Constructionin the Atlanta market is heating up again, and many banks are hoping thathistory will not repeat itself.
Followersof the Atlanta market say that activity has not reached the overheated levels witnessedjust before the Great Recession, and note that the memories of the crisis thatclaimed scores of banks in Atlanta remain firmly in many community bankers'minds.
WaltMoeling, senior counsel at Bryan Cave LLP, said there are many cranes in the area,and noted that there are new condominiums and office buildings beingconstructed on all four sides of his firm's midtown Atlanta office.
"MarkTwain said history doesn't repeat itself but it rhymes, and this rhymes,"Moeling said in an interview. "The story I get is that most of the bigconstruction is funded by the larger banks which have the capacity to do that.The smaller banks are sticking to their small business customers."
Georgiaconstruction jobs in March 2016 increased9.5% from year-ago levels, which marked the strongest growth since 2000,according to the Bureau of Labor Statistics. That growth follows 5%-plus yearover year growth in construction jobs reported in every month since October2013.
Theconstruction activity comes as job growth is expected to remain strong in metroAtlanta. Jeff Humphreys, director of Simon S. Selig, Jr. Center for EconomicGrowth, which is part of the University of Georgia's Terry College of Business,projected in November that job growth in Atlanta wouldoutpace national employment growth in 2016.
Thenew development has also continued as office vacancy rates in the Atlantamarket have declined. Vacancy rates in the market reached a 15-year low in thefirst quarter, according to CBRE's Atlanta research department. CBRE recentlyfound that Atlanta office rents grew in the first quarter for the ninthconsecutive quarter. Given rent increases and declining vacancy rates, buildersare responding with new space, CBRE said, highlighting three developments underconstruction that will bring more than 1 million square feet to the market, aswell as three more speculative developments anticipated to begin constructionin 2016.
"Overthe past months, many Atlanta office assets have been placed on the market totrade or have traded," Dan Wagner, CBRE Southeast Research Manager, saidin an April 21 news release. "While this would typically indicate themarket is nearing the top of a cycle, Atlanta fundamentals remain resilient."
Manybanks in Atlanta remember just how much the market fell from the top of theprevious cycle, and those institutions have not forgotten the pain thatfollowed. Atlanta produced more bank failures than any other metro area in theU.S., largely due to excessive lending concentrations and a lack of corefunding. Advisers working with banks inmetro Atlanta have said that many institutions made structural mistakes,underwriting loans to projects rather than the quality of borrowers, relying onhigh-net-worth individual guarantees as collateral and using interest reservesin acquisition, development and construction loans consistently. Those reservesprevented loans from becoming distressed much earlier and might have given somebanks a false sense of confidence, but eventually stress reared its ugly head.
Whileadvisers say building activity has resumed in force, they note that the morerecent activity looks different than in the years before the credit crisis,where residential construction fueled banks' growth. Construction activity isnow more focused on the commercial and multifamily sector, they say.
R.Lee Burrows Jr., CEO at Banks Street Partners, also noted that the residentialreal estate market still has not fully recovered from the downturn,highlighting that home prices are not back to their 2007 levels by "anystretch of the imagination." He said banks with less than $50 billion inassets remain cautious and the Great Recession is still "verypresent" in their minds.
Banksthat have operated in Atlanta for years have also faced a new round ofcompetition from newer entrants. Several community bank and smaller regionalplayers have entered the metro Atlanta market in recent years, with ,IBERIABANK Corp.,Bank of the Ozarks Inc.,Renasant Corp. andothers building through acquisitions. Still, even as traditional M&Aactivity has resumed in force in Atlanta, large banks such as , Wells Fargo & Co., Bank of America Corp. and still dominate themarket. Burrows noted that those large institutions are currently financingmost of the larger construction projections.
"Inthe metro area, there is a lot of industrial and residential growth, butprimarily around apartments. And apartments appear to be the next bubble toburst in Atlanta and many other big markets," Burrows said in aninterview.
Leadingup to the last downturn, small and large banks alike financed the considerableconstruction activity in metro Atlanta. Virtually all institutions in Atlantatook part in the pre-crisis building boom, but that is not necessarily the casetoday.
"Youreally had that aggressive growth at that level being funded byeverybody," Moeling said of the growth before the credit crisis."There is much more awareness of the issue [now]. And it's not a top tobottom banking issue to the same extent. The big projects are being funded bythe much larger institutions by and large."
Burrowssaid community banks are ceding business to larger banks simply because theycannot match their prices. Some of the nation's largest institutions can be farmore aggressive on rates because they have lower costs of funds, other sourcesof revenues and continued access to the capital markets.
"WellsFargo always has access to the capital markets. If you're a $500 millioncommunity bank and you screw up, access to the capital markets is not anautomatic for you," Burrows said.
Whilesome banks might be proceeding with caution, regulators are also watching theresurgence in commercial real estate, and have said that they plan topay "specialattention" to CRE lending risks in 2016.
Somebanks operating in the metro Atlanta market have said that they are taking timeto examine their portfolios given the recent growth. Chairman,President and CEO Kessel Stelling Jr. recently said that he is focusing onloan quality, notquantity. Synovus Chief Credit Officer Kevin Howard added that the company ispulling back fromconstruction lending. He said the company is watching rent growth versus wagegrowth, and noted that there are a couple of markets that are currently aheadof themselves.
BryanCave's Moeling said pulling back in select lending areas and markets andfocusing on quality over quantity is not something that banks often expressedbefore the downturn.
Otherbanks are being cautious to not put too much of their balance sheet at risk andcould end up deciding to return more capital to shareholders opposed topursuing more aggressive growth. Burrows said many small bank management teamsthat lived through the Great Recession are hesitant to lever their capitalbelow 9%. He said many of those institutions feel like they are doing a goodjob because they have a CAMELS 1 rating and operate in strong regulatorystanding, but he said many of those institutions are reporting returns onequity in the mid-to high-single digits due to their high capital levels.Burrows said those institutions are currently stock piling capital, and hebelieves they will be reluctant or struggle to lever their capital bases evenmore. That scenario likely will prompt those institutions to return morecapital to shareholders through increased share buybacks and dividends, hesaid.
"Ifyou're showing your shareholders a 7% or 8% return on equity and you'recomplementing that with 3% dividend yield, in this interest rate environment, Iwould say that most shareholders would be pretty happy with that," Burrowssaid.