FDIC Sounds Warning on Commercial Real Estate : Economy: Several Southern California cities are high up on a list of potential trouble spots. Anaheim is an area of special concern.
Commercial real estate markets in several major California cities, including Los Angeles and Anaheim, may be headed for trouble if lending excesses are not curbed, the chairman of the Federal Deposit Insurance Corp. indicated Tuesday.
L. William Seidman released a list of 40 large American cities, ranked according to risk, that is supposed to serve as an “early warning system” for regulators and lenders on where commercial real estate loan problems are brewing.
“We’d like to have lenders know more and move quickly when supply and demand appear to be getting seriously out of balance,” Seidman said in a speech in Dallas.
Seidman cited two cities--Nashville and Anaheim--as places where heavy office construction is occurring against a backdrop of high vacancy rates and low job growth. “Does this mean that Nashville and Anaheim are in for real estate crashes?” Seidman asked. “We don’t know, but we’d like to know.”
Regulators are concerned about the example of Phoenix, a city that four years ago was a boom town but now is in the throes of a banking and real estate collapse. “They’re looking at the Phoenixes of four years ago,” said one commercial real estate analyst. “One hiccup and they go boom.”
Problem real estate development loans have become a major stain on the nation’s banking system. They were the major reason why Congress had to bail out the savings and loan industry last year and are becoming a major blot on the bottom lines of the nation’s major commercial banks.
Seidman’s remarks are part of growing chorus of skeptics who feel that California may not be able to escape the real estate slump that has affected other parts of the country, such as Arizona and New England.
“California is a tough call at this point,” said Alex Sheshunoff, a banking consultant from Austin, Tex., who noted that current defense cutbacks do not bode well for the future of the state’s economy.
However, he noted, the state still has a large migration of people coming in from other states, which does bode well. “A strong economy can cover up a whole lot of problems,” he said.
Most bankers and real estate experts in California still maintain that the commercial real estate markets are not headed for major trouble. “There is plenty of demand for almost any kind of space,” said James Didion, chief executive of Coldwell Banker Commercial, a real estate brokerage based in Los Angeles.
According to regulatory statistics, San Jose and Anaheim had commercial office vacancy rates of more than 20%, while Los Angeles had a vacancy rate of 18.4%. Anything above 16% is high and anything above 19% is very high, said Sanford Goodkin, a real estate consultant in San Diego for KPMG Peat Marwick, the accounting firm.
Seidman’s remarks are almost sure to aggravate growing tensions between regulators and commercial bankers. Many commercial bankers already feel that regulators have cracked down far too hard and indiscriminately on real estate loans.
“I think the regulators are part of the problem,” Goodkin said. “It’s almost as if they want to force bankers completely out of the real estate market.”
“There have been no changes, at least in official policy,” replied Roger Watson, research director at the FDIC. “There is no evidence that the exams are tougher today then they were yesterday or than they were 10 years ago.”
Seidman also released a list showing where residential housing prices are growing the fastest, which he also considers a danger sign. They’re growing fastest in Seattle and Honolulu, followed by Sacramento, San Jose, San Diego, Los Angeles and Riverside.
“Increasing prices often trigger more development, which at some point in the future might lead to an excess of supply, and lower prices,” the FDIC chairman said.
Seidman also compiled another separate list of 40 cities where construction lending is growing the fastest and problem real estate loans are unusually high. Orlando and Miami in Florida lead that list, with Riverside, Los Angeles and Anaheim ranked Nos. 9, 10 and 11, respectively.
Seidman made his remarks at a seminar in Dallas sponsored by the Resolution Trust Corp., the agency established by Congress last year to sell the assets of failed thrifts.
Seidman, who is also chairman of the RTC, noted a few facts to drive home his point.
“Since 1986, bank assets have grown 12%. Bank real estate loans, however, have grown four times as much--48%. Unfortunately, nonperforming real estate loans have grown even more--54%,” he said.
Seidman’s remarks also coincided with another report released Tuesday that blamed depressed real estate markets for a sharp drop in commercial-bank income in 1989. Bank income fell 34% to $15.8 billion in 1989, according to Sheshunoff Information Services.
The profits were “disappointing,” Alex Sheshunoff said, “but hardly surprising in view of the speculative excesses building up in the real estate sector, particularly in the Northeast.”
THE 20 RISKIEST MARKETS
Cities are ranked according to a weighting system that takes all indicators into account. California cities appear in boldface.
Growth Office Growth in in office employment Office Change in City office completions growth vacancy vacancy starts rate rate Phoenix 3.0% 5.3% 0.6% 22.8% 5.5% Nashville 3.4 4.2 0.6 16.1 Anaheim 3.5 5.7 1.0 20.8 5.2 Atlanta 4.2 3.9 2.1 20.2 3.9 Philadelphia 3.3 2.9 0.7 14.7 3.0 Austin 0.6% 3.4% 0.7% 37.6% 4.9% Oklahoma City 1.0 0.0 -0.6 30.4 3.2 San Jose 2.5 2.0 0.8 22.7 2.6 Detroit 2.6 3.4 1.7 20.3 3.8 Ft. Lauderdale 5.1 3.9 2.5 19.2 2.1 Los Angeles 3.6% 2.5% 1.6% 18.4% 2.0% Riverside 4.7 4.9 2.9 18.2 4.6 Orlando 6.0 7.2 3.6 18.2 3.9 Baltimore 3.0 3.5 1.5 17.9 3.5 Kansas City 3.2 2.3 1.9 16.4 3.1 Dallas/Ft. Worth 1.0% 1.0% 0.8% 33.1% 2.7% Washington 4.6 6.1 3.3 17.5 2.7 New York 0.9 1.4 0.2 13.3 2.0 Boston 3.0 2.1 1.1 12.3 2.1 New Orleans 0.4 -0.5 0.5 20.3 0.1
Source: F. W. Dodge
