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Bank Trends - Metropolitan Atlanta Construction and Development Lending Trends |
Growth in construction activity, however, has been slowing from its postrecession cyclical peak in 1992. During 1997, single-family permit issuance in the metropolitan area increased by 2.5 percent (see Chart 3). Even so, the number of homes under construction in the market by the end of the third quarter of 1997 was below year-ago levels after peaking at 13,600 units in 1996. The previous peak in the number of homes under construction occurred in 1987 at 12,300 units before sliding to nearly half that level during the recession in the early 1990s. A slowdown in construction activity now would likely lead to higher levels of competition as developers fight to maintain market share. Although first-quarter 1998 home prices were up a soild 8.4 percent from one year earlier, forces of demand may begin to moderate. Part of the recent acceleration in home-price appreciation may be the result of moderating mortgage rates, which often have an inverse relationship with home prices. As Atlanta's economy moves away from its cyclical peak and as population growth continues to slow, however, growth in demand for new housing may cool, easing pressure on home-price appreciation. Mortgage rates also play a role in shaping demand for new housing. In late January 1998, the average 30-year fixed-rate mortgage fell to 6.79 percent in the Atlanta metro area. This rate is somewhat below the national average, the result, in part, of competitive pressures in the metropolitan area. The current interest rate environment and economic conditions have led to the emergence of a seller's market for new and existing homes as buyers are encouraged by lower rates. Despite overall slowing growth in market activity, single-family construction continues to expand strongly in some component counties (Carroll, DeKalb, Fulton, Paulding, Pickens, Spalding) (see Table 4). Continued rapid homebuilding in excess of estimated growth in population in Paulding and Pickens Counties may be of some concern (see Map 7). The ratio of permit issuance to resident population also remains well above average across most of the metropolitan area's northern counties. Retail Real Estate Markets Atlanta's retail sector has enjoyed six years of sustained growth following the recession of 1990-91. Retail-trade employment growth peaked in 1993, then slowed. Even so, the industry has experienced gains well in excess of the national average. This is partially the result of Atlanta's emergence as a regional retailing center in the Southeast. The Olympics in 1996 gave retailers an additional boost. By 1997, however, growth in retail trade had slowed to almost even with the national average. If expansion in the industry continues to slow, absorption rates in retail real estate markets may be affected. Retail construction activity across the Atlanta Region has been strong over the past few years as developers responded to an economy enjoying rapid growth. Although vacancy rates have started rising in nearly one-half of the Region's metropolitan areas, nowhere has the upward pressure been more noticeable than in Atlanta. In the third quarter of 1997, the retail vacancy rate in this metropolitan area was 10.2 percent, up more than 3 percentage points from just two years earlier to its highest level since the last recession (see Chart 6). The rise in Atlanta's retail vacancy rate is, to a large extent, the product of persistent construction activity in excess of absorption rates. |
According to data
provided by the F.W. Dodge Real Estate Analysis and Planning Service,
retail space construction has increased substantially since its cyclical
trough in 1991 at 2.13 million square feet of net new supply. In contrast,
7.77 million square feet of net new supply were injected into the Atlanta
metropolitan area market in 1996. Third-quarter 1997 data show that construction
activity is below last year, but the gap between net new supply and absorption
has risen to its highest level since 1989. The overall retail stock now
has surpassed 100 million square feet. There are indications that expansion
of retail space may continue. According to F.W. Dodge, as
of December 1997, retail projects totaling nearly 30 million square feet
were in the planning stages, with three new regional malls slated for development
over the next few years in the Atlanta metropolitan area.
