As Construction Grows, U.S. Commercial Property Sees Growing Exposure to CMBS Loan Default Risk

The overall near-term outlook for new construction and space absorption for the U.S.’s major property markets fell in the first quarter of the year.

Moody’s Investors Service property market scoring system, known as “Red-Yellow-Green,” indicates which markets are most (red) or least (green) vulnerable to short-term declines in occupancy and rent, important drivers of Commercial Mortgage-Backed Securities (CMBS) loans default risk. The composite Red-Yellow-Green score decline to Green 68 in the first quarter from Green 71 in the prior quarter, Moody’s said Aug. 9 in its most recent update of the scoring system.

"At the end of the first quarter our scores were green for all the major US commercial property types except suburban office and hotels, which were yellow, indicating those markets are somewhat more vulnerable to decreasing income," said Moody's director of commercial real estate research, Tad Philipp.

A credit manager for a large construction firm in the Florida area said the market is staying relatively strong, and both business and collections are good and seem likely to stay that way in the near term.

The score for the multifamily sector decreased in the first quarter to Green 75 from Green 77 on a deteriorating supply-demand relationship, though it remains the highest scoring sector, Philipp said. Multifamily scores improved in 20 markets, stayed the same in four and worsened in 38. Nashville’s score, for example, continued to fall because of the higher level of construction in the city, which is as high as 8% of current inventory.

Philipp said the hotel sector experienced the biggest drop, to Yellow 61 from Green 74, as revenue per available room growth continued to decline as forward supply increased. Indeed, scores for the sector in 42 cities declined, including New York and Chicago, which both dropped to red designations.

High vacancy rates in the suburban office sector led it to drop five points—the top 10 markets all exceed 10% vacancy rates, Moody’s said. The Central Business District (CBD) sector also dropped five points but stayed in Green territory.

- Nicholas Stern, editorial associate

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