Moody’s Expects 20-30% Decline in Commercial Real Estate
The balance in supply and demand that is currently helping to support US commercial real estate prices is expected to give way to decreasing demand over the next several months, leading to lower rents and higher vacancies, says Moody’s Investors Service in a new report.
The weakened conditions are likely to put downward rating pressure on the ratings of some commercial real estate mortgage-backed securities, says the rating agency.
“We do expect that the 2006 through 2008 vintages will experience more downward pressure on ratings than earlier vintages,” says Moody’s Managing Director, Nick Levidy. “In particular we are concerned about fixed rate deals with concentrations of pro forma loans – loans that were underwritten assuming continued strong macroeconomic tailwinds.”
Two mitigating observations noted in the report are 1) commercial real estate is entering this downturn with little excess supply, and 2) only a small percentage of the loans backing CMBS face refinancing in 2009.
Moody’s expects commercial property values to decline 20%-30% from their peak in late 2007, with the market reaching a bottom in 2010-2011.
Aggregate defaults in commercial real estate loans are also expected to increase several fold over the next few quarters from the current historically low rate of under 1%.
Moody’s says conditions across all markets and property types are under pressure.
“The headwinds faced by the retail sector in particular appear to be strengthening, the hotel sector has been re-pricing for months, demand for office space appears to be on the decline in many markets, and multifamily properties are buffeted by cross currents relating to unemployment, shadow rentals of unsold homes and condominiums and home affordability,” says Levidy. “Meanwhile industrial properties have been impacted by slower trade and retail sales.”
Moody’s/REAL Commercial Property Price Indices (CPPI) increased in September, rising 2.5% over the previous month, while it’s most recent Red-Yellow-Green quarterly report on market supply-and-demand showed mixed performance. Moody’s Delinquency Tracker (Moody’s DQT), which measures outstanding delinquencies on loans in CMBS, has risen 37 basis points to 0.60% in the past year.
For details see US CRE Finance 3Q 2008: Storm Clouds Continue to Build.
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