The most active submarket in the Atlanta metropolitan area is Gwinnett County, where over 1.83 million square feet are under development as of year-end 1997, according to a recent report by Jamison Research Inc. Most building activity, however, is the result of 1.7 million square feet of space under construction for the Mall of Georgia project. Many local analysts foresee that construction activity in the area of the mall will climb as big-box retailers are attracted to the mall site, although construction could be constrained by limited amounts of land. Office Real Estate Markets Office employment in the Atlanta metropolitan area continues to grow, albeit at a rate well below its cyclical peak in 1994. In 1997, employment in this category rose by 4.1 percent compared with the national rate of increase of 3.3 percent. Office employment growth is a significant component of demand for office space. The office real estate market space continues to expand. According to the Atlanta Business Chronicle, over 5 million square feet of new space was injected into the metropolitan area's markets during 1997. Nine million square feet of office space is expected to come on-line within the next two years as construction activity continues unabated. In contrast to rising deliveries of office space, absorption in the metropolitan area appears to be moderating. Through the first half of 1997, annualized absorption stood at just under 2 million square feet, the lowest level in more than ten years. Slowing absorption in the face of strong building halted a five-year retreat in Atlanta's office vacancy rate (see Chart 7). Tightness remains readily apparent in most suburban markets, however, where vacancies stood at 7.6 percent at year-end 1997. This compares favorably with downtown, where the vacancy rate in the fourth quarter of 1997 was 15.2, according to CB Commercial. The most active submarkets of the Atlanta metropolitan area remain centered along a line extending from Buckhead through Alpharetta along GA Highway 400 (North Fulton County), where nearly one-third of all new construction activity is taking place. Such has been the pace of new construction that Class A vacancies had risen to 23 percent in early 1998, according to LaSalle Partners. One area that could see greater levels of office and retail development in the coming years, however, may be a corridor located between the site of the Mall of Georgia (northeast Gwinnett County at Interstate 85 and GA Highway 20), which is scheduled for completion in August 1999, and Gwinnett Place Mall. Continued growth in the economy and demand for office space have spurred speculative construction throughout metropolitan Atlanta. Even in the downtown market, plans are being made for the submarket's first speculative office high rise in several years. REITs are playing a large role in the recent round of office-space development in the Atlanta metropolitan area. According to a recent Lehman Brothers study, REIT ownership in the central business district is at 14.8 percent. The ownership share is even higher in the suburbs, where eight REITs control 22.7 percent of office space. The degree to which the market is concentrated may give REITs some ability to inflate rents and, consequently, property values. Multifamily Real Estate Markets Although multifamily permit issuance is below its cyclical peak in 1995, construction activity remains at historically high levels. Year-to-date multifamily permit issuance in 1997 was well in excess of 10,000 units (see Chart 8). Over the past three years, it is estimated that more than 20,000 new apartment units have been delivered to the market. Overbuilding may emerge as a concern if economic and population growth continue to moderate while building activity remains close to current levels (see Chart 9). Rent appreciation has stalled and occupancy rates already have fallen by over 1 percentage point over the past year and currently stand near 94 percent. Dale Henson Associates, an apartment tracking firm, expects that occupancy levels may fall by another 2 percentage points in 1998, as apartment openings surpass 1997 levels and population growth continues to slow. Lower interest rates also may encourage renters into home buying during 1998. The largest segments of the Atlanta multifamily market remain its core counties. Together, Cobb, DeKalb, Fulton, and Gwinnett Counties accounted for over 80 percent of construction in the market during 1997 (see Table 5). With the exception of Fulton, permit issuance is up more than 10 percent in each of these counties. Permit issuance in Fulton County is down 24 percent from 1996, but this may have been the result of a temporary ban on permit issuance in Atlanta from April 1997 to June 1997 because of growth restrictions associated with overburdened sewer lines. Growth in Fulton County in 1998 may likewise be constrained by other types of moratoria throughout the county. Industrial Markets Industrial employment growth in the Atlanta metropolitan area has eased over the past few years and, in the fourth quarter of 1997, fell below the national average for the first time during the 1990s. Nearly 450,000 workers in the Atlanta area are classified as being employed in industrial sectors of the economy, which include manufacturing, warehousing, mining, and utilities. Continued expansion in industrial employment is one factor influencing demand for new industrial space. Industrial space construction in the Atlanta metropolitan area has enjoyed successive gains for the past several years (see Chart 10), making it one of the most active markets in the country. According to Jamison Research Inc., an additional 17.2 million square feet was injected into the market in 1997, a substantial increase over 1996 construction levels. Absorption likewise saw a rise in 1997 to over 13.2 million square feet. The gap between supply and demand, however, resulted in an increase in the metropolitan market's overall vacancy for the second year in a row as development surpassed absorption by 4 million square feet. CB Commercial estimates that the industrial vacancy rate in the third quarter of 1997 was 11.0 percent, compared with 9.9 percent one year earlier. From 1998 to 1995, in contrast, vacancy rates in the metropolitan area generally trended downward, except in 1991. The Northeast Submarket (Gwinnett County) dominates Atlanta's industrial market, with 6 million square feet of new space coming on-line over the past year. Absorption in this submarket has remained constant over this period at over 2.3 million square feet. Continued growth in the metropolitan area's economy has spurred speculative construction, and more developers have moved into the market over the past year, according to an article in Commercial Real Estate South. Jamison Research Inc. estimates that, as of year-end 1997, over 8 million square feet of space was under construction in the Atlanta metropolitan market, three-quarters of which is considered speculative. Higher construction levels and greater numbers of developers could intensify competitive pressures in the future. Although higher levels of competition are expected, the industrial market currently remains relatively concentrated, with six REITs controlling 9.1 percent of the market. While vacancy rates have risen somewhat over the past year and new supply has surpassed absorption, many analysts do not anticipate a sharp slowdown in industrial space construction during 1998, as much of the existing space is technologically obsolete. Conclusion All sectors of commercial and residential real estate development in metropolitan Atlanta remain very active. Projects currently under construction and those in the planning stages that are expected to be completed over the next two years represent a substantial increase in supply. These developments, if completed, could further aggravate vacancy rates, which have edged slightly higher in a few sectors and submarkets over the past year. A number of these new projects are speculative, and their absorption is largely predicated on a continuation of current economic conditions. Disequilibrium in the Atlanta real estate markets, caused by overbuilding or a change in economic circumstances, could pose a risk to insured institutions. Insured institutions' exposure to the metro Atlanta real estate markets has grown substantially and is at a level not seen since 1988, or two years before the last economic recession. Managers of insured institutions, particularly those headquartered in the metro area, with high construction and development loan concentrations should closely monitor local economic and real estate market conditions, given the inherent volatility of this lending.
