administrative support 

areas have been hit hard with a focus on efficiency.”16 

Technological advances may have improved the efficiency of the asset management function; however, in the 

15 Reosti, John. February 26, 2001. “Wanted: A Few Good Commercial Loan Officers.” American Banker. 16 May, Joseph W. July 16, 2001. “The Top 10 Current or Prospective 

Lending Challenges in Large Financial Institutions.” Emerging Issues 

in Large Financial Institutions. Federal Financial Institutions Examination Council. 

event of an economic slowdown, institutions with 

increasing levels of problem C&I loans could have difficulty managing these more labor-intensive commercial 

loan portfolios if they are not adequately staffed. 

Economic and Competitive Factors Could Affect 

All Commercial Lenders in the Region 

The confluence of economic and competitive factors 

could contribute to additional deterioration in commercial loan portfolios among the Region’s insured institutions. C&I delinquency and loss rates have been higher 

among larger institutions; however, banks and thrifts of 

all sizes could be vulnerable to the ripple effects from 

weakness in the Region’s economy, particularly in the 

high-tech manufacturing, lumber, and tourism industries. 

Additionally, credit-scoring models are not yet recessiontested, loan transaction sizes have increased, and cutbacks 

in loan department staffing could be problematic if the 

volume of problem loans increases significantly. 

By the San Francisco Region Staff 

San Francisco Regional Outlook 8 Third Quarter 2001 
In Focus This Quarter
 

Slowing Economy Reduces 


Demand for U.S. Office Space
 

•	 Demand for U.S. office space contracted during 

the first half of this year as the amount of newly 

vacated space exceeded the amount of newly 

occupied space for the first time since at least 

1981. 

•	 The U.S. office vacancy rate jumped 250 basis 

points in the first half of 2001, from 8.3 percent to 

10.8 percent. 

•	 With construction levels remaining high and 

demand still weak, the vacancy rate could rise 

further by year-end. 

Overview 

Commercial real estate (CRE) markets traditionally 

have been—and remain—highly cyclical. During the 

1990s, most U.S. office markets experienced a strong 

upswing. However, declining office employment 

growth along with other recent signs point to a possible 

downturn. As reported by Torto Wheaton Research 

(TWR), the U.S. office vacancy rate, which stood at a 

19-year low of 8.3 percent at the end of 2000, jumped in 

only six months to 10.8 percent, the largest six-month 

increase in the 20 years TWR has tracked these data. 

Office vacancy increases range from modest levels in 

some markets to high levels in markets where supply 

and demand imbalances are more pronounced. 

An uptick in construction activity combined with a substantial drop in demand for office space has led to a 

slackening of office market conditions. In light of the 

ongoing uncertainty as to the near-term direction of the 

U.S. economy, these trends make the current situation 

difficult for office market participants to read. 

This article reviews recent developments in U.S. office 

markets and describes demand-side and supply-side 

trends that have contributed to the recent weakness.1 

It notes the role played by the changing fortunes of 

1 For further discussion of demand and supply trends, see Sally Gordon, “CMBS: Red – Yellow – GreenTM Update, Second Quarter 2001 

Quarterly Assessment of U.S. Property Markets,” Moody’s Investors 

Service, July 6, 2001. 

high-tech firms in a number of metropolitan areas and 

how this situation has increased the volume of space 

available for sublease. Finally, the article focuses on the 

local construction loan exposures of insured banks and 

thrifts that have the task of managing their risks under 

changing market conditions. 

Vacancy Rates Have Risen 

Quickly from Cyclical Lows 

At year-end 2000, the U.S. office vacancy rate stood at 

8.3 percent—a 19-year low. Many individual metro 

areas posted even lower vacancy rates. For example, at 

year-end 2000, vacancies were 4.4 percent of available 

space in Seattle, 1.3 percent in San Jose, and 3.0 percent 

in Oakland. Beginning with first quarter 2001, as a 

result of a slowing economy and the fallout from the socalled “tech-wreck,” the U.S. vacancy rate rose by 120 

basis points to 9.5 percent—the highest absolute quarterly increase since these data were first published in 

1981. Another record increase of 130 basis points 

occurred during the second quarter, bringing the vacancy rate to 10.8 percent. To put these increases in perspective, consider that the national office vacancy rate 

has increased more than 50 basis points in any given 

quarter only twice.2 Nonetheless, the current vacancy 

rate of 10.8 percent remains low by historical standards, 

as the average rate for the past 20 years has been 13.9 

percent. 

