The Atlanta Fed's Brian Bailey. Photo by Sadat Karim
No matter how you parse it, $2 trillion is a lot of money.
It equals about a tenth of the U.S. economy's annual output. It's also roughly the volume of commercial real estate (CRE) loans on the books of the nation's commercial banks. And even that figure does not include commercial and industrial loans that are backed by a building or land, explained Brian Bailey, a subject matter expert in CRE in the Atlanta Fed's Supervision, Regulation, and Credit (SRC) Division.
By themselves, financial institutions based in the Atlanta Fed's six-state district hold $200 billion in direct CRE loans, which is down slightly from the peak in 2008, according to SRC data. The upshot: lending to owners and builders of office buildings, apartments, subdivisions, shopping centers, and warehouses is critical for financial institutions. Therefore, to Federal Reserve banking supervisors who are charged with ensuring the safety and soundness of financial institutions, monitoring the health of CRE markets is essential.
Bailey is central to that work. A sought-after speaker at real estate industry conferences, he casually rattles off office vacancy rates in Nashville, the square footage of warehouses built in metro Atlanta last year, and the ways online retailing and ride sharing are influencing retail and apartment markets.
"He lives, eats, and breathes CRE," Scott Hughes, director of the Atlanta Fed SRC's regulatory risk analysis unit, said of Bailey. "Brian can bridge that gap between the real estate and construction industry and our bank examiners and banks. He can translate everything that everybody's talking about."
Bailey steeped in the CRE business
Bailey's multilingualism is well earned. He spent 18 years in the CRE industry, appraising and assembling development deals. He later focused on the real estate advisory business at a global accounting firm and then directed real estate finance at Florida's largest commercial developer. He also worked on multibillion-dollar development projects with a company with global real estate holdings before joining the Atlanta Fed.
The core of Bailey's job involves keeping bank examiners informed about CRE markets. (Listen to Bailey discuss his work in this podcast episode.) Examiners are the front-line personnel who comb banks' books to help ensure their safe and sound operation. Taking the pulse of CRE is detailed work, as property markets are extremely localized. A hot office market in one pocket of a metropolitan area may sit a few miles from an ice-cold district.
This precision suits Bailey. He analyzes banks' CRE loan portfolios and participates in examinations in other ways. Bailey also creates data-heavy reports on CRE market conditions and particular aspects of CRE finance, such as analyses of a surge in industrial construction powered by the growth in ecommerce.
"He's very engaged with the examination staff," Hughes said. Bailey also shares his expertise. In recent months he has appeared at forums at the Philadelphia and Boston Feds. He has spoken at about two dozen "Ask the Fed" sessions, where bank examiners join bankers to discuss supervisory issues and trends. In all, Bailey speaks at from 30 to 50 industry, academic and other external events each year.
Those appearances help to sharpen regulators' awareness of industry conditions and keep bankers mindful of regulators' concerns. Bailey views it as part of being a good steward. "It's important for us to be part of the larger conversation, to share our views on issues that are shaping the real estate and real estate finance industry," Bailey said.
For example, Bailey often discusses where property market conditions may be headed. Those conversations may encourage bankers to rethink certain assumptions and perhaps steer a more prudent path, he said.
That sort of flexibility can be especially important in today's economy. Real estate conditions are generally sturdy. Strong job growth has fueled demand for office space and apartments. Surging ecommerce has boosted construction of big, advanced warehouses and distribution centers. Yet the recovery from the Great Recession is nearly nine years old, long by the standards of economic expansions. There is always the chance, Bailey warns, that lenders who invest late in a cycle will end up struggling with loans that might not be repaid. "We certainly need to assess the amount of risk that institutions have because ultimately, our mandate is the safety and soundness of the financial system," he explained.
Conversations, conferences reinforce other communication
Though conferences and personal conversations with bankers are useful, they are not the only way the Fed registers its views with CRE lenders. More formal channels include what regulators call "guidance." Those documents officially notify bankers of regulators' expectations and concerns. For example, in 2006 the Fed and other federal financial regulatory agencies issued guidance on banks' increased concentrations of loans in CRE.
The agencies issued further notice to CRE lenders in late 2015. The Fed, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation put out an interagency statement "to remind financial institutions of existing regulatory guidance on prudent risk management practices for commercial real estate (CRE) lending activity through economic cycles."
The intelligence gathering of Bailey and his colleagues plays a role. It helps regulatory agencies determine when to issue guidance and what that guidance should say. After guidance has gone out, Bailey and others help determine its effectiveness.
For instance, Bailey said criteria the agencies recommended in 2006–07 proved to be sound. Among institutions that exceeded the agencies' suggested parameters on the growth and volume of CRE lending, 23 percent failed between March 31, 2007, and September 30, 2011, according to Federal Reserve Board of Governors analysis. Among banks that operated within the regulators' suggested guidelines, only 0.5 percent failed.
Charles Davidson
Staff writer for Economy Matters