Moody's Calls Commercial Real Estate ‘Largely Stable’

MBA (4/10/2008 ) Murray, Michael
Real estate markets that support commercial mortgage-backed securities (CMBS) are “generally stable or weakening only moderately” with the exception of limited-service hotels, said Moody’s Investors Service, New York, in its Red-Yellow-Green report for the first quarter.

Six of seven commercial property types measured in the report posted scores similar to the fourth quarter of 2007; and—for the fourth consecutive quarter—Los Angeles and New York had the strongest composite scores of any market across all property types. The overall commercial real estate composite score for the United States was 69 in the first quarter, a drop of one point from the previous quarter.

Limited-service hotels, however, showed significant deterioration as its green score of 77 dropped inside the yellow territory of 64. The Moody’s report scores markets on a scale from zero—the weakest—to 100—the strongest—and describes the scores as traffic light colors, with red at 0-33, yellow at 34-66 and green at 67-100.

"As economic growth forecasts continue to deteriorate, corporate downsizing coupled with waning consumer confidence will increasingly affect hotel demand growth," said Sally Gordon, senior vice president at Moody's Investors Service. "While previously, economic weakness was thought to most significantly curb full-service demand, the slowdown is beginning to spill over into the limited-service sector as well."

Indeed, full-service hotels fell slightly deeper into the yellow territory during the quarter, dropping two points to 59, the ratings agency reported. Moody's said the basic supply and demand metrics for the sector continued to deteriorate as the near-term economic outlook worsened.

Six of 49 full-service hotel markets had green scores, 26 earned yellow scores and 17 received red scores. In the limited-service hotel sector, 18 of 48 markets had green scores, 27 received yellow scores and three markets brought in red scores.

Central business district (CBD) offices showed a slight improvement in supply versus demand, while two sectors—multifamily and industrial—declined marginally, the report said. Multifamily housing, retail and CBD office had green or strong scores, while four sectors—suburban office, industrial and the two hotel sectors received yellow scores.

During the first quarter, the multifamily housing sector slipped three points, reversing a trend of improving scores during the previous three quarters, but multifamily remained in solid green territory at 81. Meanwhile, 50 of the 60 multifamily markets that Moody's follows were green, with the remaining 10 in yellow territory. The ratings agency reported no red markets for multifamily and retail.

Retail scores did not change from the previous quarter and the property-type, consisting of neighborhood and community shopping centers, kept their position as the strongest and most stable property type. Retail had a composite score of 82 for the third quarter in a row. The sector's score has been in the green, 81-84 point range for 17 consecutive quarters. Of the 53 retail markets, Moody's reported that 43 had green scores and 10 had yellow scores.

The CBD office market gained two points, increasing its score to 69. Although Moody’s expects demand for downtown office space to decline slightly during the next one-year horizon. The ratings agency said that supply has also slowed to “barely a trickle—down to 0.6 percent, its lowest level since 2005.”

“The relatively small supply-demand imbalance should not undermine market stability too profoundly,” the report said.

In all, of the 46 CBD office markets in the study, 17 are green, 23 are yellow and six are red.

Moody's composite score on the industrial market dropped two points to 68—still in the green range—with 22 markets at green scores, 23 markets with yellow scores and six of the markets in the red.

Suburban office scores, however, remained the same from last quarter—the lowest score of any sector—showing a weak supply-demand relationship continues in the sector, the report said. With four of 52 suburban office markets at green, 31 are yellow and 17 are red.

“Unlike the CBD office segment, suburban markets continue to experience a very hearty pace of new supply, 2.9 percent, notably ahead of the rate of expected growth in demand, to leave a negative supply-demand imbalance of [minus] 2.6 percent,” Moody’s said. “Suburban office supply shows no signs of dropping off, while demand wanes.”

Long Island, N.Y., Honolulu and Salt Lake City, respectively, rounded out the five top cities—all green, based on Moody’s rankings.

Jacksonville at a red 27 score was down 10 points from the fourth quarter of 2007 and ranked as the worst market after Phoenix, Trenton, N.J., San Antonio and Dayton, Ohio—down 16 points to a yellow 44 score in the first quarter.