Commercial Real Estate Markets Hold Steady

A new report by Moody’s Investors Service indicates that six of the seven commercial property types held their ground at the end of the first quarter. Limited service hotels bucked the trend, with scores declining to 64 on Moody’s scoring system, from 77 in the fourth quarter of 2007.

The ratings agency’s scoring system assigns scores of 0 to 100, with a higher score indicating better performance. A traffic light analogy further defines performance, with green indicating the highest-scoring performance (67 to 100), yellow for average (34 to 66), and red for the worst performance (0 to 33).

“As economic growth forecasts continue to deteriorate, corporate downsizing coupled with waning consumer confidence will increasingly affect hotel demand,” says Sally Gordon, a Moody’s senior vice president. Although the slowdown had been assumed to curb full-service demand, it has begun to spill over into the limited-service sector, she says.

Six of 49 full-service hotel markets reviewed achieved green scores, 26 rated yellow scores, and 17 red. With limited-service hotels, 18 of 48 markets reviewed scored green, 27 were yellow, and three earned red.

In the multifamily property sector, scores were down three points to 81. However, the multifamily scores had improved in the last three quarters. Of the 60 multifamily markets the ratings agency follows, 50 received a green rating and 10 fell into the yellow category.

Retail properties, including neighborhood and community shopping centers, earned the highest score for three consecutive quarters. Keeping up 17 uninterrupted quarters with a score above 80, retail properties garnered an 82 for the first quarter. Of the 53 retail markets the ratings agency tracks, 43 rated green while 10 fell into yellow territory.

Ratings for the office sector were decidedly mixed. Although downtown office properties rose two points to 69 points in the first quarter, Moody’s forecasts CBD demand to drop slightly over the next year as the economy slows. However, the ratings agency reports that supply is also down to its lowest level since 2005, outpacing demand by just 1%, a good sign for the sector. Of 46 office markets Moody’s follows, 17 are green, 23 are yellow, and six are red.

Unlike the CBD office sector, with its high barrier to entry, new supply continues to be added to the suburban office property sector, creating a situation in which supply exceeds demand by 2.6%.
For the first quarter, suburban office scores held steady at yellow, or 42, the lowest for any property sector. Of the 52 suburban office markets Moody’s ranks, four fell into the green category, 31 were rated yellow, and 17, red.

As for the industrial sector, the score dropped two points to 68. Of 51 industrial markets Moody’s tracks, 22 were in green territory, 23 in yellow and six in red.

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