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Retail, Limited-Service Hotel Sectors Show Better Fundamentals

Two commercial property sectors showed an improvement in the last quarter of 2005, while three showed minor deterioration, reports Moody's Investors Service.

The retail and "limited-service" hotel sectors were the ones that improved, compared to the third quarter of 2005, while the industrial, downtown office and multifamily property sectors were the ones that declined.

And the suburban office and "full-service" hotel sectors remained unchanged in their performance, Moody's said.

The Moody's report scores commercial property markets nationwide on a scale of zero to 100, with properties in the 0-33 range falling in the weak category, those in the 34-66 range in the middle category and those in the 67-100 range identified as strong markets.

Based on this methodology, the rating agency identifies the worst U.S. markets for the fourth quarter, with scores for the previous period in parenthesis, as Trenton, N.J., 40 (37); Hartford, Conn., 44 (48); Jacksonville, Fla., 45 (45); San Antonio, 52 (60); Las Vegas, 53 (57); Atlanta, 53 (54); and Wilmington, Del., 53 (66).

The five best markets are Los Angeles, 85 (88); Memphis, Tenn., 83 (75); Honolulu, 82 (83); Orange County, Calif., 80 (78); and Tucson, Ariz., 79 (74).

Los Angeles and New York, the cities most frequently represented in commercial mortgage-backed securities issuance, scored 85, down from 88, and 78, up from 73, respectively, Moody's reports.

For the fourth quarter, 20 markets, including the Wilmington downtown office market, which declined 50 points, and Trenton's limited-service hotel market, which gained 47 points, saw "dramatic" score changes.

Of these 20 markets, "most were smaller markets, once again demonstrating the greater volatility inherent in small markets," according to Sally Gordon, a Moody's analyst who authored the report.

The Washington downtown office market was the exception to the small town pattern, with this big city market's score declining from 68 to 48, the largest score change in a major market, Moody's said.

While this market's supply pipeline is "robust," demand growth is not good, which makes for a supply-demand imbalance.

Multifamily housing saw its score decline from 86 to 82, and also gave up its position as highest scoring sector, with retail moving ahead to 84. This is also the fifth consecutive quarter in which "multifamily demand forecasts failed to keep pace with the supply pipeline," according to Patricia McDonnell, a Moody's analyst and co-author of the report, who sees an uptick in vacancy rates to 5%, from 4.6% for the third quarter, as reflecting this trend.

The industrial sector has been negatively impacted by positive vacancy trends being counterbalanced by a softening of demand.

Community shopping centers saw their score improve as a result of "robust growth in real personal income" and Moody's expects this driver of demand to continue and stay ahead of increases in supply.

Both full-service and limited-service hotels saw revenue rise in the fourth quarter, with revenue per available room rising over 12% for the former category and 15.8% for the latter, compared to the fourth quarter of 2004. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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