Most of the nation’s large metro areas saw increases in 

office vacancies during the first half of 2001. Fortyeight of the 53 major metropolitan areas tracked by 

TWR recorded a higher vacancy rate in June 2001 than 

at year-end 2000. Thirty-eight markets experienced 

increases of at least 100 basis points, and four markets 

saw vacancy rates jump by more than 600 basis points. 

As shown in Table 1 (next page), most of the markets 

experiencing the largest jump in vacancy rates also are 

home to concentrations of high-tech employment.3 As 

2 TWR notes increases of 60 basis points in the second quarter of 

1989 and in the first quarter of 1999. 

3 Seven of the ten markets with the highest first-half 2001 vacancy 

rate increases are also among the top ten cities having the greatest 

levels of high-tech employment. 

San Francisco Regional Outlook 9	 Third Quarter 2001 
In Focus This Quarter
 

TABLE 1 

In Many Markets, Office Vacancy Rates Reflect 

Concentrations of High-Tech Employment 

VACANCY RATE VACANCY RATE INCREASE IN HIGH-TECH AS % 

AS OF 6/30/01 AS OF 12/31/00 VACANCY RATE OF TOTAL MARKET 

METRO AREA (%) (%) (BASIS POINTS) EMPLOYMENT 

AUSTIN 11.8 5.0 680 10.1 

SAN JOSE 8.1 1.3 680 27.4 

OAKLAND 9.3 3.0 630 6.5 

SAN FRANCISCO 10.3 4.1 620 8.3 

SEATTLE 9.4 4.4 500 6.6 

KANSAS CITY 15.9 11.0 490 2.7 

BOSTON 8.7 3.9 480 8.2 

PHOENIX 16.9 12.5 440 4.7 

WILMINGTON, DE 10.4 6.2 420 3.8 

WASHINGTON, DC 7.8 3.9 390 7.8 

NATION 10.8 8.3 250 4.8 

Sources: Torto Wheaton Research, Economy.com, Inc. 

high-tech markets spurred higher demand for office 

space in the recent past, these markets are now giving 

back greater quantities of previously occupied office 

space. Table 2 (see page 18) lists office vacancy rates 

and changes along with lending concentrations, construction activity levels, and high-tech employment 

percentages for 53 major metropolitan areas and for 

the nation. 

Unlike the last cycle, during which office vacancies 

shot up primarily in overbuilt downtown areas, recent 

increases are occurring more sharply in suburban than 

downtown sections of metropolitan areas. As of June 

30, 2001, the average downtown office vacancy rate 

was 8.5 percent, and the average for suburban markets 

was 12.1 percent. Increases in office availability are 

dispersed among Class A office properties as well as 

Class B/C properties, yet vacancy rates do show disparities across many submarkets. For example, the 

South of Market area in San Francisco reports significantly higher office vacancy rates than the Financial District.4 Similarly, in the Washington, DC, 

metropolitan area, the technology-intensive northern 

Virginia office market has experienced higher office 

vacancy increases than downtown Washington, DC, or 

suburban Maryland. 

4 Louis, Arthur M. July 24, 2001. “Empty Offices, Economic Downturn, Overconstruction Leave Commercial Landlords with More 

Space on their Hands.” San Francisco Chronicle. 

Office Demand Drops 

Net absorption, the primary indicator of demand for 

office space, was negative during first quarter 2001 for 

the first time since TWR began reporting the series.5 

(Negative absorption occurs when space returned to the 

market by existing tenants exceeds the space occupied 

by new tenants.) This negative performance was repeated in the second quarter. The decline in the volume of 

competitively leased space totaled 30 million square 

feet during the first half of 2001. (See Chart 1.) 

The bulk of negative absorption in the first half of 2001 

is due to the return of office space to the market through 

subleasing.6 TWR reports that there were 43 million 

square feet of space “give-backs” through subleasing in 

the first half of 2001, and after offsetting absorption of 

13 million square feet, negative absorption was 30 million square feet. 

