Lower Oil Prices Giving U.S. Equity REITs Minor Boost
- Apr 22, 2015
By Stephen Boyd, Director, REITs, Fitch Ratings
Lower gasoline and heating oil prices will bolster consumer discretionary incomes and will likely lead to greater retail and travel spending, providing a moderate net benefit to U.S. equity REITs, according to Fitch Ratings.
We believe shopping centers and hotels should experience the greatest benefit, with multi-family also gaining, but to a lesser extent. More commercial-oriented office and industrial sectors will also benefit less. Office properties in oil-exposed areas will have heightened vulnerability to tenant failures and increasing vacancy.
Fitch believes Houston is most at risk, though portfolios have held up thus far. CRE fundamentals tend to lag broader economic trends, so reports of slower leasing velocity, increased sublease space and new supply may take several quarters to develop.
Lower oil prices will likely slow hiring in the Houston MSA, resulting in lower CRE space demand. Moderate portfolio exposures, strong balance sheets and good capital access should limit the ratings impact on Fitch’s rated REIT portfolio. Aggressive development (including some speculative projects) could challenge the industrial and office sectors. Fitch-rated U.S. CMBS office property exposure in the Houston MSA totals about $2.5 billion (0.65 percent of total outstanding Fitch-rated CMBS balances) and across all property types is $9.5 billion (2.5 percent).
Exposure to lower oil prices for REITs is limited outside of Texas. Few REITs have exposure to the secondary/tertiary markets where lower oil prices have stalled fracking activity. Examples of the latter include western Pennsylvania and the Dakotas. These markets generally lack the long-term, sustainable employment growth and barriers to new supply that most REITs favor. U.S. CMBS conduit exposure to shale oil areas outside Texas is also very limited. This is largely because the shale oil industry is still relatively new, having only taken off within the past decade.
On balance, unlike for U.S. CMBS, the negatives of a sustained period of low oil prices seem more likely to outweigh the positives for assets in Canadian CMBS. Canadian CMBS conduit performance may diverge more sharply between oil-focused areas in Alberta – such as the cities of Calgary, Edmonton and Fort McMurray – and the rest of the country.