CMBS Supply-Demand Fundamentals Stable; Delinquency Rate Declines

Michael Tucker mtucker@mba.org

February 22, 2018


Commercial property market supply and demand fundamentals remained relatively stable in the third quarter, reported Moody's Investors Service, New York.

The overall composite score increased one point to remain in the green zone with a 70 score. "The composite scores were green for all property types covered except for hotel and suburban office," Moody's said.

The multifamily score increased one point to green 83. It remains the highest-scoring sector, Moody's said. The vacancy rate remained unchanged at 4.6 percent and construction as a percentage of existing inventory also remained stable at 2.1 percent.

The retail sector decreased one point to green 74. "Fundamentals remained relatively unchanged within this sector, with the vacancy rate increasing slightly to 10.2 percent," Moody's said.

The office sector diverged based on location. Central business district offices remained stable at green 68. While the score for suburban offices increased one point to yellow 59 even though the vacancy rate decreased from 14.2 percent to 14.1 percent during the quarter.

Moody's said the industrial sector remained unchanged at green 74. The overall vacancy rate continued its decline, falling to 7.7 percent from 7.9 percent one year ago.

The hotel sector also remained stable at yellow 55 in the third quarter, unchanged from the prior quarter. Hotels remain in the yellow range mostly because revenue per available room growth continued to decline, falling to 0.5 percent from 1.3 percent in the prior quarter and 2.8 percent in third-quarter 2016.

The overall share of green, yellow and red markets deteriorated to 52 percent, 42 percent and 6 percent, respectively from 53 percent, 41 percent and 6 percent in the previous quarter.

The Red-Yellow-Green report tracks which markets are vulnerable to loan default risk factors including short-term occupancy and rent declines. "Red" or tenants' markets show stress and score between 0 and 33 with supply rising faster than demand. "Green" markets score between 67 and 100 and show low or falling vacancy rates; Moody's considers them landlords' markets.

Looking at late payments, Fitch Ratings, New York, said the U.S. CMBS delinquency rate declined for the seventh consecutive month in January, due to both low new delinquencies and steady new issuance activity.

Loan delinquencies fell 10 basis points in January to 3.12 percent from 3.22 percent at year-end. Total outstanding delinquencies equaled $11.6 billion in January, down from $11.8 billion in December. The new delinquency volume represented the lowest level seen since 2015.

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