Office employment growth, the source of new office 

space demand, tends to be driven by the finance and services sectors.7 Year-over-year job growth in the finance, 

5 Net absorption is the net change in total competitively leased space 

per period, as measured in square feet. 

6 In some metropolitan areas, over half the total office space available 

for rent (vacant space) is sublease space. 

7 TWR constructs its office employment index based on trends in the 

FIRE sector plus selected categories of the services sector. See TWR 

Office Outlook, Spring 2001, Vol. II, p. A.1. 

San Francisco Regional Outlook 10 Third Quarter 2001 
 

In Focus This Quarter
 

CHART 1 

Net Absorption Turned Negative in 2001 

Vacancy Rate (%) 

Square Footage (000s) 

Vacancy 

Rate (%) 

–40,000 

–20,000 

0 

20,000 

40,000 

60,000 

80,000 

100,000 

120,000 

140,000 

Completions 

(S.F.) 

Absorptions 

(S.F.) 

Negative 

Absorption 

’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

0.0 

2.0 

4.0 

6.0 

8.0 

10.0 

12.0 

14.0 

16.0 

18.0 

20.0 

Notes: 2001 is as of June 30. S.F. = square footage 

Source: Torto Wheaton Research 

insurance, and real estate (FIRE) and services sectors 

combined was more than 3 percent in every month from 

January 1993 through June 2000. Since the middle of 

2000, job growth in these sectors has fallen steadily to a 

year-over-year rate of less than 1.5 percent in June 2001. 

A spring 2001 survey conducted by Salomon Smith 

Barney indicated that tenants estimated their growth in 

office space demand to be only 0.6 percent over the following 12-month period.8 Also contributing to reductions 

in demand are increases in worker layoffs. Announced 

layoffs during the first seven months of 2001 totaled over 

983,000 individuals, more than triple the number of 

announced layoffs during the same period last year.9 

The slowdown in the demand for office space contrasts 

sharply with the situation last year, when absorption 

rates and office employment growth were robust in most 

markets, and leases were executed quickly for newly 

constructed properties. As shown in Chart 2, absorption 

of office space in 2000 actually outstripped the trend in 

office employment by a considerable margin. Why? 

With relatively easy access to initial public offering and 

venture capital funding, many startup firms anticipated 

rapid growth and leased office properties accordingly. In 

fact, venture capital funding facilitated historically higher rates of office space absorption by high-tech and other 

startups. In active bidding wars, new high-tech firms 

increased their office space holdings. A phenomenon of 

space hoarding developed in which some high-tech 

companies leased large quantities of office space in 

anticipation of future expansion. 

8 Boston, Gary, Ross Nussbaum, and Jonathan Litt. May 16, 2001.
 

“Real Estate Demand Survey.” Equity Research: United States, Real
 

Estate Investment Trusts. Salomon Smith Barney. 
 9 Data provided to Haver Analytics by Challenger, Gray & Christmas.
 

More recently, because of a slowing economy, curtailed 

funding, and failures to achieve sales expectations, 

many high-tech and dot-com firms have closed or 

scaled back operations significantly. At the same time, 

traditional firms have reconsidered plans to expand, 

adopting a “wait and see” attitude. Consequently, as 

demand for space declines, large blocks of office space 

are returning to markets for sublease. 

Space available for sublease is similar to landlordoffered space available for rent—space under both categories should count toward a market’s available rental 

space. However, in the case of subleasing, tenants, 

rather than landlords, offer properties for rent. Tenants 

may attempt to sublease the property themselves or use 

a broker; however, in general, only space handled by a 

broker is included in the tally of a market’s available 

rental space. Consequently, current office vacancy 

increases could be higher than reported. 

CHART 2 

Office Demand Spiked in 2000 as Employers
 

Took on More Office Space than Needed
 

Sq. Ft. Absorbed Office Employment 

(000s) Growth (000s) 

120,000 

Office employment 

growth 

Office absorption 

’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

1,000 

900 100,000 

800 

80,000 700 

60,000 600 

40,000 500 

400 

300 

20,000 

0 

200 

–20,000 100 

–40,000 0 

Note: 2001 is as of June 30. 

