Fitch: Potential Recession, Scarce Capital to Slow REITs Pandemic Recovery

Fitch Ratings, New York, said challenging economic and financial trends for U.S. real estate investment trusts will continue into 2023 after emerging in 2022.

These trends could put a damper on fundamentals for recently better-performing sectors and could further damage credit profiles for REITs that had already been under pressure, Fitch said in its Equity REITs Outlook 2023 report.

But the report noted decelerating fundamentals will not drive deteriorating credit profiles overall in 2023 for most REITs rated by Fitch due to the “insulation” created by layered lease maturities and longstanding liability management.

“Fitch expects slower growth for sectors that had been experiencing solid demand, including industrial and open-air shopping, and more difficult conditions for others that have been challenged, including office,” said Chris Wimmer, Senior Director in Fitch’s U.S. Corporates group.

Fitch said it anticipates the balance of rating outlooks for REITs will move to stable from negative as ratings stabilize after downgrades. “Office landlords, in addition to facing lower space utilization, are likely to meet additional incremental leasing challenges in a recessionary economy,” the report said. “Additionally, REITs that depended on favorable capital market conditions and a robust disposition environment to lower leverage will face downward rating pressure.”

The report noted Fitch-rated REITs “demonstrate robust liquidity” on average, supported by large portfolios of high-quality unencumbered properties and stable contractual income. “This is counterbalanced by high dividend payout ratios mandated by REIT regulations, which constrain cash flow, and leverage that is high relative to corporate entities at the same rating level,” it said. “These considerations result in a preponderance of REITs rated in the ‘BBB’ category. Should a deeper and longer recession than predicted by Fitch emerge in 2023, new or reaffirmed negative outlooks will likely be necessary.”