The Trends: Tough Times Ahead for REITs

Same-property cash net-operating income for industrial REITs rose 3.2 percent in the third quarter, up from a 2 percent gain accrued in the second quarter, according to RBC Capital Markets’ “3Q08 Office/Industrial Earnings Wrap-Up.” But a move toward less leasing activity will probably put enhanced pressure on earnings and cash flow for the remainder of the year. Meanwhile, same-property occupancy is showing signs of downward pressure, according to the report, coming in at 92 percent in the third quarter, down from 92.1 percent in the previous quarter and 94.6 percent during 2007’s third quarter.“The recent weakness in the industrial subsector can be traced to the complete collapse of these platform and business models that have been built over the past decade,” the report stated. “Each company faces challenges with respect to leverage and liquidity to varying degrees. Management changes that have occurred over the past several months only serve to highlight the liquidity concerns in the industry overall. We expect that substantial challenges are ahead … for the next 12 to 24 months as global fundamentals continue to deteriorate at an accelerating pace and capital to support the needed liquidity remains difficult to arrange.”