Source: Torto Wheaton Research 

San Francisco Regional Outlook 11 Third Quarter 2001 
In Focus This Quarter
 

Meanwhile, Construction Continues 

An uptick in office construction activity that began in 

many metro areas during the late 1990s has been a key 

element contributing to recent increases in office 

vacancies. According to the Bureau of the Census, 

U.S. expenditures on office construction totaled $47.5 

billion in 2000, continuing a seven-year cycle of 

expansion. Adjusted for inflation, this amount represents about 78 percent of the peak level of office construction expenditures that occurred in 1985. 

Recently, the pace of construction has slowed slightly, 

falling to an annualized rate of $44.3 billion in 

May 2001. 

Reflecting these large dollar outlays on office construction, TWR projected in December 2000 that 

111.3 million square feet of new office space (or 3.6 

percent of existing stock) would be completed during 2001. This newly completed space will come 

on the market following a period of rising construction activity from 1998 through 2000, during which 

the volume of completed office space averaged 84.9 

million square feet per year. As shown in Chart 3, 

however, current office construction activity as a 

percentage of existing stock falls well below that of 

the 1980s. 

CHART 3 

Many metropolitan areas currently experiencing high 

levels of construction activity also are seeing the largest 

increases in office vacancies. For example, cities that 

are positioned toward the upper right quadrant of Chart 

4 are characterized by higher vacancy rate increases and 

more new office space construction. The ten cities with 

the highest first-half 2001 vacancy rate increases had 

total square footage of under-construction office space 

at 6.5 percent of existing stock as of year-end 2000.10 By 

comparison, total office space under construction 

nationally was 4.5 percent of existing stock.11 

Even as most projects move toward completion, some 

developers are reconsidering office construction 

plans. Builders have stopped construction of significant 

projects midstream in the Austin, Dallas, Seattle, and 

northern Virginia markets in response to retrenchment 

by major tenants and competition from subleased space. 

Softening Extends to Other 

Commercial Real Estate 

Other major commercial real estate markets are also 

feeling the effects of a slowing economy and, with the 

exception of the retail sector, are experiencing increasing vacancy rates. 

Office Construction Activity Increases in Recent Years yet Remains Well Below Level of the 1980s 

12 

10 

8 

6
 

4
 

2
 

0 

Notes: Construction activity is completions per year divided by prior year-end stock. 2001 is projected. Office Completions Divided by Stock (%) 

’82 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 

Source: Torto Wheaton Research 

10 One measure of a metropolitan area’s exposure to overbuilding 

and rising vacancy rates is the degree of construction activity. This 

measure is found by dividing a metropolitan area’s completions 

square footage or the under-construction square footage by the 

total stock of office property. 

11 The national 4.5 percent level for office properties under construction at December 2000 is higher than the 3.6 percent level for projected completions in 2001 because not all properties being built in 2001 

will be completed during the year. 

San Francisco Regional Outlook 12 Third Quarter 2001 
In Focus This Quarter
 

CHART 4 

Some Markets with Large First Half 2001 Office Vacancy Increases 

Also Have High Construction Activity 

Note: Construction activity is measured by a market's under-construction square footage at year-end 2000 divided by total square footage in that market as of year-end 2000. 

Source: Torto Wheaton Research, Spring 2001 Basis Point Vacancy Increase 

Construction Activity as Percentage of Stock 

Austin 

San Francisco 

San Jose 

Oakland 

Ventura 

Fort Lauderdale 

Seattle 

Miami 

Charlotte 

Orlando 

Las Vegas 

Northern New Jersey 

Phoenix 

Boston 

Washington, DC 

Kansas City 

Wilmington, DE 

Portland 

Atlanta 

Denver 

Columbus 

San Diego 

Nation 

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

–200 

–100 

100 

300 

400 

600 

700 

800 

0 

200 

500 

Industrial vacancy rates had fared well in recent years. 

As of year-end 2000, the national vacancy rate of 6.7 

percent was the lowest since 1984. Now, however, a 150­

basis-point increase has occurred, with industrial vacancies increasing to 8.2 percent in the first half of 2001.12 

As the economy and the nation’s high-tech and manufacturing sectors continue to slow, demand for industrial 

space for research and development and storage and distribution is declining. Industrial property subleasing is on 

the rise, and negative absorption occurred in the first half 

of 2001. At the same time, completions of industrial space 

during 2001 are estimated to exceed 220 million square 

feet, the highest level since 1988. Landlords are offering 

concessions, such as lease terms of one year compared 

with five to ten years, in an attempt to attract new tenants. 

