West’s Commercial Real Estate Market Slipping, FDIC Says : Economy: Within California, the conditions are mixed. The weakness could be menacing for banks, which on average have 33% of their assets in such loans.
The commercial real estate market is worsening in California and other Western states, an ominous development that ultimately could threaten the health of the region’s banks, according to a Federal Deposit Insurance Corp. survey issued Tuesday.
Within the state, conditions are mixed, the survey showed. The market is weak in Southern California, with rising office vacancy rates reported in Los Angeles, San Diego and Ventura counties, offset by a slightly declining rate in Orange County. In the north, vacancy rates are improving in Sacramento, San Francisco and San Jose.
A serious real estate slump could be particularly menacing for Western banks, which on average have 33% of their assets in real estate loans, far above the national average of 25%. The banks have far fewer delinquent loans than the troubled institutions in New England, but that could change abruptly if California’s commercial real estate problems worsen.
Although the situation is worsening in the West, its commercial real estate market is in far better shape than in New England and Texas. Besides California, the Western region includes Arizona, Colorado, Hawaii, Alaska, Idaho, Montana, Nevada, Oregon, Utah, Wyoming and Washington.
“They don’t at this point indicate the same problems as the Southwest and Northeast,” FDIC Chairman L. William Seidman said at a Washington news conference.
The outlook for residential real estate is much more encouraging, according to the FDIC report, with experts in all regions, including the West, reporting improved conditions.
The survey relied on the views of nearly 500 senior officials at all the federal banking agencies. Those polled include the examiners who scrutinize real estate markets and loans as well as the liquidators who manage and sell properties acquired from failed banks and S&Ls.;
It was the second quarterly poll of the government’s own experts by the FDIC, which is trying to compile a more complete assessment of real estate trends. The effort reflects the fact that the increasingly fragile nature of the banking system has become closely linked with the movement of real estate prices. Real estate lending--home and commercial mortgages, construction and development loans--represents the banking system’s biggest category of business, far surpassing lending for commercial and manufacturing enterprises.
The survey findings assess conditions in the real estate market at least six months before they will affect financial results at the banks, Seidman said. A negative survey trend indicates that more loans will go bad, resulting in additional foreclosures by banks, and eventually, more bank failures.
In commercial real estate, “some metropolitan areas are showing new signs of weakness while others are just starting to come back,” the FDIC report said. Instead of declaring construction loans delinquent, many banks are renegotiating the notes and converting them into permanent financing, according to the FDIC.
In general terms, housing activity is the most buoyant segment of the real estate business, with almost 75% of the respondents indicating that home prices are holding steady or increasing, according to the survey, which was conducted earlier this month.
“Banks are still lending actively to homeowners,” the FDIC study said. “Residential home mortgages grew by $48 billion (13.4%), increasing in 46 states. In California, home mortgages increased almost $13 billion (23.4%), the largest dollar increase in any state.”
The commercial market, by contrast, is sluggish. “Things look a little better, except they don’t look very good,” Seidman said.
Office Vacancy Rates in California The commercial real estate market is weak in the state, with vacancy rates worsening in much of the Southland.
Improving
Current 3-year Location rate average Oakland- East Bay 17.6 20.7 Sacramento 13.8 16.6 San Francisco 14.0 21.0 San Jose 11.9 15.6 Orange County 21.2 21.5
Worsening
Current 3-year Location rate average Los Angeles 18.9 16.3 San Diego 21.9 20.7 Ventura County 26.1 18.0
Source: FDIC, Coldwell Banker
