Deals

Cash flow volatility soars in US

Over the past year, the volatility of net operating income for commercial real estate in more than 370 markets has hit levels unseen since Fitch Ratings first began tracking the metric in 2000. Worst affected office markets were New York, Los Angeles and Chicago.

By
Zoe Hughes
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The volatility of cash flows for US commercial real estate reached historic highs during 2008, peaking at levels not seen since Fitch Ratings began tracking the metric nine years ago.

In its annual Property Market Metric report, Fitch revealed that the volatility score for cash flows in 379 markets in the US jumped from a score of 2.98 in 2007 to 3.62 by the end of 2008.

The scores are derived by monitoring the performance history of US CMBS transactions along with 10-year net operating income forecasts. The higher the score the worse the volatility of property cash flows.

“What is noteworthy is the size of the increase. The magnitude of change reflects challenging forecasts for all commercial real estate property types across all US markets.

Bob Vrchota, Fitch Ratings

Since 2000, when the index was launched, the score has never peaked above 3.5. The 2008 figures were also the largest year-on-year increase ever recorded by the index.

US office was the worst affected sector during 2008 with volatility jumping to 3.68 from 2.62 in 2007. No office market in the US improved over the 12 month period, compared to 2007 when 86 percent of the overall office volatility scores remained unchanged and 14 percent improved. The primary cities showing the greatest volatility were New York, Los  Angeles and Chicago.

Multifamily was the second most volatile sector in terms of cash flow with San Francisco, Miami and Phoenix the worst primary cities affected. The retail, industrial and hotel sectors followed.

Managing director Bob Vrchota said an increase in cash flow volatility had been expected given declining real estate fundamentals. But he added: “What is noteworthy is the size of the increase. The magnitude of change reflects challenging forecasts for all commercial real estate property types across all US markets.”