Industrial properties are somewhat less exposed to risks 

from overbuilding than office properties because of 

shorter construction periods and the ability to respond 

quickly to any change in demand. An exception is the 

telecommunication hotel,13 a new entry into this market. 

This property type is characterized by a longer construction cycle and the fact that it typically has a “single 

use” design. In recent months, construction of these 

structures began in many high-tech markets to provide 

enhanced levels of data service. With declining demand, 

some telecom hotels stand vacant. 

12 Torto Wheaton Research. 

13 Telecom hotels are large, high-energy-consuming warehouses that 

house machinery, servers, routers, and switches that are the physical 

underpinning of the electronic commerce conducted on the Internet. 

They are hotels in the sense that they house equipment belonging to 

many different telecommunication companies. John Holusha, “Home 

for Machinery of the Internet,” The New York Times, August 16, 2000. 

The demand for hotel rooms is adversely affected by a 

slowing economy. Businesses have cut travel budgets 

and consumers have scaled back leisure plans, contributing to a decline in occupancy levels and revenue per 

available hotel room in most markets throughout 2001. 

Currently, upscale and luxury hotels are suffering more 

than limited service hotels. According to Smith Travel 

Research, limited service hotels, particularly budget 

hotels, represent the only lodging sector with higher 

occupancy levels through the first four months of 2001 

when compared to the same four month period in 2000. 

The supply of new hotel properties is lower than in the 

past, as financing for new hotel construction for the 

most part has been curtailed in recent years. However, 

limited service hotels are reported to be overbuilt in a 

number of markets in the Southeast and Southwest.14 

Annualized expenditures for new construction of all 

hotel types were $12.1 billion as of May 2001, falling to 

the lowest level since 1996.15 

The multifamily sector has experienced robust construction and equally strong absorption in recent years 

as new household formation, the driver for apartment 

demand, continues to increase. Annualized construction 

expenditures of $25.5 billion as of May 2001 were at the 

highest level since 1989.16 Despite the relative equilibrium between supply and demand for apartments in most 

markets, vacancy increases and rent declines are occurring in some locations. This decline has been most acute 

14 Kozel, Peter P. June 18, 2001. “U.S. Commercial Property Markets 

in a Slowing Economy: Implications for CMBS Credit Performance.” 

Standard and Poor’s Structured Finance. 

15 Data provided to Haver Analytics by U.S. Bureau of the Census. 

16 Ibid. 

San Francisco Regional Outlook 13 Third Quarter 2001 
In Focus This Quarter
 

in the more concentrated high-tech markets, such as San 

Francisco, where reported average rental rates dropped 

8.1 percent between the end of March and the end of 

May 2001.17 

Despite a slowing economy, the retail sector has performed reasonably well, as consumers maintain relatively high spending levels. Many of the store closings 

in 2000 and 2001 have been absorbed by new tenants as 

landlords have acted quickly to avoid letting vacant 

space linger. Meanwhile, robust construction has continued, with total expenditures in 2000 of $52.6 billion 

and an annualized level of $52.2 billion as of May 2001. 

Each of these two years’ expenditure levels exceeds all 

previous years’ retail construction amounts since data 

were first gathered in 1964.18 

Taking note of the robust level of retail construction 

activity, a recent Moody’s article finds that the nation’s 

mall retail and “power center”19 space grew by 3.3 percent in 2000, while population growth expanded by 

only 1.2 percent. The article raises concerns for potential excess supply of retail space resulting from a construction rate that is almost triple the population 

growth rate.20 A negative consequence of the high 

rate of retail construction is found in a recent 

Standard and Poor’s study. This article points out that 

most of the retail mortgages (held in commercial 

mortgage-backed pools of assets) that defaulted during 2000 did so because of competition from new 

retail establishments.21 

Implications for Insured Institutions 

Office vacancy rates during the first half of 2001 

increased at an unprecedented rate. What does this 

mean for insured institutions? On the one hand, at mid2001 vacancy rates remained below their 20-year average. Yet the speed of the increase and the number of 

17 Associated Press, News in Brief from the San Francisco Bay Area,
 

June 13, 2001.
 

