Moody’s: CMBS Supply/Demand Fundamentals ‘Stable’

Commercial property market supply and demand fundamentals remained relatively stable in the fourth quarter, reported Moody’s Investors Service, New York.

Moody’s Red-Yellow-Green report tracks markets that are vulnerable to commercial mortgage-backed securities 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 fourth quarter, Moody’s said. The composite scores were green for all property types covered except for hotel and suburban office. 

Moody’s noted that the hotel sector score deteriorated from 61 to 59 and suburban offices slipped from 60 last quarter to 59, putting both sectors well into the yellow zone.

Multifamily remains the sector with the best supply and demand balance. Its score increased six points to green 83 due to improving demand, Moody’s said. The sector has improved in each of the last three quarters.

The retail sector–both neighborhood and community centers–remained stable at 74. “The composite score has been in green territory since the second quarter of 2013,” Moody’s said. The sector’s vacancy rate continued its improvement trend, falling to 10.2 percent from 10.4 percent in the previous quarter.

Moody’s noted that 50 of 62 mutifamily markets showed lower year-over-year retail vacancy rates while only 12 showed higher vacancy rates.

The score for central business district offices held steady at 69, Moody’s said, noting that scores increased in 19 markets, decreased in 25 and were stable in six markets. Suburban offices slipped from 60 to 59. “High vacancy rates continue to plague the [suburban office] sector, with only 13 markets experiencing vacancy rates below 10 percent,” Moody’s said. The sector’s score has ranged from yellow 55 to yellow 63 since second-quarter 2013.

The industrial sector score slipped one point during the quarter from 74 to 73 but remained solidly in the “green zone,” Moody’s said. “This sector has been in the green territory since the first quarter of 2014.”

The hotel sector continued its slide into yellow territory, falling to yellow 59 from yellow 61. “Deteriorating revenue per available room growth and elevated forward supply have been drivers that have resulted in the hotel composite score declining from a peak of green 80 in the fourth quarter of 2014,” Moody’s said.

Forward supply remains be a hotel sector concern, Moody’s noted. It has increased to 3.6 percent of current inventory from 3.2 percent a year ago. “The hotel sector has been experiencing forward supply above 2.5 percent of current inventory since the fourth quarter of 2014,” the report said.