Moody’s: Supply/Demand Fundamentals Slip Slightly

Commercial property market supply/demand fundamentals slipped in first-quarter 2016, reported Moody’s Investors Service, New York. 

Moody’s Red-Yellow-Green report indicates which markets are most vulnerable to short-term occupancy and rent declines, both commercial mortgage-backed securities loan default risk factors. “Red” or tenants’ markets score between 0 and 33 and show stress, with supply rising faster than demand. “Green” markets–landlords’ markets–score between 67 and 100 and show low or falling vacancy rates.

“The composite scores were green for all property types covered except for suburban office and hotels,” Moody’s said. Suburban offices scored yellow 58 and hotels scored yellow 61.

The overall composite score fell to green 68 from green 72 in 4Q 2015, Moody’s Director of Commercial Real Estate Research Tad Philipp said.

Multifamily decreased by two points to green 75, but remained the highest-scoring sector, Moody’s reported. Central Business District offices decreased to green 73 from green 78. Scores increased in 17 markets, decreased in 25 markets and remained unchanged in five.

The suburban office sector decreased to yellow 58 from yellow 63 after four quarters of continuous increases. Vacancy for all top 10 suburban markets topped 10 percent; suburban Washington, D.C. had the highest vacancy with 19.1 percent.

The retail composite score remained stable at green 71, representing the twelfth consecutive quarter the sector remained in the green territory, Moody’s said.

The hotel composite score fell sharply during the quarter to yellow 61, a 13-point drop from fourth-quarter 2015, Moody’s reported. “Revenue per available room growth in covered markets continues to weaken,” Moody’s said, noting that RevPAR growth fell to 2.5 percent year-over-year compared to 8.3 percent in first-quarter 2015. 

This data point follows national trends. Smith Travel Research, Hendersonville, Tenn., reported RevPAR growth declined to 2.7 percent in the first quarter from 8 percent in first-quarter 2015. Moody’s said 42 markets saw their scores decline including Chicago (red 3) and New York (red 9), which fell 45 points and 25 points respectively.

The industrial composite score remained steady at green 70 for the third straight quarter, Moody’s reported. Scores increased in 28 markets, decreased in 21 and remained the same in seven.