18 Data provided to Haver Analytics by U.S. Bureau of the Census.
 

19 According to the Urban Land Institute, a power center is a community shopping center in which at least 75 to 90 percent of the selling
 

space is devoted to multiple off-price anchors and a discount department store or warehouse club. It is the “power” of its anchors that
 

gives the center its name. 


20 Sally Gordon, op. cit.
 

21 Kozel, Peter P. April 20, 2001. “Outlook for Property Markets in a
 

Slower-Growing Economy and the Implications for CMBS Credit
 

Performance.” Standard & Poor’s Structured Finance.
 

metropolitan areas that have experienced softening 

make this a trend that deserves the close attention of 

insured institutions, especially those with significant 

concentrations in commercial real estate and construction lending. 

Financial indicators of real estate credit quality in banking remain favorable, with losses and delinquencies 

trending up modestly from minimal levels. Noncurrent 

construction and development (C&D) loans as of March 

31, 2001, remain at a relatively low .92 percent of all 

outstanding C&D loans. (Noncurrent C&D loans as a 

percentage of all C&D loans averaged .93 percent for 

the past five year-ends.) Similarly, noncurrent CRE 

loans22 as of March 31, 2001, were .82 percent of all 

CRE loans, a level consistent with the average for this 

ratio of 1.08 percent for the past five year-ends. Chargeoff ratios at March 31, 2001, for both C&D and CRE 

loans were each at .02 percent and remain below the 

averages of .05 percent for each for the past five yearends. These favorable numbers are the legacy of a 

strong economic expansion, whereas current economic 

events suggest the potential for future deterioration in 

credit quality. 

The outlook for commercial real estate credit quality 

depends on the depth and duration of the current economic slowdown and on the risk management practices 

of each institution. In this regard, as signs of increasing 

risk materialize in conjunction with a declining economy, lenders appear to be managing risks prudently and 

avoiding speculative lending.23 Anecdotal information 

suggests that borrowers are pressed to obtain higher 

prelease commitment levels in order to gain loan 

approvals. In addition, lenders are requiring more upfront equity.24,25 

The importance of risk management practices is magnified by the heightened lending concentrations currently prevailing at some banks. Institutions with 

elevated concentrations in CRE and C&D lending have 

been more likely to experience significant problems 

during times of economic stress (for further details, 

22 CRE loans are nonfarm, nonresidential loans secured by real estate.
 23 Speculative construction lending is defined as a loan not accompanied by a meaningful presale, prelease, or take-out commitment. 


24 “Capital Is Still Plentiful for Right Projects.” Midwest Real Estate
 

News. July 2001. Vol. 17, No. 7. 
 25 Further information on bank underwriting practices can be found in
 

Federal Deposit Insurance Corporation, Division of Research and
 

Statistics, Report on Underwriting Practices, http://www.fdic.gov/
 

bank/analytical/report/index.html.
 

San Francisco Regional Outlook 14 Third Quarter 2001 
In Focus This Quarter
 

see History of the Eighties26). As shown in Chart 5, the 

percentage of insured institutions with commercial real 

estate loan concentrations between 200 and 400 percent of capital is higher now than it was in the late 

1980s. However, there are relatively fewer institutions 

at the highest concentration level, in excess of 500 

percent of capital. In fact, fewer than 1 percent of 

insured institutions are at this level. A similar story 

holds true for construction loans, as the increasing 

concentrations are in the range of 100 to 300 percent of 

capital (see Chart 6). 

There are a number of issues for construction lenders 

and commercial real estate lenders to consider going 

forward. Because uncovered loans (C&D loans made 

without assurances of a firm take-out commitment) 

tend to be higher-risk, an important part of managing 

the risk in construction lending has traditionally been 

the lender’s ability to obtain a take-out commitment. 

