2012 May Be Pivotal for U.S. Equity REITs, For Better or Worse

By Steven Marks, Head of U.S. REITs, Fitch Ratings

After nearly two years of stable credit trends, 2012 may be the year that Fitch Ratings revises its outlook on the U.S. equity REIT sector.

By Steven Marks,
Head of U.S. REITs, Fitch Ratings

After nearly two years of stable credit trends, 2012 may be the year that Fitch Ratings revises its outlook on U.S. equity REIT sector. However, the direction of the broader economy has yet to dictate what that outlook will be. How fiscally prudent equity REITs will also be a key factor in what direction the outlook may head.

Fitch would consider revising the outlook for equity REITs to positive if sector-wide leverage levels decreased, fixed-charge coverage levels increased and capital markets access and liquidity levels remained strong. Other factors that may facilitate an upward outlook revision are if same-store net operating income growth turned positive for several consecutive quarters across most property types, the macroeconomic backdrop resulted in sustained job growth (driving demand for space), and asset transaction volume improved.

Conversely, Fitch may revise the outlook for equity REITs to negative in 2012 if access to long-term unsecured debt capital reverted to the weak levels observed in late 2008 and early 2009. Other adverse developments would include issuers embracing riskier strategies such as speculative development and higher leverage and if property-level fundamentals weakened.

The days of playing defense may also come to an end for U.S. equity REITs in 2012 with more merger and acquisition activity on the horizon. Asset prices are still well below peak valuation in several markets, which may put REITs in a prime position to be more acquisitive in the coming year.

Tenant growth will remain tepid in the coming year and keep space demands for commercial real estate at modest levels. Fitch expects continued solid liquidity and relatively unchanged leverage and coverage metrics despite the fragile economy.

From a property-specific standpoint, fundamentals in the multifamily sector should continue to have a positive trajectory in 2012. Most retail REITs should have relatively unchanged same-store net operating income growth. The suburban office and industrial sectors will continue to face challenges to maintain same-store net operating income.