Outlook Negative for U.S. Equity REITs Despite Recent Liquidity Improvements

Despite improved liquidity profiles and access to the unsecured debt market, weak property operating fundamentals across the U.S. equity REIT sector and the uncertainty as to the exact timing of a full economic recovery remain areas of concern for U.S. equity REITs in 2010, according to Fitch Ratings.

Fitch is maintaining a negative Negative outlook Outlook for the U.S. equity REIT sector heading into 2010.

While Fitch’s REIT Outlook remains Negative, "Fitch may revise the Outlook to Stable if expectations regarding property-level fundamentals, liquidity, and access to capital hold true in 2010," according to Managing Director and U.S. REIT group head Steven Marks.

"If liquidity and access to capital remains strong, expect more rating affirmations and fewer downgrades and downward Outlook revisions that characterized 2009," said Marks. "Conversely, less access to capital and increased use of secured debt will put a strain on liquidity," which Marks adds will lead to a more circumspect view of the sector. (Click to enlarge)

Despite weakened fundamentals, Fitch maintains a Stable Outlook for multifamily REITs in 2010 due to limited supply and continued access to low-cost financing from Fannie Mae (FNM) and Freddie Mac (FRE).

Health care REITs‘ Stable Outlook is largely driven by demographic trends that continue to benefit the health care sector, portfolio diversity and limited supply.

Meanwhile, the prospect of further store closures and weak leasing activity will continue to weigh on retail REITs (Negative Outlook). ‘

Unemployment remains a more pivotal factor in the health of office REITs (Negative Outlook).

Above-average leverage and a slow economic recovery, which has reduced overall productivity and the need for space are the key drivers behind the Negative Outlook for industrial REITs.