Anaheim Called a Real Estate Trouble Spot
Commercial real estate markets in several major California cities, including Anaheim and Los Angeles, 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 metroplitan areas--Anaheim and Nashville--as places where heavy real 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.
In Orange County, developers are also rolling the dice on the belief the economy will stay strong. Already, high vacancy rates mean many landlords have had to lower their rents to rock bottom in order to keep tenants coming in the door. In fact, rents have dropped so far that companies which went into partnership with local developers have been bailing out and selling their interest in the buildings.
Yet until recently, office buildings continued to go up pell mell and the vacancy rate remained lodged stubbornly in the low 20% range.
But if there is a commercial real estate crash in Orange County’s future, commercial real estate brokers say they haven’t seen the signs. Brokers are among the most knowledgeable observers of the market, but they also tend to be among the most optimistic.
The brokers say office construction has finally slowed in Orange County as lenders backed off from the risks and low returns. Some thrifts were also constrained by changes in the federal banking laws that limited their real estate investing after the savings and loan debacle.
Also, the brokers say, Orange County will create enough new jobs to fill those offices, even if the economy does slow a little.
“Even at a slower pace our economy will still be better than most parts of the country,” said Scott Perley, a vice president of the Cushman & Wakefield brokerage.
As for the slowdown in construction, Coldwell Banker’s figures show there were nearly 3.3 million square feet of office space under construction in Orange County during the first quarter of the year, compared to 3.4 million last year.
But most of what’s under construction this year, says Coldwell, isn’t high-rise office buildings, as it was last year, but low-rise office parks in the relatively undeveloped southern half of the county. Only five such buildings are scheduled to be completed this year.
“And if you look at how much space tenants are absorbing, the statistics are very heady,” said Ollen. “There are still a lot of big tenants out there looking for space.”
According to regulatory statistics, San Jose and Anaheim had commercial-office vacancy rates of more than 20%, while Los Angeles has 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
