Most commercial real estate markets in the U.S. continue to post weak fundamentals and are unlikely to see recoveries soon, according to Moody's Investors Service's latest Red-Yellow-Green study. Measures of market strength are generally showing little movement, Moody's says.
The Moody's report scores markets on a scale of 0 (weak) to 100 (strong) and describes them in traffic light colors, with scores of 0-33 identified as red, 34-66 as yellow, and 67-100 as green. The new third-quarter study reflects data from the second quarter of 2009.
Though Red-Yellow-Green scores remained relatively unchanged, halting some steep declines experienced in recent quarters, Moody's says it is premature to assume that markets have reached bottom. Marginal contractions in supply are behind most improvements in the supply-demand balance of some of the markets, says Moody's. There are few signs of a robust recovery in demand – a key condition for real improvement in market conditions assuming constant supply, Moody's explains.
All of the seven sectors tracked by Red-Yellow-Green posted market-strength scores similar to those in the previous quarter, with the exception of the multifamily sector, which shifted upwards into green territory, buoyed by improvements in forecasted absorption rates.
The multifamily sector returned to green territory after its score increased from 66 to 75. The improvement reflected projected absorption, increasing to 0.8% from 0.2%, as the supply pipeline contracted to 0.7% from 1.0%. This has led to a supply-demand imbalance, changing into a situation where demand is outpacing supply.
The retail sector held steady at the record-low score it reached in the previous quarter of Yellow 46. A 0.5% increase in vacancy offset a slight improvement in the supply-demand imbalance, from -1.3% to -1.1%. In the retail sector, 27 markets saw an upswing in score this quarter, while 22 markets experienced a drop.
The score for offices in central business districts also remained unchanged at Yellow 42, reflecting trends similar to those in the retail sector. Though vacancy increased from 11% to 11.7%, a slowdown in construction and a pullback in negative-demand projections narrowed the supply-demand mismatch from 4% to -3.4%.
Suburban offices remained flat as well, with a score of Red 27 for the second consecutive quarter. Vacancy also increased in this sector, to 17.6% from 16.7%, as the supply-demand imbalance also tightened. However, a reduction in the supply pipeline, from 1.5% to 0.9%, was the sole reason for improvement in the supply-demand relationship, as the demand forecast was unchanged at -1.8%.
The industrial sector shed an additional six points, falling from a score of Red 27 to Red 21. The sector has declined 41 points in three quarters. The supply-demand mismatch saw little movement this quarter, but vacancy continued to increase – up another 3% to 15.2%. This represents a year-over-year vacancy growth of 4.9%. All 51 industrial markets in the report have double-digit vacancy rates.
The full-service hotel sector remained at Red 0 for the third straight quarter, as year-over-year revenue-per-available-room (RevPAR) growth continued its downward spiral. RevPAR is down 22.8% over last year – a further deterioration from last quarter's 20% drop. Forty-nine of the 50 markets in the report experienced double-digit RevPAR declines. Future projections improved, however, as RevPAR is only expected to decrease 2.4% over the next year, versus the -4.1% projected last quarter. All but one market – Honolulu – have scores of Red 0.
The limited-service hotel sector performed similarly to the full-service sector, as its score also continued at Red 0. RevPAR growth reached a record low for the sixth straight quarter in the sector, at -20.7%, with 25 individual markets posting declines of more than 20%. All 49 markets are in Red territory this quarter, with 45 having scores of Red 0.
SOURCE: Moody's Investors Service