Real Estate Index Down

Real Estate Index Down NEW YORK, NY - Two new reports from Moody's illustrate the worsening fundamentals of the U.S. commercial real estate market. In its latest Red-Yellow-Green® study, Moody's says all seven property types showed declines in market strength during the last quarter of 2008. And in a separate report, Moody's reports that CRE prices fell 0.6 percent in February.

The fourth quarter drops were most dramatic in the two hotel sectors, full- and limited-service, which scored zero for the quarter, reflecting extreme market weakness. Only the multifamily housing sector continues to have a "green" (strong) score; during the last quarter, however, this dropped seven points to 72 as vacancy rates rose.

Although construction remains in check in most commercial real estate sectors, all but one–multifamily housing–have negative demand projections for the coming year, the rating agency points out. As a result, supply is outpacing demand by increasing margins across the board.

Retail slipped to a score of 55 to join central-business-district (CBD) office (48) and industrial (46) in yellow territory.

The overall commercial real estate composite score for the United States is 42 — a dramatic 16-point drop from last quarter. Moody's notes that the two largest markets supporting commercial mortgage- backed securities, New York and Los Angeles, continued to weaken significantly during the quarter, with both falling deep into yellow from green.

Commercial real estate prices as measured by Moody's/REAL Commercial Property Price Indices (CPPI) decreased in February by 0.6% from the previous month. Moody's expects to see a continued decline in commercial property prices in the coming months as property fundamentals continue to erode and cap rates continue to rise.

Prices are now down 21.2% from a year ago and 17.9% lower than they were two years ago. They have declined 21.5% from their peak in October 2007.

Moody's says that with the significant decrease in commercial real estate prices over the last several months, properties backing loans originated as far back as 2005 are now seeing price depreciation, on average, increasing the risk that the loans will fail to refinance at maturity. Although not necessarily representative of the broader commercial real estate loan market, it is also worth noting that few CMBS loans maturing in the next two years are from vintages with more than 10% price depreciation.

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