Consumer Spending Boosts Some Real Estate Values

Property sectors driven by consumer spending - multifamily and retail - remain strong while those tied more to the corporate side - office and industrial - lag, although they continue to recover, Moody's Investors Service says in its commercial real estate market report for the third quarter of 2004.

The multifamily sector remains strong, and Moody's has designated 51 of the 59 multifamily markets the rating agency tracks as green markets, each scoring in the highest range of 67-100.

As well, Moody's reports that the multifamily vacancy rate is down to 5.8% for the third quarter of 2004, from 6.0% in the second quarter of the year.

Neighborhood and community shopping centers are also strong, with a composite sector score of 83 for the third consecutive quarter, Moody's reports.

Moreover, the rating agency sees restrained construction in the sector.

Sally Gordon, a Moody's analyst/vice president and co-author of the report, said, "The composite square feet of community shopping center space per capita also remains unchanged at 10.7, as does the one-year forward estimate of new supply at 1.7% of existing inventory."

In the office sector, the rating agency is seeing a narrowing of the differential between downtown and suburban office markets, with downtown scores seeing a decline and suburban office scores gaining.

Patricia McDonnell, another Moody's analyst and co-author of the report, noted, "Slightly better than half (54%) of the 46 central business district markets covered have a higher score this quarter. The average vacancy rate of 13.6% is down a hair from 13.7% last quarter, and has remained within a very tight band of 13.6% to 13.8% over the past four quarters."

The Moody's analysts believe that the suburban office subsector's composite score has improved due to an improved vacancy rate of 17.2%, an improvement over each of the last four quarters.

The industrial sector "continues to be challenged by vacancy rates above historical norms," the rating agency reports.

For the third quarter, vacancy in the sector slipped slightly to 11.2%, from 11.4% for the previous period. And while both the "full-service" and "limited-service" segments of the hotel industry remain in the highest scoring green range, composite scores for these properties declined, the rating agency said.

Ms. Gordon observed that growth in revenue per available room, on a year-over-year basis, in the full-service hotel sector is down to 8.8% from the second quarter's 11.7% growth rate. In the limited service sector, RevPAR increase of 8.3% is "only slightly behind the 8.5% pace of last quarter," she said.

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