U.S. equity real estate investment trusts (REITs) may face more pressure to maintain a stable rating outlook over the next year and a half, according to Fitch Ratings. The New York credit rating agency believes, however, that REITs remain “fairly well-positioned” to maintain their current ratings in the face of overall difficulties in the U.S economy.
In some REIT segments, ongoing economic slowdown is likely to strain property-level fundamentals, earnings stability and growth. This means that access to capital and adequate liquidity levels will be areas of focus for Fitch’s ratings, according to Steven Marks, a Fitch managing director and head of the rating agency’s U.S. REIT group.
“REITs with assets in markets that have been disproportionately affected by the housing downturn, as well as those REITs exposed to markets with low barriers to entry and weakening economic and employment bases, are at greater risk for declines in net operating income growth and occupancy levels,” says Marks.
“Working to the sector's advantage is the fact that many REITs have enhanced liquidity by scaling back development pipelines and stock buybacks under authorized share repurchase programs, which Fitch views as a credit positive.”
Some REIT sectors are of more concern than others to the rating agency.
In the multifamily REIT sector, Fitch is maintaining a stable outlook even while viewing the sector with concern. This is because the economy has affected certain markets more negatively than others, and additional job losses in the economy are likely to cause a cutback in demand for apartments.
Office REITs may also come under increased pressure on the credit front as declines in employment growth, particularly in the financial services sector, have weakened operating fundamentals at property levels.
And a rash of store closings in the retail sector leads Fitch to expect more signs of strain for retail REITs as well, even as the rating agency retains a stable outlook for retail REITs.
Of particular concern are retail stores whose fortunes are tied to more discretionary consumer spending on home improvement items, furniture, housewares, apparel and electronics.
“Retail property vacancies will likely inch up as consumer spending reluctance has led to a spate of bankruptcies and store closings in retailers like Boscov's, Mervyns, Levitz, Sharper Image, and Linens ‘n Things,” notes Marks.