Moody’s: CRE Supply/Demand Remains Steady

Commercial property market supply/demand fundamentals held steady in late 2015 consistent with balanced construction and absorption, reported Moody’s Investors Service, New York.
Moody’s Red-Yellow-Green report indicates which markets are most or least vulnerable to short-term declines in occupancy and rent, 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 overall composite score came in unchanged at green 72, said Moody’s Director of Commercial Real Estate Research Tad Philipp. Scores were green for all the major commercial property types except suburban office, which came in at yellow 63 in the final quarter of last year, he said. Multifamily continues to be the highest-scoring sector, with the vacancy rate and upcoming supply both at modest levels.

Philipp noted that only 10 suburban office markets registered vacancy rates below 10 percent while eight had 18 percent or greater vacancy rates. “Meanwhile, in the central business district office sector the vacancy rate improved slightly between the third and fourth quarters of last year, while upcoming supply increased and forecast demand remained the same,” he said.

Multifamily’s score decreased two points but remained in the green zone at 77, Moody’s said. Central Business District office decreased to green 78 from green 79 while suburban office increased to yellow 63 from yellow 61.  

The retail, hotel and industrial sectors all remained steady in the last two quarters of 2015, Moody’s reported. Retail’s vacancy rate continued to edge down, with 36 of 62 markets reporting a lower year-over-year vacancy rate compared with 40 the prior quarter. Retail scored a green 71, marking its eleventh consecutive quarter in green territory. 

The hotel sector remained steady at green 74, marking the seventh consecutive quarter of green scores for this asset class, Moody’s said. Revenue per available room growth continued to slow, falling to 5.2 percent from 5.6 percent in the third quarter, the fifth consecutive quarter with slowing RevPAR. 

Industrial sector upcoming supply increased while forecast demand decreased for the first time since third quarter 2010. But the sector held steady at green 70, Moody’s said. Four of the five strongest industrial markets are in California: Los Angeles (green 91), Orange County (green 89), San Francisco (green 84) and Ventura (green 84).