REIT Outlook Negative, But Improving

REIT Empire State Realty Trust, New York, owns the Empire State Building in Manhattan.

The 2021 rating outlook for U.S. real estate investment trusts remains negative, but Fitch Ratings, New York, said its outlook for the sector is improving.

Fitch said nearly 34 percent of U.S. REITs have negative rating outlooks, outnumbering positives by a 20-plus percentage point margin, supporting the negative sector rating outlook. Fundamentals will likely remain well short of 2019 levels for most property types next year and setbacks are likely for some property types, the agency said.

“{We expect] a bounce in same-store net operating income for most property sectors during 2021,” said Fitch Ratings Senior Director and U.S. REIT Sector Head Stephen Boyd. “However, many traditional property sectors, such as retail, multifamily and office are unlikely to surpass 2019 prior-cycle peak cash flows until 2023 or later.”

Recent positive vaccine news suggests life might look more normal as early as next fall, Fitch noted. “However, we expect coronavirus spread and an anemic stimulus could weigh on near-term performance for sectors with high exposure to pandemic-related disruption,” the report said.

On a positive note, Fitch noted the REIT sector entered the pandemic on “unusually strong” financial footing. Sector leverage could increase to the high 5x range next year, which the report called a healthy ratio and one in line with historical levels. “Proactively, liability management has also left most investment-grade equity REITs with strong liquidity profiles to navigate further pandemic stress,” the report said.

Nearly two-thirds of Fitch-rated issuers currently have a stable rating outlook; the remaining issuers are rated ‘CCC’ and below, for whom Fitch elected not to assign an outlook. “However, property fundamentals have generally performed in line with our rating case expectations developed early in the pandemic, which, when combined with strong liquidity, has exceeded expectations supporting stabilizing outlooks at current ratings in many cases,” the report said.

Fitch said the coronavirus pandemic drove a number of ratings downgrades and negative outlooks based on cashflow volatility, tenant and geographic exposure and other factors.