Fundamentals in the U.S. property markets improved in the second quarter, while high levels of construction in four major hotel sector markets since 2014 have led to supply/demand imbalances, according to new Moody’s Investors Service analysis.
The rating agency said its Red-Yellow-Green scores for the major U.S. property markets, including the hotel, retail, multifamily and industrial sectors, increased slightly in the second quarter to Green 70 from Green 68 in the prior quarter. The Red-Yellow-Green scoring system uses Moody’s near-term outlook for new construction and absorption. Scores indicate which markets are most (Red) or least (Green) vulnerable to short-term declines in occupancy and rent, which are indicators of Commercial Mortgage-Backed Securities (CMBS) loan default risk.
"At the end of the second quarter, our scores were Green for all the major U.S. commercial property types except hotel and suburban office, whose 'Yellow' scores indicate these markets are somewhat more vulnerable to decreasing volume," said Moody's Director of Commercial Real Estate Research Tad Philipp. "Multifamily remains the highest-scoring sector, with New York and Seattle both seeing improvement, including the pace of construction dropping below 3% of existing inventory."
The central business district office segment dropped for the third consecutive quarter, despite Seattle’s 15-point gain, while the suburban office segment declined by 18 points as demand decreased and construction increased, Moody’s analysts said. The retail sector saw a one-point gain, realizing 13 consecutive quarters with a Green reading, as the vacancy rate dropped to 10.9% in the second quarter from 11.2% in the first quarter. The industrial composite score increased as vacancy rates dropped. The hotel composite score also improved four points on revenue per available room growth despite softening demand.
All is not well in all U.S. hotel markets, however, as high construction rates in New York, Houston, Miami and Dallas hotel markets since the end of 2014 have led to a declining Red-Yellow-Green score for the sector, which stood in upper Yellow territory by the end of the second quarter, Moody’s said. "The driving force behind the deterioration in the hotel sector's Red-Yellow-Green score is projected forward supply," Philipp said. "The sector has seen a significant expansion of construction activity, with its score starting to fall after supply exceeded the long-term national average of approximately 2.0% in the fourth quarter of 2014."
– Nicholas Stern, editorial associate