CMBS Supply-Demand Fundamentals Steady; Special Servicing Falls

Michael Tucker mtucker@mba.org

April 23, 2019


Commercial property market supply and demand fundamentals remained stable in late 2018, Moody's Investors Service reported.

Moody's Red-Yellow-Green CMBS score held steady at 71 on a 100-point scale in the fourth quarter as fundamentals stayed stable in the retail, multifamily, office and industrial sectors. The composite scores remained in the "green zone" above 67 for all property types except for hotels and suburban offices.

Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, called it remarkable that supply imbalances remain so "muted" as the economic recovery approaches the ten-year mark. "Of course there will always be markets threatening disequilibrium--lodging products, in particular--but for the most part, these are exceptions against a benign backdrop," he said. "Even fewer of these markets show retrenchment in net operating income, an obvious harbinger of a downturn."

Moody's reported multifamily fundamentals remain the strongest among sectors sector despite a one-point drop to 84. Of the 66 markets the ratings firm studied, scores improved in 28, deteriorated in 28 and were unchanged in 10.

The retail composite score held steady at 78, Moody's said. Upcoming supply has not exceeded one percent of existing inventory since late 2008 and the metric currently stands at 0.3 percent. The retail vacancy rate fell 10 basis points to 9.0 during the fourth quarter.

Central business district offices improved one point to 69 as the fourth-quarter vacancy rate decreased to 10.5 percent, Moody's said. But the score for suburban office remained in the yellow zone at 61.

The industrial sector's score decreased one point to a still-healthy 74, Moody's reported. "The decline in the market's score was due to a decrease in forecast demand," the report said. "Additionally, the year-over-year vacancy rate increased to 6.2 percent from 6.0 percent."

The hotel composite score rose one point to 57 as the baseline revenue per available room target grew to 6.6 percent from 5.0 percent in the prior quarter. "The sector's supply-demand relationship also improved this quarter," Moody's said.

Studying CMBS loans in special servicing, Trepp LLC, New York, said the special servicing rate declined to 3.42 percent in March, down from 4.80 percent a year ago. "There was a slight bump in the rate of hotel loans in special servicing last month, but a notable decline in the office tally made up for lodging's increase and helped push the [overall] rate down," Trepp's Special Servicing report said.

Specially serviced loans represent nearly 4 percent of all loans on the servicer watchlist, specially serviced or delinquent, Trepp said.

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