CMBS Supply-Demand Fundamentals Dip

Moody’s Investors Service, New York, said the supply and demand outlook for most property types in the securitized commercial real estate market dipped in fourth-quarter 2020.

The overall composite score in the firm’s “Red-Yellow-Green” quarterly assessment fell by one point during the quarter as measures to curb the spread of COVID-19 continued to disrupt operations for many properties backing commercial mortgage-backed securities loans, Moody’s said. The overall Red-Yellow-Green score declined to yellow 45 from yellow 46 in the prior quarter.

The report examines real estate market supply and demand variables to determine the outlook for the commercial properties that support most of the collateral backing CMBS.

Keith Banhazl

“Over the past year, pandemic-related restrictions have led to deteriorating fundamentals in particularly the hotel, retail and office sectors,” said Moody’s Managing Director Keith Banhazl.

Banhazl noted the composite score for the hotel sector remained in the red zone for the fourth quarter in a row, “while for the retail sector it moved back into yellow territory from red,” he said. The composite score for central business district office and for suburban office fell 14 points and 10 points, respectively. The CBD office score dropped to yellow 41 while suburban offices fell to yellow 39.

The hotel market now trails its baseline revenue per available room target by 66.1 percent after leading it by 4.5 percent in the final quarter of 2019, Banhazl said. The sector’s supply-demand relationship deteriorated in Q4 2020 to 1.2 percent from -2.6 percent in Q4 2019, with the year-over-year improvement driven by an increase in the forecast change in demand for room nights. The composite score for the retail sector improved to yellow 35 from red 32 the third quarter.

Scores weakened in 15 of the 62 markets Moody’s examined, improved in 44 and were unchanged in three, while the supply-demand relationship improved to -3.1 percent from -3.4 percent the prior quarter, driven by an improvement in forecast demand. Upcoming supply growth has not exceeded 1.0 percent of existing inventory since 2008 and currently stands at 0.3 percent, while the fourth-quarter vacancy rate remained at 9.4 percent compared to 8.6 percent a year earlier.