Moody's: Commercial real estate outlook improving

Posted on July 27, 2011

The commercial real estate market is showing increased signs of stability, led by burgeoning demand for apartments, according to a report issued Monday by Moody’s.

The firm’s review of U.S. commercial property trends in the first quarter shows modest market improvement, with the projected rate at which commercial space is being leased edging out the rate of increase in the supply of commercial space.

Moody’s ranks markets’ health on a scale of zero to 100, with the highest score representing a stronger market.

The overall commercial real estate market ranking for the nation increased two points to 67.

“Scores for the central business district and suburban office markets rose moderately, while those for the multi-family, retail, and industrial markets were consistent with the previous quarter, ” said Keith Banhazl, a senior credit officer at Moody’s.

Commercial real estate generally is divided into five main categories: Office, industrial, retail, hospitality and apartments, sometimes referred to as the multifamily sector.

The U.S. apartment market registered a score of 88, the highest ranking in Moody’s first-quarter review, with Newark, N.J., Miami, Portland, Ore.., and Ventura County, Calif., all registering individual market scores of 94 or higher.

The retail market held steady at 64, with San Francisco posting the highest individual market score at 88, followed by Long Island, N.Y., and Honolulu, each at 81.

Office space in cities’ central business districts registered a four-point bump to 70, Moody’s said. However, the segment’s vacancy rate increased to 13.2 percent from 12.9 percent in the first quarter.

Fort Worth, Texas, and New York shared the highest ranking in the sector at 87, followed by Washington D.C., which was unchanged at 81.

The nation’s suburban office markets also improved four points to 52, despite a high, but declining vacancy rate in the 18 percent range.

The strongest suburban office market was Nashville, Tenn., at 78, followed by Honolulu at 73. The weakest markets were Las Vegas and Detroit, both 17.

Improving demand for industrial properties helped nudge down the category’s U.S. vacancy rate to 14.1 percent from 14.3 percent in the second quarter. The sector scored a 61 in Moody’s ranking.

Hotel properties saw brighter trends in the first quarter, with full-service hotels moving eight points higher in Moody’s ranking to 63.

Projected demand surpassed the previous quarter’s four-year high, the firm said.

Now, demand for hotel space is expected to outpace supply by 4.3 percent, the largest gap since 2005, Moody’s said.

Limited-service hotels also registered an increase in Mood’s ranking to 62 from 55, although demand projections dipped slightly.