Fitch: Commercial Properties Have a Long Road to Recovery

September 26, 2011
By Nicholas Ziegler, News Editor

Courtesy Wikipedia Creative Commons user twoblueday

U.S. commercial properties have seen some minor improvements of late, but the sector still has quite a ways to go before it can completely shake off the effects of the economic recession, according to Fitch Ratings.

Net operating income across all types is down 1 percent from the end of 2009 to the end of 2010, but the bleeding has generally stopped. NOI was down 5 percent from 2008 to 2009.

And Fitch’s pessimism affects all commercial property types, not just office or industrial – the two sectors thought to have the longest road to recovery country-wide. Despite a report last week by PKF Hospitality Research that affirmed hotels’ recovery would be soon forthcoming, Fitch sees hotels to be in a weak position like the rest of the industry.

“Drilling down into specific property types, hotels have seen the largest performance declines over the last two years, with NOI dropping 25 percent between 2008 and 2010.The daily reset of overnight rates make hotel properties the most vulnerable to performance declines,” Adam Fox, senior director with Fitch, said. Overall hotel performance may have begun to show signs of improvement with one year of positive growth, but many hotel properties, especially limited-service hotels located in secondary and tertiary markets, continue to report a lower NOI in 2010 than in 2008.

Despite such a gloomy outlook, Fitch sees stabilization on the horizon, with the majority of commercial property depending on factors including the unemployment numbers and consumer spending. “One year of greater NOI stability does not mean a recovery,” Fox said.

Multi-family properties performed better than the hospitality sector, declining only one 1 percent over the two-year period studied. Property managers had been maintaining lower rents and offering significant concessions in order to keep occupancy numbers buoyed, but those concessions are slowly fading.

“Office and retail properties, which benefit from longer-term leases, experienced a modest decline in NOI of 4 percent and 3 percent, respectively, from year end 2008 to 2010,” the report noted.

The data analyzed came from Fitch’s analysis of 21,334 commercial properties with fully reported financials from 2008 to 2010 which secure the firm’s $270.4 billion CMBS portfolio, with 34 percent of holdings in office, followed by 33 percent retail, 14 percent multi-family, 7 percent hotel, 6 percent industrial/warehouse and 6 percent other property types.