Moody's report: multifamily, retail strong, but office weak

Real Estate Weekly, Nov 6, 2002

Properties underlying commercial mortgage-backed securities (CMBS) continue to diverge with consumer-oriented real estate, such as retail and multifamily buildings, holding their own while office and industrial buildings, tied to the corporate sector, continue to decline, said Moody's Investors Service in its quarterly Red-Yellow-Green * report on U.S. commercial real estate.

The well-being of property markets affects the credit of CMBS. In Moody's report, markets are described in traffic light colors: red (under stress 0-33), yellow (34-66 warrants monitoring), or green (67-100, not under imminent stress).

"Those sectors driven by the consumer side of the economy - multifamily buildings and shopping centers - continue to be strong, at least for the time being. The multifamily score remained virtually unchanged at 72, also green, down from 73 last quarter," said Moody's Sally Gordon, vice president/senior credit office and author of the report.

The other major real estate sector tied to consumer spending - community and neighborhood shopping centers - improved its scores from 79 to 88 quarter-to-quarter.

"The national average retail and individual markets should resume growth as measured by increases in real (i.e., inflation-adjusted) personal income. While annual income growth was projected to be a meager 0.5% six months ago, it has accelerated to 2.4% for the next one-year period," Gordon said.

Those sectors dependent on business spending are still in the doldrums. The national office market score improved slightly from 40 to 46 between the first and second quarters of 2002, but is still in the yellow zone.

"The national vacancy rate is higher year-over-year, rising from 11.3% in second-quarter 2001 to 15.7% in second-quarter 2002. Vacancies also increased quarter-to-quarter, but by a shallower amount, from 15.4% in the first quarter to 15.7% in the second," Gordon said, adding, "The slower rate of deterioration could imply stabilization of market dynamics within the foreseeable future."

The industrial market also remains in the doldrums with a score of 52, solidly in the yellow zone, the same score it had for the first quarter of 2002.

"Vacancies continued to rise to 10.8% from 10.2% last quarter and from 8.2% a year earlier. That vacancy rate is only a hair below the 11% rate from 1992, which was the trough of the industrial property market cycle in the previous recession," Gordon said.

Even if the national economy were to recover more vigorously than current data portend, the industrial sector is likely to lag the macro-economy by a wide margin.

"The increasing efficiency with which warehouse space is utilized means that more goods flowing through the economy do not generate proportionately more demand for warehouses. As a result, the sector could languish for a couple of years," Gordon said.

The hotel sector remains red with national average scores of zero. "Among the 25 markets we cover, two are green, none are yellow, and 23 are red - 21 of which have scores of zero. Revenue per available room (RevPAR) declined by more than 7% year-over-year through the second quarter. The dip in RevPAR, however, is less severe than the -10.4% of the last period, providing some indication of a slow rebuilding in the hotel sector," Gordon said.

Overall for all commercial real estate categories, the five worst markets in the country were as follows: Denver, 31 (14); Austin, 32 (28); Portland, Ore. 36 (55); Stamford, Conn., 38 (57); and Baltimore, 39 (44). The previous quarter's score is indicated in parenthesis.

The five best overall commercial real estate markets in the country were: Long Island, N.Y., 79 (76); New York, N.Y. 78 (64); Norfolk, Vir., 78 (78); Los Angles 75, (71); and Northern NJ, 73. (61).

The Moody's report discuses each commercial real estate sector in depth. It is titled "CMBS: Red - Yellow - Green * Update, 3Q 2002 Quarterly Assessment of U.S. Property Markets."