CMBS Metrics Improve Slightly
The outlook improved slightly for properties that support most commercial mortgage-backed securities, reported Moody’s Investors Service, New York.
Moody’s CMBS Red-Yellow-Green Update reported the overall composite score improved three points to 74 out of a possible 100 in the second quarter, “consistent with a balanced rate of both construction and absorption,” the ratings firm said.
The Red-Yellow-Green report examines supply and demand trends to determine an outlook by property sector and by market. “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.
“When I talk to lenders around the country, their views precisely reflect what Moody’s puts into numbers,” said Brian Olasov, executive director of financial services consulting with Carlton Fields Jorden Burt, Atlanta. “Most markets continue to do well with properties generally showing small but consistent net operating income increases.”
Olasov said low financing costs continue to contribute to operating profits and supply remains muted, which supports market performance. “Retail, for example, shows only 0.3 percent predicted new supply compared to existing stock,” he said. “Until banks sort out issues with High Volatility Commercial Real Estate affecting construction lending, this important source of new development financing will be constrained.”
Moody’s said the highest-scoring metros across property types include San Francisco (Green 85) Oakland, Calif. (Green 84) and Los Angeles (Green 83). The lowest-scoring major metros include Albuquerque, N.M. at Yellow 58 and Trenton, N.J., Houston and Wilmington, Del. at Yellow 51.
Multifamily remained the highest-scoring sector as apartment properties increased one point to Green 84. Central business district offices also improved one point to Green 76 while suburban offices increased one point to yellow 60. “Notable suburban office red markets include Houston (Red 26) and San Jose (Red 22), both of which have high levels of construction and a supply-demand imbalance,” Moody’s said.
The retail sector improved one point to Green 71, driven in part by lower vacancy rates across most markets. The industrial sector improved by two points to Green 71. Meanwhile, the hotel sector fell two points to Green 78, marking the fifth consecutive quarter of green scores for this asset class.
“The only property type flashing caution is lodging,” Olasov said. “Revenue per available room growth has been so rapid across so many markets, it’s easy to rationalize the need for new product coming online.” He noted that new hotel supply growth of 2.8 percent far outpaces second-place multifamily construction’s 1.7 percent. “But we also know from recent experience that lodging performance turns on a dime.”
