CMBS Supply-Demand Fundamentals Remain Stable

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

The overall composite score increased one point to 71, remaining in the 100-point scale’s green zone. “Composite scores were green for all property types covered except for hotel and suburban office,” Moody’s said.

The multifamily score held steady at green 83. It remained the highest-scoring sector despite a minor vacancy rate increase from 4.9 percent in first-quarter 2017 to 5.0 percent in early 2018, Moody’s said.  Apartment vacancy rates increased in 39 markets, decreased in 25 and held steady in two markets year-over-year. Currently, 25 markets have construction above 2.5 percent of existing inventory, up from 18 markets in the prior quarter. 

The retail sector increased two points to green 76, largely because forecasted construction as a percentage of existing inventory currently stands at just 0.3 percent and has not exceeded 1.0 percent since late 2008, Moody’s said. The overall retail vacancy rate decreased 20 basis points to 9.4 percent as construction and absorption held steady at at 0.3 percent and 0.4 percent, respectively.

The report said Phoenix and Dallas retail fundamentals improved significantly, from yellow 61 to green 67 in Phoenix and from green 69 to green 76 in Dallas. Both metros saw significantly improved supply-demand relationships.

Office sector fundamentals diverged based on location, Moody’s said. The central business district office score increased to green 67 from yellow 66 but the score for suburban offices decreased one point to yellow 56 as the sector’s fundamentals were relatively unchanged.

The 10 largest central business district office markets constitute nearly three-quarters of all CBD inventory, Moody’s said. In the first quarter, four of those 10 largest markets scored in the green zone, five markets in yellow and only one market–Houston–was red with a 31 score.

The industrial sector’s score increased to green 75 from 73 last quarter. Moody’s said 48 market scores increased and only nine declined from the first quarter. New York showed the most improvement, jumping 11 points to green 75 due to an overall improvement in fundamentals.

The hotel sector’s score fell two points to yellow 59 as the sector’s supply-demand relationship deteriorated. Notable markets experiencing deterioration included Washington, D.C., which fell to 35 points red 23 and Atlanta, which dropped 12 points to yellow 41.