ViewPoint Live: Real Estate Market Entering New Phase - April 5, 2016

ViewPoint Live: Real Estate Market Entering New Phase

The commercial real estate market, a major focus of lending for southeastern banks, appears to be entering a new phase, Atlanta Fed real estate expert Brian Bailey said during a recent ViewPoint Live webcast.

An improving economy has fueled demand for apartments as well as office, retail, and industrial space. A strengthening real estate market has, in turn, generated bank lending: U.S. banks' commercial real estate (CRE) loans outstanding at the end of 2015 exceeded $1.6 trillion, topping the highs of 2008, according to bank call reports. In the Southeast, the rebound in CRE lending has been less pronounced, but the volume has steadily climbed to its highest level in five years.

To be sure, a strengthening real estate sector is good news for banks, Bailey said. But Atlanta Fed banking examiners, and lenders themselves, should be mindful of the varying circumstances across and even within geographic markets, he noted. For example, while apartment rents and occupancy rates continue rising nationally, in some places like southern Louisiana, where the energy industry is important, the opposite is happening. And even within metropolitan Atlanta, where apartment construction "completion rates" are not above historical norms, multifamily building is booming in Midtown and Buckhead, Bailey observed.

Meanwhile, in the office category, "we're seeing a little more risk but not a significant amount," Bailey said. Most Southeast markets continue to post office vacancy rates below their long-term averages. In the retail segment, he added, the continued growth of online shopping has kept vacancy rates from falling as steeply as rates for office and warehouse space.

U.S. property a magnet for foreign money
Finally, amid a sluggish world economy, investors consider American real estate a safe haven. Foreign capital invested in U.S. commercial property reached $88 billion at the end of last year, double the total of a year earlier, and up from less than $10 billion in 2009. Global money—particularly from Asia, Canada, and the Middle East and Africa—is pouring not just into "gateway markets" like New York and San Francisco, but also into the next tier of cities such as Atlanta and Miami, and even into smaller markets in the Southeast, Bailey said.

The influx of foreign capital has helped to raise real estate values. In fact, CRE prices over the past year have grown at twice their historical rates after rising even more quickly over the past five years, Bailey pointed out. The concern among regulators is that foreign capital flows into U.S. real estate historically ebb and flow. A reduction in foreign investment could quickly lower property valuations, affecting appraisal values used in loan underwriting.

ViewPoint Live is a twice-yearly webcast in which Atlanta Fed Executive Vice President Mike Johnson and other members of the bank's Supervision and Regulation department discuss banking trends and conditions. In the April 5 podcast, Lali Shaffer, a senior financial policy analyst, joined Johnson and Bailey, also a senior financial policy analyst.