Fitch Stays Negative on REITs into 2010
Real estate investment trusts (REITs) face a number of challenges going into 2010 and Fitch Ratings is maintaining its negative outlook on the sector. Fitch’s negative outlook reflects a fragile stabilization of the US economy, weakening property-level fundamentals, strengthening liquidity, driven by more accessible unsecured debt capital markets, slightly elevated leverage levels, lower coverage metrics, limited development pipelines and a slow asset sales environment. While there are very early signs of some US economic improvement, Fitch remains concerned about future declines in US gross domestic product (GDP), unemployment levels exceeding expectations, property-level fundamentals weakening beyond current assumptions, and increased pressure on coverage metrics, Fitch analysts wrote in a REIT outlook report. While Fitch projects US GDP growth to be 1.8% in 2010 and 2.5% in 2011, occupancy and rent growth is expected to lag a broader economic recovery. Fitch did not rule out revising its negative outlook if conditions improve. “If liquidity and access to capital remains strong, expect more rating affirmations and fewer downgrades and downward Outlook revisions that characterized 2009,” said managing director and US REIT group head Steven Marks. “Conversely, less access to capital and increased use of secured debt will put a strain on liquidity,” which Marks added will lead to a more circumspect view of the sector. The multifamily REIT division is projected to outperform the sector due to limited supply and continued access to low-cost financing from Fannie Mae (FNM) and Freddie Mac (FRE). Healthcare REITs are also projected to perform better driven by “demographic trends that continue to benefit the health care sector, portfolio diversity and limited supply,” Fitch said. However, office REITs won’t improve until employment numbers do and slow recovery will also hurt industrial REITs. Retail REITs will under perform on lagging consumer retail demand. “Overall retail sales in 2010 will be flat to up modestly from 2009 levels, translating to soft consumer demand due to high unemployment levels, continued challenges to consumer credit, and ongoing US household deleveraging,” Marks said. Write to Austin Kilgore. The author held no relevant investments.