Each depositor insured to at least $250,000 per insured bank

INTRODUCTION

The condition of real estate markets has been, and is likely to remain, an important determinant of credit risk for banks and thrifts. For that reason, since early 1991 the FDIC has conducted a survey of field staff from all of the federal thrift and bank regulatory agencies about changing conditions in their local real estate markets. The purpose of the survey is to provide a timely indicator of changes in residential and commercial real estate market conditions.

The nationwide survey polls FDIC senior examiners and asset managers as well as bank examiners of the Federal Reserve Banks, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. Participants are asked broad qualitative questions about conditions and trends in specific metropolitan areas in five distinct real estate property markets: single-family, multifamily, office, retail, and industrial. The major and non-major metropolitan areas covered, and the criteria guiding participants' responses, are listed in the notes for the national results table at the end of this report.

Comparisons of survey results across different periods or geographic areas must be interpreted carefully. The pool of respondents can change from survey to survey, and observations about a specific market's activity can also differ from those about another market because of unique historical activity.

Changes in Real Estate Markets

The results of the July survey clearly indicate movement in some property markets in the first half of 2001 although reports of stability generally dominated. During the six months ending June 2001, the majority of senior examiners and asset managers reported general conditions as unchanged in all local property markets except office. In all other property markets, reports of stable conditions were in a substantial majority.

However, in all property markets, the proportion of those who said conditions were unchanged was less than in the previous survey in January. Furthermore, where changes in market conditions were observed, reports of worsening conditions were more frequent than those of improving conditions. For commercial markets, the difference was noticeable.

According to results of the most recent survey, conducted in July, local commercial real estate markets have lost some momentum. The latest poll showed far fewer responses of improving office, retail, or industrial market conditions than in recent surveys. A majority of respondents shifted their previous reports of "better conditions" and "no change in conditions" to reports of worsening conditions. In their comments, respondents observed that the deterioration in the commercial sectors reflected weakness in the technology industry but, at the same time, they recognized that in many markets, changes were occurring in an environment of historically tight conditions.

Single-family markets had the highest proportion of respondents noting better conditions, at 20 percent, followed by 14 percent who observed improving multifamily markets. Only in the residential markets did the frequency of "better" reports increase from the previous survey in January, albeit slightly (single-family, up from 17 percent; multifamily, up from 12 percent). In single-family markets, there was no change in reports of worsening conditions while in multifamily such reports rose to 21 percent, from 13 percent.

Observations of deterioration in local commercial markets far outweighed those of improving conditions. In addition, such observations were significantly more frequent in the July survey than six months ago. Almost one-half of the respondents reported somewhat worsening conditions in local office markets (48 percent, up from 17 percent). Almost one-third observed that conditions in retail markets were worse (34 percent, up from 18 percent) and one-quarter said the same about industrial markets (26 percent, up from 11 percent). Nevertheless, for retail and industrial markets, the majority replied that conditions were unchanged.

The accompanying map combines respondents' evaluations of general conditions of all five residential and commercial property markets into an assessment of "overall market" conditions. Overall market conditions were reported to be worse than six months earlier in Albany, Atlanta, Denver, Nashville, Oakland, Salt Lake City, San Francisco, and San Jose. There were no metropolitan areas that had an overall assessment of better real estate market conditions. In fact, there was no clear indicator that overall conditions had improved or deteriorated in the remaining metropolitan areas reporting.

Current Conditions in Real Estate Markets

Readings of residential and commercial markets were less positive in the July 2001 survey than in the January 2001 survey. The results suggested weakness in activity rather than a downturn, as respondents continued to describe supply and demand most frequently as "in balance" for all property types except office. However, those reporting market imbalance skewed strongly towards excess supply in commercial markets, while tight conditions prevailed in residential markets.

For every property type, observations that market conditions were either tight or in balance were down from the previous survey. At the same time, reports of excess supply increased in all markets, markedly so for the office market. It should be noted, however, that such reports were widely qualified as "some excess capacity" rather than the more serious "excess inventory."

Thirty percent of respondents reported single-family markets as tight, while 28 percent reported excess supply. Albany, Albuquerque, Atlanta, Birmingham, Denver, Des Moines, Honolulu, Indianapolis, Las Vegas, Louisville, Memphis, Nashville, New Orleans, Portland (Oregon), and Salt Lake City were noted for some looseness in their single-family markets. As for multifamily markets, 28 percent of respondents observed supply conditions as tight; 22 percent said markets had too much supply. Respondents cited Birmingham, Indianapolis, Kansas City, Little Rock, Orlando, and Raleigh as metropolitan areas with excess supply in multifamily property markets.

Conditions in office markets were described as tight by only 5 percent of respondents (down from 17 percent in the last survey). Almost two-thirds (64 percent) viewed office markets as having excess supply, double the proportion who observed this in January. Almost every metropolitan area reported on was noted for excess supply. The 64 percent observing excess supply comprised 54 percent of respondents who qualified their responses as "some excess capacity" and 9 percent who reported "excess inventory." These numbers were given some depth by comments noting that the "decline occurred from a previously strong market and the overall office market is not stressed at this point" and "six months ago demand was red hot, now it's merely strong."

Retail and industrial markets were characterized as in balance by 51 percent and 60 percent of respondents, respectively. Excess supply in retail markets was observed by 43 percent of respondents. Respondents noted too much retail supply in the metropolitan areas of Albany, Birmingham, Cincinnati, Columbus, Dallas, Denver, Hartford, Honolulu, Little Rock, Louisville, Milwaukee, Nashville, New Orleans, Omaha, Orlando, Philadelphia, Salt Lake City, and St. Louis. As for industrial markets, 35 percent reported excess supply, citing Albany, Atlanta, Dallas, Honolulu, Indianapolis, Kansas City, Orange County, and Washington, DC.

Single-Family Real Estate Markets