NEW YORK CITY—The REIT sector gets generally favorable marks from Standard & Poor's, which calls performance of the North American REIT universe “solid” in its latest report card. With a “stable” outlook for most of the real estate trusts it rates, S&P thinks the sector should continue to experience “favorable ratings momentum,” in the absence of an uptick in leveraged merger & acquisition activity or an interest rate shock.

"Despite weak US GDP growth during the first half of this year, Standard & Poor's expects moderate economic growth for the balance of 2014 and for this to continue into 2015,” says credit analyst Lisa Sarajian. “These conditions should support improving business sentiment and stronger employment levels.”

In addition, Sarajian says expectations for benign inflation should support consumer purchasing power. “These favorable trends should in turn drive stable to improving occupancy rates as tenant demand strengthens along with modest rental rate growth, despite the expectation for increasing new supply levels in many markets," she adds.

Although it's uneven, the continued economic expansion that is underway has strengthened business and consumer sentiment. S&P notes that this in turn has bolstered tenant demand, “with occupancy levels and rental rates improving and new supply additions being readily absorbed—at least thus far—in most markets.”

The firm's economists continue to view the risk of a US recession to be in the 10% to 15% range, while the probability of stronger-than-expected economic performance is slightly higher at 15% to 20%. “As a result, our base-case outlook for North American REITs is positive,” according to S&P.

In the near term, S&P is predicting “positive, though decelerating, same-store NOI trends. However, we think this is as much the result of an improved economic picture as it is the strong asset quality within most rated REIT portfolios, which enables those companies to generally outperform in their markets. Performance will also continue to vary by property sector and individual REIT portfolio composition.”

On a sector by sector basis, S&P says, retail REITs are putting up strong performance this year, benefitting from expanding tenant demand amid contained new supply levels and the re-tenanting of small shop space that was lost during the great recession. That being said, a new report from Fitch Ratings notes that traditional in-line mall tenants are increasingly relocating outlets from second-tier malls into dominant, open air shopping centers. Fitch says this emerging trend could weaken the credit profiles of retail REIT landlords with sizeable second-tier mall holdings, among them Washington Prime Group and CBL & Associates.

“The shifting landscape of retail and e-commerce” has spurred demand for industrial space, as has the broad recovery in manufacturing, says S&P. “For the still uneven and very competitive office sector, improving payroll employment has been an important support as landlords grapple with what we view as secular changes in the nature and amount of office space that companies now desire.”

The multifamily subsector, says S&P's report, “continues to outperform our expectations, despite the housing recovery and increasing levels of new construction. In fact, it is now cheaper to own than rent in many major markets, but renters are staying put,” whether due to lifestyle preference, a desire to remain mobile or an inability to qualify for a mortgage.

Among S&P-rated REITs at present, those with “positive” outlooks (15%) significantly outnumber negatives (5%). However, the ratings agency says the majority of REIT outlooks (80%) are stable.