References ERE Yarmouth. 1998. Emerging Trends in Real Estate: 1998, March. Federal Deposit Insurance Corporation. 1996-97. Loan Underwriting Survey, various. Goldblatt, Jennifer. 1998. Will REITs, mortgage-backeds make a difference in downturn? American Banker, 18 February. Goldblatt, Jennifer. 1998. Bankers must hang on tight to ride realty roller coaster. American Banker, 20 February. Goldblatt, Jennifer. 1998. As REITs expand, so does banks' role as lender. American Banker, 25 February. Grant, James. 1996. The Trouble With Prosperity. New York, NY: Times Books. Random House. Hash, Steve, and Martin, Michele. 1997. Lehman Brothers. Commercial REIT data book: a guide to U.S. commercial real estate owned by equity REITs, December. Kammert, Jim; Marinac, Christopher; and Hannula, Jill. 1997. Real estate investment trusts (REITs): staying the course with REITs. The Robinson-Humphrey Company, Inc., Equities Research Update Report, May. Loan Pricing Corporation. 1997-98. LPC Gold Sheets, various issues.
The National Association of Real Estate Investment Trusts, Inc. 1997. The REIT story. NAREIT Online.
The National Association of Real Estate Investment Trusts, Inc. 1998. REITs go mainstream in 1997. NAREIT Online, 22 January. Netherton, Martha. 1998. Booming office market shows signs of weakness. Atlanta Business Chronicle, 11 May. Pacelle, Mitchell. 1998. Suburban office vacancies are on the rise, study shows. The Wall Street Journal, 29 April. Ratajczak, Dr. Donald. 1998. Georgia testing depths of unemployment and must slow by 1999. Georgia State University Economic Forecasting Center's Forecast of Georgia & Atlanta 1998, February. Real Estate Alert, various issues. Salter, Sallye. 1998. Atlanta edged out of REIT's spot. The Atlanta Journal-Constitution, 19 February. Sherman, David M.; Acheson, William L.; and Seeley, Stuart B. 1996. Smith Barney, Inc. Real estate investment trusts: the ABCs of REITs, November. Stacy, Neel. 1998. Apartment market gives out conflicting signals. Atlanta Business Chronicle: Commercial Real Estate Industry Focus, 3-9 April. Vitner, Mark. 1997. The southeast commercial construction outlook. First Union Regional Economic Review, March.
About the Authors All authors are located in the Atlanta Regional Office of the Division of Insurance. Jack M.W. Phelps, CFA, Regional Manager jphelps@fdic.gov; Scott C. Hughes, Regional Economist,shughes@fdic.gov; W. Brian Bowling, Financial Analyst, wbowling@fdic.gov; Pamela R. Stallings, Financial Analyst, pstallings@fdic.gov. The authors would like to acknowledge the valuable contribution and insight given by many individuals, both within and outside the FDIC, during preparation of this product.
About the Division of Insurance The Division of Insurance (DOI) was created in 1995 to identify, analyze, and report on existing and emerging risks to the banking industry and deposit insurance funds. Arthur J. Murton is Director of DOI. About Bank TrendsBank Trends is a series of occasional papers published by the Division of Insurance. The papers are summaries of current issues in banking, economics, and finance as they relate to exposures to the banking system and deposit insurance funds. These analyses are available free of charge on the FDIC's World Wide Web site at www.fdic.gov. Copies also can be obtained free of charge by writing to Bank Trends, Analysis Branch, Room 4033, Division of Insurance, FDIC, 550 17th St. NW, Washington, D.C. 20429. Other DOI ProductsRegional Outlook is published quarterly by each of the FDIC's eight Regions and explores potential risks and trends affecting insured depository institutions from a regional and national perspective. These publications and other products are available on the FDIC's World Wide Web site at www.fdic.gov. DisclaimerThe views expressed in this article are those of the author(s) and do not necessarily reflect the official position of the Division of Insurance or the Federal Deposit Insurance Corporation.
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Last Updated 7/22/1999 | insurance-research@fdic.gov |
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