Fitch Downgrades Outlook for REITs

NEW YORK CITY-Citing a recessionary economy, softening property fundamentals and weakening liquidity profiles, Fitch Ratings has revised the 2009 rating outlook for the US equity REIT sector to negative from stable. The ratings agency says office REITs are an area of particular concern.

“REITs are in a difficult debt refinancing environment that will lead to worsening fixed charge coverage ratios, more challenged liquidity profiles and softening unencumbered asset coverage metrics,” says Steven Marks, managing director and head of the US REIT group at Fitch, in a release. “In addition, a slowing asset sales market will hamper REITs’ ability to reduce leverage and sell weaker-performing assets to recycle capital to improve overall portfolio quality.”

With Fitch projecting a slightly more than 1% decline in GDP for next year–the steepest decline since World War II–and unemployment to exceed 8% by late next year, the outlook for office REITs is especially challenging because space absorption is driven by both growth in GDP and employment, according to Fitch. Similarly, industrial REITs face weakened industrial tenant demand and declining national occupancy rates that will challenge the rental pricing and earnings power of these companies, the release states.

Given the recent decline in consumer discretionary spending and a deteriorating labor outlook, retail REITs also get a negative outlook from Fitch. However, necessity-based properties such as grocery-anchored shopping centers should perform well, according to the release.

Two REIT subsectors with a more encouraging credit outlook are multifamily and healthcare, and Fitch says it’s retaining the “stable” rating for these REITs. Helping the outlook for multifamily REITs is their continued access to financing from Fannie Mae and Freddie Mac, while healthcare REITs will continue to benefit from long-term demographic trends driving demand for services amid a relatively limited new supply of product.