CMBS Supply/Demand Stable; Delinquency Rate Drops

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

Moody’s Red-Yellow-Green commercial mortgage-backed securities report tracks which markets are 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 dropped one point but remained in the green zone with a 69 score. “This is the first drop in the composite score since the first quarter of 2016,” Moody’s said.

The scores remained in the green zone for all property types except for hotels, which fell to yellow 55, and suburban offices, which fell to yellow 58, the report said.

“With the exception of new-supply lodging, all other asset classes raise what I call the ‘Passover Question’: how is this recovery different from all other recoveries?,” said Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York.

Olasov noted the economic cycle is now more than 100 months into a recovery–the second-longest cycle since World War II. “At this point in prior real estate cycles, lenders loosened standards, borrowers sought the last dollar of debt and new supply flooded the market, leading to rises in vacancies and dips in rental receipts,” he said. “With limited exceptions, supply has been muted this time around resulting in a benign balance between supply and demand.”

Even some yellow-zone markets such as Nashville, Tenn., have strong economic stories to support new construction, Olasov noted. “This augurs well going into 2018 for plateauing values and few leverage excesses,” he said. “Absent extraneous shocks–including transformative tax reform–the fundamentals appear to be in rough equilibrium.”

Trepp, New York, said the the CMBS delinquency rate dropped “sharply” in October for the fourth straight month. The delinquency rate for commercial real estate loans in CMBS fell 19 basis points to 5.21 percent, Trepp Senior Managing Director Manus Clancy said. “That is the second-largest rate drop measured in the last 19 months,” he said.

Clancy noted Trepp had predicted continuing CMBS delinquency rate declines. “That certainly proved true in October as the [delinquency] rates for all five major property types improved,” he said. “As fewer 2006 and 2007 loans reach their balloon dates and more distressed loans are resolved, the delinquency rate should continue to trend lower.”