Like different segments of the CRE market, REITs have been buffeted by tighter lending circumstances, increased rates of interest that put strain on valuations and fundamentals, and macroeconomic headwinds. Surveying the battlefield, Fitch Rankings has slashed its 2023 outlook for REITs from “impartial” to “deteriorating.”
Lending by banks, which Fitch says symbolize about half of the $5.5 trillion industrial mortgage market, dropped 20% from February to April this 12 months, and tightened once more in Could. Anticipated additional contractions in CRE credit score will restrict alternatives for transactions.
Even so, Fitch believes many of the REITs it charges “have the capability to resist such a slowdown inside score sensitivities.” Some “with ample dry powder” might even discover alternatives to discount hunt by capitalizing on distressed property gross sales.
On a barely extra cheerful observe, Fitch says, “We now have pushed out our forecast for a U.S. recession to late 2023 from mid-year and fundamentals for stronger performing property varieties have usually exceeded our expectations, whereas struggles are mounting for weaker performing sectors.”
Fitch predicts extensive variations in efficiency by property kind over the subsequent two years, although none will probably be unscathed. “The workplace REIT sector has met, or modestly underperformed, our low expectations throughout 2023” the report states, brought on by issues concerning the enterprise cycle in addition to distant work. “The commercial sector, though not white sizzling, continues to ship above common occupancies and outsized hire progress which have modestly exceeded our projections.” However, Fitch expects demand on this sector, in addition to purchasing facilities, to chill considerably as tenants maintain again.
“REITs with de-levering methods that depend upon favorable capital market circumstances and a strong disposition surroundings might face downward score strain,” Fitch cautioned. Nevertheless, it doesn’t count on the turmoil within the banking system to lead to “significant stress.” Nor does it anticipate that REITs’ entry to unsecured revolvers will probably be impeded. However renewals might face increased pricing and a few banks could also be reluctant to undertake conventional financial institution syndicate actions, resembling making funded time period loans.
Fitch anticipates that REIT senior unsecured issuance will stay subdued for the remainder of the 12 months. After reaching ranges of round $74 billion in 2020 and 2021, it slumped to round $28 billion in 2022 as a result of rising rates of interest. To this point, Q1 2023 has been the weakest in 5 years at simply $10 billion.
On the constructive aspect, Fitch famous, “most REITs proactively managed their liabilities, using the low-interest-rate surroundings of the previous decade to time period out debt and improve stability sheet flexibility.”
