The overall outlook for Moody's-rated real estate investment trusts (REITs) is stable, as the REITs continue to keep their real estate portfolios well occupied and benefit from their access to the capital markets, says Moody's Investors Service in the industry outlook "US REITs and REOCs Update."
Moody's also has a stable outlook for the operating fundamentals of five of the six major property sectors in which the REITs operate, the one exception being multifamily properties, for which Moody's has a positive outlook.
"Although at this time in the cycle we expect most property types to stabilize, we do not expect a robust recovery, particularly for the industrial and office sectors, which we expect to lag the other sectors,"
says Moody's Senior Vice President Philip Kibel. "Furthermore, the macro-economic environment remains very uncertain given the European debt crisis, the Middle East instability, the US fiscal cliff and the pending US elections."
Moody's says operating fundamentals for all the major property sectors are either improving or showing signs of stabilizing. Apartment and lodging fundamentals have picked up much faster than have those for the other property sectors, with suburban office and industrial still soft to slightly improving.
Operating metrics for retail and healthcare REITs have held up and, in some cases, improved, says Moody's.
Moody's notes that the tremendous availability of capital that the REITs saw in 2011 has continued into the first half of 2012, with approximately $12.3 in common equity offerings among the REITs in this period, as well as the approximately $9.7 billion in unsecured debt and $5.4 billion in preferred stock being issued.
Not only have the REITs benefitted from a favorable financing environment, they look well positioned to handle economic conditions that have interest rates returning to higher, more normal levels.
"REITs will need to refinance their recently originated and/or floating rate instruments in a more "normalized" interest rate climate, but we believe it is a challenge they can handle," says Kibel. "Although interest rates will increase in the medium term to the detriment of some of the REIT's credit metrics, the sector will in general be able to withstand the change without it having a dramatic effect on credit quality and ratings."