CRE Vacancy Rates Improvement Means More CMBS Stability

Register now

This week two separate reports showed that vacancy rates in the commercial real estate sector have dropped. This bodes well for future CMBS performance.

The data showed that occupancy and performance fundamentals are beginning to come back, bringing more stability down to the asset level of property transaction because, with a steady flow of rental income, deals will perform better.

Moody's Investors Service Red-Yellow-Green study for 2Q10 showed the supply pipeline of new properties continued to shrink across all sectors, with improvement in the balance between supply and demand in six of the seven sectors that make up the market.

"While vacancy rates continue to rise due to the poor absorption experienced in 2009, demand going forward is on the upswing, and the pace of growth in vacancy rates should begin to flatten and possibly contract in the coming quarters," said Keith Banhazl, Moody's vice president and senior analyst.

Cushman & Wakefield also released midyear 2010 statistics for the U.S. office market that show the average vacancy rate for U.S. central business districts (CBDs) has declined for the first time since 2007.

The average U.S. CBD vacancy rate was 14.8% at midyear 2010, a 0.2 percentage point decrease from 15% at the end of 1Q10. The average vacancy rate for U.S. CBDs had been climbing steadily for nine quarters, since it bottomed in the 4Q07 at 9.7%.

"Markets throughout the U.S. continue to strengthen, as it becomes strongly apparent that the national vacancy rate for CBDs has peaked," said Maria Sicola, executive managing director and head of Americas research for Cushman & Wakefield. "Increased leasing activity has attributed to declines in vacancy."

Although the positive data may signal some recovery in the sector it comes across as conflicting with unemployment data that shows the trend of joblessness continues to climb.

"The data on commercial real estate is sending conflicting signals and is being read by different people in different ways,” said Malay Bansal, head of portfolio management and advisory for CRE & CMBS at NewOak Capital. “[The positive data] is seen by many as signs that the CRE market is stabilizing. Others point to declining rents and high unemployment as factors that point to further declines ahead. Both the viewpoints have some validity, which probably implies that the CRE sector might move sideways in near term with some volatility caused by which of the two views is stronger at any given point."

Bansal said that for CMBS, a consensus that the property price decline has stopped will be enough for bond spreads to tighten.

"Real estate prices do not necessarily need to go up for CMBS spreads to tighten,” he said.

For reprint and licensing requests for this article, click here.