REITs Still Strong but Long-Term Outlook Remains Foggy

NEW YORK CITY-Standard & Poor’s is taking a wait-and-see attitude on REITS in the aftermath of the September 11 attacks. No immediate rating actions are anticipated, but it’s too soon to forecast the long-term effects of the World Trade Center bombings on the various real estate market sectors.

S&P’s Managing director of real estate ratings, Lisa Sarajian, says that “while other markets have been extremely volatile, REITs have held up remarkably well relative to other benchmarks.” She attributes the comparatively positive performance of REITs so far to their “stable and defensive cash flows due to underlying contractual leases of varied duration and asset type.”

Debt refinancing needs of S&P-rated firms also have remained manageable despite economic downturns. “The right side of the balance sheet is also in pretty good shape,” Sarajian says. “REIT equity so far is holding up and external liquidity remains sound.”

But REITs are nevertheless an undependable barometer of future real estate market trends, she says, because they are too far up the food chain. And with no economic recovery in sight, REIT portfolios have no surety of remaining safe financial havens. “It is clear that REIT earnings are lagging indicators and ultimately they’ll be tethered to the credit quality of their rent-paying tenants, so the longer and deeper the expected recession proves to be, the more negative our bias for current ratings will become.”

Sarajian says that while “some property sectors and geographic markets are going to be more immediately vulnerable than others in the current environment,” three areas will be heavily scrutinized by S&P in the coming months: