Commercial REITs Face Troubled Future, Says Fitch

The multifamily and health care sectors of real estate investment trusts (REIT) are expected to perform slightly better than their other commercial real estate sector counterparts. But the overall outlook of REITs remains negative, according to Fitch Ratings’ REIT midyear outlook report. As foreclosures increase, so have the number of tenants out of necessity populating the country’s multifamily housing units, Fitch said. However, the report notes that many tenants are living with roommates to cut expenses, tempering apartment occupation rates. Multifamily REITs are also enjoying steady access to capital from Fannie Mae (FNM) and Freddie Mac (FRE), proceeds used to repay and reorganize debt. The nursing homes, assisted living communities and other facilities that make up the health care REIT sector are seeing rents increase but occupancy declining. Seniors that would typically sell their home before moving into a facility are putting off that decision until the residential market thaws. But, Fitch noted, the US population is aging, and it expects the health care sector to perform well in the long term. Both sectors were rated stable, while office, retail and industrial were all given a negative outlook rating in the report. Corporate bankruptcies and the rising rate of unemployment will drive office space vacancy rates to historic levels and recent gains in rent will be lost, Fitch said. A bright side to the office downturn is that new supply of office space has been relatively low. Unlike the office space downturn of the early 1990s, which saw a significant overbuilding of new office buildings, the lack of financing has kept new construction down, which will help the sector recover faster when demand returns. New industrial space delivery is declining in 2009 after a boom in new supply in 2008. However, slower international trade will also push vacancies up. The bankruptcies of a number of large retail chains and depressed consumer spending have increased retail vacancies in malls and strip centers. Stores that are still in business are reducing their locations and many are expecting rent concessions as neighboring tenants close down and retail centers become less active. Write to Austin Kilgore.