Analysts Rebut Dire Outlook for O.C. Real Estate : Office Buildings: “We do not see any evidence to suggest that ‘the sky is falling’ on California,” state says in response to federal warning.
The State Banking Department on Thursday cast the nation’s top bank regulator as Chicken Little with the release of a report that discerned no evidence that “the sky is falling” on California’s real estate developers and their lenders.
The study comes two weeks after L. William Seidman, chairman of the Federal Deposit Insurance Corp., warned that developers in six California markets--and especially Orange County--may have built too many office buildings and may not be able to repay their loans.
The two financial analysts who wrote the state report said they considered more factors than did the FDIC study, which they characterized as rather narrow. They also said that the FDIC’s prophecy could become self-fulfilling if not refuted.
The analysts reached two conclusions: Most state-chartered banks don’t have a lot of bad real estate loans, and California real estate markets--including Orange County--aren’t likely to go over a cliff any time soon.
They recommended no major changes in the way California scrutinizes state-chartered banks.
“We do not see any evidence to suggest that ‘the sky is falling’ on California real estate,” wrote analysts P.K. Prakash and Mary Ann Havens in the conclusion of the report. “However, we are concerned that this not become a self-fulfilling prophecy.”
Seidman warned in a recent speech that more cities may be going the way of those in the Southwest and New England, where developers built too many office buildings and lenders got stuck with bad loans when the economy went sour.
The FDIC contrasted growth in office employment with office vacancy rates in ranking the Anaheim metro area--Orange County--in third place on a list of potential trouble spots. The FDIC said it is developing an “early warning system” to predict where problems in commercial real estate lending are likely to turn up. (Phoenix was first on the FDIC list and Nashville second.)
“Does this mean that Nashville and Anaheim are in for real estate crashes?” Seidman said. “We don’t know, but we’d like to know.”
Thursday’s state report, on the other hand, said the FDIC didn’t appear to consider California’s rapid population growth in its figures. The state is growing at 2 1/2 times the national average, the state report said, and the 421,000 people who migrated here in 1988 and 1989 composed the highest influx since 1942 and 1943.
The state report also advances another argument often cited in the debate over the California economy: Its diversity lessens its vulnerability to economic downturns, since robust industries buoy weaker ones during a downturn.
The FDIC figures show Orange County had a rate of growth in office employment of 1%, which the FDIC says may not be sufficient to support a 3.5% rise in office construction and a 21% vacancy rate. The high vacancy rates mean that many landlords and their partners must charge extremely low rents to get tenants into their buildings. (House sales, too, have slowed, as high prices in Orange County have scared off all but the most determined buyers.)
But the state report says those figures neglect to take into account the county’s 1.9% rise in population last year to 2.3 million in July; the unemployment rate, which, at 2.7% in February, is far below the national average of 5.3%; a slight decline in non-residential building permits from $1.5 billion in 1988 to $1.4 billion in 1989; and an office vacancy rate of 22% last year that was only a percentage point or so above the national average for suburban areas.
On the banking side, a larger percentage of state-chartered banks in the county show a potential for problems than the state average, the state report concluded, with 48% of the banks in the county showing a “need for improvement,” compared to 27% statewide.
But the problems, the department said, don’t seem to be related to real estate. The percentage of delinquent real estate loans at Orange County’s banks--3.7%--is about the same as the state average, which is 3%. (Most state-chartered banks tend to be the smaller ones, since the biggest banks are usually national banks.)
The state report continues a running debate over the future of the California real estate market. Optimists tend to point to the state’s resilient economy and its ability to fill most of the houses and office buildings the developers build. The pessimists argue that cuts in defense spending will hurt California, where defense industries are a bigger chunk of the economy than is generally realized; and that population gains may not be as big in the future, since some residents will flee the state’s declining quality of life.
As for Orange County, there are still a lot of businesses looking for office space, according to real estate brokers who track the market. But it’s not clear how much of that demand is generated by the rock-bottom rents at many buildings.
Still, say most experts, if the market isn’t exactly in the pink of health, it isn’t anywhere near an impending disaster.