CMBS Supply-Demand Fundamentals Stable; Freddie Mac Defeasance Jumps

Michael Tucker mtucker@mba.org

August 08, 2019


Commercial property market supply and demand fundamentals slipped one point in the first quarter but remained stable, reported Moody's Investors Service, New York.

The overall composite score decreased one point to 70 on a 100-point scale, safely in the green zone. "The composite scores were green for all property types covered except for hotel and suburban office," Moody's quarterly Red-Yellow-Green Update said.

Moody's said the multifamily sector's score decreased one point to 83, maintaining its rank as the highest scoring sector. The multifamily vacancy rate decreased to 4.6 percent from 4.8 percent a year before. Upcoming supply growth increased slightly--to 2.2 percent from 2.0 percent in late 2018--while forecast demand growth increased to 1.9 percent from 1.7 percent, the report said.

The retail sector, including both neighborhood and community centers, held steady at a 78 composite score, Moody's said.

Central business district offices decreased one point to 68 as the year-over-year vacancy rate decreased to 10.4 percent from 10.7 percent while suburban offices held steady at 71, Moody's said.

The industrial composite score held steady at 74. The sector has remained in the green range since 2014.

The hotel score declined four points, Moody's said. It fell to 53 from 57 in the prior quarter. "The decrease in the overall composite score is due to slowing of the revenue per available room growth rate and resulting deterioration in the lead to it baseline RevPAR target," the report noted. It said the overall market now leads its baseline RevPAR target by 2.6 percent compared with 6.6 percent in early 2018 and 3.5 percent a year before. "This marks the narrowest lead to baseline RevPAR since third quarter 2014," the report said.

Studying multifamily mortgage-backed securities, Kroll Bond Rating Agency, New York, observed a "meaningful increase" in loan defeasances among Freddie Mac K-Series transactions. "Since our last report on the subject, defeasance volume has soared to new highs," KBRA said in its report, As Freddie Mac K- Series Defeasance Accelerates, Supplemental Debt Slows.

KBRA called the defeasance volume increase "unsurprising" because the U.S. is well into its longest economic expansion in history with 121 consecutive months of GDP growth. "Throughout this period, the multifamily sector has benefited from strong investor demand, demographic shifts and living preferences that have all contributed to rising values," the report said.

CoStar Group, Washington, D.C., reported multifamily price growth posted an 8.5 percent improvement over the past twelve months.

"There is no economic rule that calls for the end to an expansionary period," KBRA said, noting the Fed's recent rate cut could fuel additional multifamily price growth. "We expect that Freddie Mac K-Series defeasances will post new highs for full-year 2019."

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