According to Fitch Rating’s 2003 REIT Scorecard, all four main REIT sectors — retail, industrial, multifamily and office — will likely see further deterioration through this year. The firm also lowered its multifamily REIT outlook from stable to negative and retained a negative ratings outlook for the office sector.

"Fitch’s principal concern in maintaining its negative outlook for the office sector and adding multifamily to the list is continued uncertainty on a sustained recovery and the related benefits of rent stabilization and growth," says John Olert, managing director at Fitch Ratings.

Olert says the multifamily sector’s deterioration in recent months has surprised many industry observers. A continued imbalance between supply and demand fueled by high unemployment levels and low interest rates — which siphon potential renters into the home ownership market — have weakened multifamily fundamentals.

According to Fitch, multifamily REITs such as AvalonBay Communities (AVB), BRE Properties (BRE), Camden Property Trust (CPT), Essex Property Trust (ESS), Gables Residential Trust (GBP) and Summit Properties (SMT) that are heavily exposed to telecom markets will continue to experience occupancy loss, flat to negative top-line growth and little-to-no pricing power. In short, the "multifamily and office REITs are slugging it out near the bottom of the market," Olert explains.

On the other hand, Fitch holds its REIT outlook for both industrial and retail REITs at stable, although industrial earnings have weakened under difficult economic conditions and, as Fitch believes, most U.S retailers will "be forced to rationalize their selling space if the U.S falls into a ‘double dip’ recession."

"If consumer confidence were to erode further, it’s very likely that retailers would have to close under performing locations," says Brian Phillips, senior director at Fitch Ratings, "which bodes poorly for REITs with less dominant or unproven assets in their development pipeline in lease-up."