In June 2006, Fitch Ratings released its annual update of Property Market Metric (PMM™) scores as part of the company’s commercial mortgage-backed securities’ (CMBS) rating process. PMM scores are Fitch’s proprietary measure of the volatility of the five major property types (multifamily, hotel, office, retail and industrial) with various regional real estate markets.
According to Fitch classifications, there are 73 primary U.S. real estate markets, composed of large suburban and metropolitan areas, with 306 secondary real estate markets. To compute PMM scores, Fitch includes the 10-year performance of the five property types as well as a 10-year net operating income (NOI) growth forecast, with lower scores indicating lower risk. The primary and secondary market averages show that, across all property types, secondary markets in both 2004 and 2005 had higher volatility than primary markets.
According to PMM scores, the multifamily sector posted the lowest average total score of the five property groups in 2004 and 2005. The office sector experienced the most overall improvement, reflected in the 21 basis-point drop in the primary office market average total score from 2004 to 2005. The retail and hotel sectors still faces uncertainty due to an increase in interest rates and energy costs, with average total scores that rose 8 and 9 basis points, respectively, in the past year. However, Fitch analysts predict volatility in the hotel sector will not change remarkably, due to short-term leases and vulnerability to revenue fluctuations. The industrial property average volatility generally improved a bit in the past year.
—Jada A. Graves
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| Multifamily |
1.73 |
2.67 |
2.49 |
2.08 |
2.80 |
2.66 |
| Hotel |
4.11 |
4.40 |
4.34 |
4.10 |
4.29 |
4.25 |
| Office |
2.55 |
3.29 |
3.16 |
2.71 |
3.54 |
3.37 |
| Retail |
2.16 |
3.46 |
3.21 |
2.21 |
3.35 |
3.13 |
| Industrial |
1.95 |
2.81 |
2.65 |
2.08 |
2.85 |
2.70 |
| Average |
2.50 |
3.33 |
3.17 |
2.64 |
3.37 |
3.22 |
| PMM—Property Market
Metric. |
| Based on third quarter performance
data. |
Source: Fitch Ratings
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