CMBS Supply-Demand Fundamentals Slip

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

Moody’s quarterly Red-Yellow-Green Report examines commercial real estate supply and demand variables to determine the one-year outlook for the collateral that backs commercial mortgage-backed securities. The overall score slipped four points during the third quarter to 66–in the yellow zone–from green zone 70 in the second quarter. All property types except for retail and hotel are starting to see increased supply and lower anticipated demand, the report said.

Individual sector scores included multifamily (green 76), retail (green 84), central business district office (yellow 39), suburban office (yellow 38), industrial (green 71) and hotel (yellow 61).

“Retail fundamentals have benefited from more than a decade of limited new supply, which has combined with post-pandemic demand to increase the retail scores for eight consecutive quarters,” the report said.

The report noted performance of hotels catering to leisure travelers improved even as business travel destinations have been slow to recover. “However, limited new supply combined with higher overall occupancies has seen national revenue per available room above pre-pandemic levels,” Moody’s said.

The office sector has been negatively affected by increases in sublet supply and lower tenant leasing demand, especially in markets with difficult commutes or industries that have easily adopted work from home, the report said.

“As a result, office scores started to decline in early 2021 in technology-exposed markets that had experienced high levels of recent supply or in markets that could easily adopt working from home post-pandemic,” Moody’s said. “This downward office score trend will likely continue as more longer-term leases come up for renewal and take up less space.”