Moody's: CRE Fundamentals Will Continue Improving

“Persistent economic concerns” will slow down the pace of recent commercial real estate performance improvements, according to Moody's. Nonetheless all of the sectors will continue to improve throughout 2013.

The CRE market “continues to benefit from limited construction and positive absorption” that have supported a positive market dynamic despite concerns about the strength of the economic recovery, explained Moody's managing director and head of U.S. CMBS and CRE CDO surveillance, Michael Gerdes.

He expects subdued GDP growth in the U.S. of around 2% for 2013, and “a slow but steady” economic recovery that will ultimately boost business confidence.

CRE sector fundamentals will drive improving market conditions, making “a significant rise in losses on” securitized U.S. commercial mortgage loans unlikely, according to Moody’s "Q1 2013 US CMBS and CRE CDO Surveillance Review."

For example, multifamily and hotel CMBS loans are expected to continue to perform well over the next year even though “at a more modest pace," compared to the fourth quarter of 2012.

While the recovery of office and retail CMBS which “has been more muted,” he said, will strengthen alongside employment and economic growth gains.

Moody's reported that its central global scenario of Commercial Mortgage Metrics has not changed at around 8% “until delinquencies start declining at a faster pace.”

CMM weighted average credit risk base expected loss declined to 8.3% from 8.4% in the fourth quarter of 2012, while expected loss for conduit and fusion transactions rates rose to 9.1%, up from 8.9%.

The overall share of specially serviced loans declined 27 bps to 11.04% in the first quarter of 2013 from 11.31% in the fourth quarter of 2012 with performing specially serviced conduit loans accounting for 17.67% in the first quarter of 2013, down 190 bps from 19.57% in the fourth quarter of 2012, “in large part due to faster workouts” of nonperforming loans from 2006-2007.