Sources of take-outs for C&D loans include other 

insured institutions, pension funds, foreign investors, 

and life insurance companies, along with public-market 

real estate investment trusts (REITs) and conventional 

mortgage-backed securities (CMBSs). Anecdotal 

reports indicate that shifts in market sentiment in 

recent months have resulted in lowered investments in 

REITs and consequently less available capital for 

REITs to purchase real estate.27 Insured institutions 

CHART 5 

Concentrations of Commercial Real Estate
 

Loans between 200 and 400 Percent of
 

Capital Are Higher Now than in the Late 1980s
 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20

Percentage of Insured Institutions

FDIC-insured institutions 

with commercial real estate 

loans-to-equity capital 

greater than: 

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

300 percent 

400 percent 

500 percent 

200 percent 

Sources: Bank Call Reports, Thrift Financial Reports (Research Information 

System, FDIC) 

26 Federal Deposit Insurance Corporation. History of the Eighties— 

Lessons for the Future, Vol. 1: An Examination of the Banking Crises 

of the 1980s and Early 1990s, Chapters 9 and 10. 1997. Washington, 

DC: FDIC. http://www.fdic.gov/bank/historical/history/index.html. 27 Smith, Ray A. August 1, 2001. “Property Held by Public Firms 

Drops.” The Wall Street Journal. 

CHART 6 

Concentrations of Construction Loans 

Have Moved Higher in Recent Years 

Sources: Bank Call Reports, Thrift Financial Reports (Research Information 

System, FDIC) Percentage of Insured Institutions 

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

FDIC-insured institutions with real 

estate construction loans-to-equity 

capital greater than: 300 percent 

200 percent 

400 percent 

100 percent 

0 

2 

4 

6 

8 

10 

12 

14 

may face increased challenges to convert construction 

and development loans into permanent loans should the 

reported REIT situation become a trend and other 

sources of permanent capital become less available to 

purchase C&D loans. 

Monitoring economic trends in general, and local real 

estate trends in particular, becomes even more important during a time of rapid change in market conditions. For example, reliance on appraisals based on 

outdated or top-of-market assumptions can result in a 

divergence between expected and realized collateral 

values or cash flows. Similarly, while preleasing commitments offer significant risk-reduction benefits to 

lenders, during a time of weakening economic conditions there is at least the possibility that a prospective 

tenant will be unable to honor a lease obligation, as 

has been the case with some firms in the high-tech 

sector in recent months. 

Conclusion 

Office market trends cannot, of course, be considered in 

isolation. The recent softening in office markets is a 

symptom of a slowing economy coupled with a rapid 

decline in the fortunes of some high-tech firms. Considered in this broader context, the challenge for insured 

institutions is simply to ensure that risk-management 

strategies are in place that will succeed under a more 

challenging economic environment. 

Thomas A. Murray 

Senior Financial Analyst 

San Francisco Regional Outlook 15 Third Quarter 2001 
In Focus This Quarter
 

TABLE 2 

Office Market and Banking Data on 53 Metropolitan Areas 

MEDIAN HIGH-TECH OFFICE 

2ND BASIS C&D AS AS SPACE 

QUARTER POINT COUNT OF PERCENTAGE PERCENTAGE UNDER 

2001 INCREASE COMMUNITY OF TIER 1 OF TOTAL CONST/ 

METROPOLITAN OFFICE FROM YEAR BANKS WITH CAPITAL AT MARKET STOCK AT 

STATISTICAL AREA VACANCY END 2000 C&D LOANS 3/31/2001 

(%) 

EMPLOYMENT 

(%) 

12/31/2000 

(%) 

