Rapid growth in commercial real estate development is putting some lenders at risk, a government study has concluded.
The study, released last week by the Federal Deposit Insurance Corp., found that Atlanta, Las Vegas, Phoenix, Portland, Ore., and Salt Lake City are undergoing swift construction growth and have relatively high vacancy rates.
As a result, the FDIC warned, banks competing to underwrite construction loans in those cities should be cautious.
"We're not saying at all that there's an imminent saturation," said Steven K. Burton, author of the report and a senior banking analyst in the FDIC's insurance division. "But if construction activity continues at its current pace, there is the risk that supply will outstrip demand."
Mr. Burton added that a number of events could stifle demand, including the Asian economic crisis, turmoil in the bond markets, or the threat of recession.
The FDIC report identified Charlotte, N.C.; Columbus, Ohio; Denver; Fort Worth; Kansas City, Mo.; Nashville; and Orlando as metropolitan areas also "vulnerable" to overbuilding.
Stephen F. Polzin, chairman and chief executive officer of Bank of the Northwest in Portland, agreed.
"I think you will see a slowdown in (Portland's) office, industrial, and suburban markets," Mr. Polzin said. He cited recent layoffs by Nike, Intel, and other local employers as a drain on demand for office space. Bank of the Northwest's commercial real estate portfolio ballooned to $18.9 million on June 30 from only $2.8 million in mid-1997.
The FDIC's study amplified recent government surveys that suggested a loosening of underwriting standards. It also served as the backdrop for an Oct. 8 letter instructing banks to take a closer look at agency rules on underwriting standards, loan-to-value limits, exceptions to loan policy, and overall investment in commercial real estate.
So far, continued economic growth has protected lenders with weak loans from being hurt, said Mark Schmidt, associate director of operations at the FDIC's supervision division. That could change, he said.
But some bankers think the FDIC may be overreacting.
"Most bankers I talk to are not involved in wholesale commercial lending like they were 10 years ago," said Lee B. Murphey, executive vice president at First Liberty Bank, Macon, Ga., and chairman of Robert Morris Associates, a commercial lenders' trade group. "They've sold it to investors, and it's not on their balance sheets anymore."
In addition, Mr. Murphey said, recent turmoil in the mortgage-backed securities market may be putting the brakes on growth.
The FDIC's study on commercial real estate looked at about 50 markets nationwide. Las Vegas had the most rapid property development of any metropolitan area. The study also found that the vacancy rates in Las Vegas for offices and factories were "relatively high."
"By almost any measure, Las Vegas is the most active construction market in the country and perhaps the most vulnerable to overbuilding," the report concluded.
The FDIC's study did not address the status of underwriting standards, but Mr. Burton said the agency is reviewing personal guarantees, equity requirements, debt-service coverage, loan-to-value limits, and pricing in the 50 markets studied.
