CMBS Supply/Demand Fundamentals Stable; Defeasance Surges
Commercial property market supply and demand fundamentals remained relatively stable in third-quarter 2018, said Moody’s Investors Service, New York.
The overall composite score decreased one point to 71, remaining in the 100-point scale’s green zone, said Moody’s quarterly Red-Yellow-Green Update. “The composite scores were green for all property types covered except for hotel and suburban office,” the report said.
Moody’s said the multifamily sector’s score increased two points to 85, remaining the highest-scoring sector. The multifamily vacancy rate decreased to 4.0 percent from 4.4 percent a year before. Upcoming supply increased “modestly,” but the year-over-year vacancy rate improved to 3.8 percent, the report said.
The retail composite score increased to 78 from 77 as the sector’s vacancy rate continued its steady decline, Moody’s said.
Office performance diverged based on location, the report said. Central business district offices decreased one point to 68 due to an increase in upcoming supply. The office increased score improved one point to 59. “Suburban office fundamentals were relatively stable this quarter,” Moody’s said.
The industrial composite score decreased one point to 75 in the third quarter as forecast demand declined to 0.8 percent from 1.4 percent in the previous quarter. Upcoming supply also increased from 2.2 percent to 2.7 percent during the same period.
The hotel score declined significantly, Moody’s said. It fell to 56 from 62 in the prior quarter. “The primary driver behind the score’s decrease was slowing revenue per available room,” the report noted. The RevPAR growth rate for the third quarter fell to 1.5 percent from 3.8 percent in the prior quarter.
Fitch Ratings, New York, reported defeasance volume “surged” last year. Defeasance occurs when a borrower substitutes government-backed securities such as Treasury notes for a loan’s real estate collateral to pay the loan off early.
“CMBS 2.0 defeasance activity grew in 2018 with volume nearly reaching the combined 2017 and 2016 activity as U.S. CMBS 2.0 borrowers anticipate higher interest rates and take advantage of improved property performance,” Fitch said. “Defeasance volume topped $2 billion every quarter in 2018, which is greater than any individual quarter in 2016 or 2017.”
Fitch reported the elevated defeasance rate continued into January, but predicted the trend will slow through 2019 as interest rates increase and property pricing levels off.
