NEW YORK CITY—While apartments, hotels and self-storage facilities may have gotten there early, 2015 may be the moment for office, industrial and retail to command the spotlight. Fitch Ratings says that REITs that own so-called early-cycle property types should continue to post the strongest internal growth this year, but the ratings agency expects growth leadership to transition this year to REITs in later-cycle sectors now seeing an acceleration of improvements in rents and occupancy levels.

“Accelerating US GDP and employment growth support all property types in 2015,” according to a recent Fitch article. “However, office, retail and, to a lesser extent, industrial properties should continue to benefit from low levels of new supply. Rent increases for these property types have only recently begun to make development feasible in select markets and bank appetites for construction lending to these sectors remains low, albeit improving.”

For office in particular, Fitch expects property fundamentals to accelerate this year. Most of the key metrics, including demand, supply, vacancy and rent growth compare favorably both with recent history and longer-term averages, says Fitch.

The ratings agency has increased its assessment of CBD market conditions to above average from average, due mainly to expectation for net absorption and rental rate growth to be “near the upper bounds of their historical ranges” while the growth in supply remains below average. Similarly, Fitch's view of suburban office fundamentals has shifted to average from below average, “given the momentum in select Sunbelt markets.”

A combination of favorable property fundamentals and improving liquidity is behind Fitch's positive view of the industrial REIT sector. It says that growing strength in the economy, employment and demographics should positively influence housing starts, auto sales and retailer productivity, boding well for industrial REITs.

Citing data from CoStar Group, Fitch says that forecast demand of 166 million square feet will outpace supply of 145 million square feet this year, which should drive vacancy downward to 6.7% nationally in '15 from 7.0% in 2014. Meanwhile, market rents continue to improve, and Reis Inc. data project that annual effective rent growth for 2014 will climb above 3.0% this year, up from an estimated 1.0% increase the year prior.

In common with its outlook for multifamily and healthcare real estate, Fitch maintains a “stable” outlook for retail. That's the case even amid a raft of recently announced—or, in the case of Wet Seal, implemented—store closings, the effects of which have been muted by diversification as well as the impact of the downturn.

In a separate report on CMBS backed by retail, Fitch notes, “Closures in certain properties will accelerate the performance divergence between dominant class A malls and inferior malls. In 2015, we believe second- and third-tier malls will continue to be at greater risk as the economic recovery for low-income consumers will remain slow, online competition continues and store traffic declines remain. Second- and third-tier malls will be subject to relatively rapid and substantial performance declines that may lead to outsized losses if these closures continue.”

Instant Insights /

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