Moody’s: CMBS Supply/Demand Fundamentals Hold Steady

Commercial property market supply-demand fundamentals held steady in the third quarter, reported Moody’s Investors Service, New York. 

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

The overall composite score was stable at green 70 in the third quarter of 2016, Moody’s said. Composite scores were green for all property types covered except for hotel and suburban office. The hotel sector scored a 61 and suburban offices scored a 60, putting both well into the yellow zone.

Multifamily remains the sector with the best supply and demand balance, Moody’s reported. Its score increased one point to green 77. “The sector’s fundamentals remained strong, with construction and demand remaining relatively stable,” Moody’s said, noting that only 15 markets have a construction-to-existing-inventory ratio above 2.5 percent.

The retail sector increased two points to 74, marking its 14th consecutive quarter in green territory. “Lower vacancy rates continue to drive the increase in score,” Moody’s said. The sector’s vacancy rate improved to 10.4 percent from 10.9 percent in the previous quarter.

Moody’s noted that 47 markets showed lower year-over-year retail vacancy rates while just 14 showed higher vacancy rates.

The score for central business district offices decreased for the fourth consecutive quarter to 69 from 72, while the suburban office score increased to 60 from 59.

“The [suburban office] improvement was driven by a lower vacancy rate,” Moody’s said, noting that the vacancy rate improved to 14.2 percent from 14.4 percent in the prior quarter. “However, high vacancy rates continue to plague this sector.” 

The industrial sector score increased to 74 from 73 in the prior quarter. Moody’s said 31 markets improved, 24 declined and four remained the same this quarter.

The hotel score fell four points to 61. “Sector fundamentals deteriorated slightly between the second and third quarters of 2016,” Moody’s said. Only 14 markets saw positive movements in the third quarter.