ALBUQUERQUE 11.6 –110 9 61.0 6.8 2.0 

ATLANTA 9.8 170 76 172.2 3.8 6.1 

AUSTIN 11.8 680 20 53.4 10.1 9.6 

BALTIMORE 8.9 60 60 22.8 3.6 6.3 

BOSTON 8.7 480 100 24.1 8.2 5.6 

CHARLOTTE 9.0 40 20 48.5 1.7 8.9 

CHICAGO 8.9 130 225 33.5 4.5 4.9 

CINCINNATI 10.1 100 58 32.6 3.1 6.0 

CLEVELAND 13.6 40 16 34.8 3.0 0.8 

COLUMBUS, OH 16.9 350 20 22.4 3.1 5.1 

DALLAS 16.4 110 75 84.5 6.5 3.9 

DENVER 12.7 370 45 70.4 5.2 4.9 

DETROIT 12.0 160 28 35.2 3.1 2.8 

FT. LAUDERDALE 12.8 310 13 19.1 2.7 10.2 

FT. WORTH 16.4 130 36 71.8 3.4 0.7 

FRESNO 14.4 20 5 196.0 0.9 0.8 

HARTFORD 14.0 150 11 25.2 3.5 0.0 

HONOLULU 12.6 –190 3 11.4 0.9 0.0 

HOUSTON 13.6 60 48 65.8 3.1 0.8 

INDIANAPOLIS 15.8 120 21 29.6 3.3 1.4 

JACKSONVILLE 11.7 –20 11 65.2 1.8 3.4 

KANSAS CITY 15.9 490 86 70.8 2.7 1.3 

LAS VEGAS 14.5 290 19 117.7 1.5 7.3 

LONG ISLAND 10.9 190 6 19.1 5.3 1.8 

LOS ANGELES 14.1 150 62 35.4 3.7 2.0 

MIAMI 10.5 310 26 28.1 1.8 9.2 

MINNEAPOLIS 10.8 20 119 44.0 6.0 5.7 

NASHVILLE 12.8 230 20 78.4 1.2 2.0 

NEW YORK 5.1 230 34 10.5 2.4 1.4 

NORTHERN NEW JERSEY 10.9 360 66 15.0 5.6 6.9 

OAKLAND 9.3 630 12 120.0 6.5 7.9 

OKLAHOMA CITY 20.3 20 44 57.8 2.6 0.5 

ORANGE COUNTY 14.7 330 14 34.5 6.4 3.9 

ORLANDO 13.1 110 23 72.1 2.3 8.1 

PHILADELPHIA 10.7 80 68 22.1 4.5 3.2 

PHOENIX 16.9 440 27 114.2 4.7 6.5 

PORTLAND, OR 9.9 280 14 118.8 6.6 6.7 

RIVERSIDE 14.4 –100 18 143.5 1.6 0.3 

SACRAMENTO 6.6 70 11 106.9 3.9 5.6 

SALT LAKE CITY 15.3 280 14 111.7 4.5 4.1 

San Francisco Regional Outlook 16 Third Quarter 2001 
In Focus This Quarter
 

TABLE 2 (CONTINUED) 

Office Market and Banking Data on 53 Metropolitan Areas 

MEDIAN HIGH-TECH OFFICE 

2ND BASIS C&D AS AS SPACE 

QUARTER POINT COUNT OF PERCENTAGE PERCENTAGE UNDER 

2001 INCREASE COMMUNITY OF TIER 1 OF TOTAL CONST/ 

METROPOLITAN OFFICE FROM YEAR­ BANKS WITH CAPITAL AT MARKET STOCK AT 

STATISTICAL AREA VACANCY END 2000 C&D LOANS 3/31/2001 EMPLOYMENT 12/31/2000 

(%) (%) (%) 

SAN DIEGO 9.7 350 21 57.5 6.6 4.9 

SAN FRANCISCO 10.3 620 21 69.0 8.3 9.7 

SAN JOSE 8.1 680 5 174.5 27.4 7.5 

SEATTLE 9.4 500 30 77.1 6.6 9.0 

ST. LOUIS 10.1 –80 80 40.4 2.6 4.8 

STAMFORD 11.2 290 10 43.5 5.6 2.6 

TAMPA 14.8 70 33 40.0 4.2 2.7 

TUCSON 8.8 100 3 178.4 4.4 4.8 

VENTURA 14.2 270 8 49.7 5.4 14.2 

WASHINGTON, DC 7.8 390 61 51.1 7.8 6.3 

WILMINGTON, DE 10.4 420 12 28.4 3.8 1.6 

W. PALM BEACH 12.2 160 18 37.2 2.3 4.8 

WESTCHESTER 12.5 120 4 19.5 12.3 2.1 

NATION 10.8 250 (1) 3,801 (1) 40.1 (2) 4.8 (2) 4.5 

Notes: Only community banks with construction loans are included in this table. Community banks are institutions
 

with assets less than $1 billion. Noncommunity banks are excluded because their lending activities are likely to
 

span a larger area than the MSA in which they are headquartered.
 

Sources: Torto Wheaton Research; Bank and Thrift Call Reports, FDIC Research Information System data;
 

Economy.com, Inc.
 

1. Only community banks with construction loans and located within a MSA are included in these figures. 

2. Percentages shown are the averages for the 53 metropolitan areas. 

San Francisco Regional Outlook 17 Third Quarter 2001 


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