U.S. REITs’ Long Road to Full Economic Recovery

Stephen Boyd

As the vaccine is rolled out throughout the country, many business and property owners are hopeful that the end of the pandemic—and its many economic hardships—may finally be in sight. With more and more Americans vaccinated each day, herd immunity no longer feels like a far-off notion.

The severe economic damage left in the wake of the virus, however, won’t be repaired overnight. In the immediate future, the U.S. still faces a surge of virus cases and corresponding stay-at-home orders nationwide. Paired with measured federal stimulus packages, the ongoing pandemic could still weigh heavily on REITS over the course of the coming year.

The pandemic drove a number of rating downgrades and negative outlooks for REITs based on cash flow volatility, tenant and geographic exposure and the amount and duration that issuers were likely to exceed previously established negative rating sensitivities. Social distancing restrictions and related store and office closures will continue to pressure tenant cash flows—particularly for regional and local in-line retail tenants with less flexibility than national chains.

Negative outlook

Currently, roughly one-third of U.S. REITs have a negative outlook, while just 3 percent are rated as positive—a margin of more than 20 percent. Therefore, the 2021 sector outlook for REITs is negative.

Hard-hit REIT sectors—such as hotels and gaming and leisure properties—relying on tourism will continue to experience much of the same decline in their businesses due to a lack of domestic and international travel. Additionally, with many companies choosing to maintain a work-from-home model for the foreseeable future, office REITs won’t be back to pre-pandemic levels anytime soon. Other property types like retail and multifamily assets are also likely to experience setbacks, particularly during the first half of the year.

But it’s not all grim news—the overall REIT sector is still improving. In general, REIT operating performance has been in line with the original expectations set early in the pandemic. When combined with better-than-expected liquidity, REITs’ performance could support stabilizing outlooks of current negative ratings in many cases.

When it comes down to it, property sectors are looking at 2023 before they can return to the peak cash flows they experienced in 2019. Given the direct economic hit brought upon REITs over the past year, it’s no surprise that it will take some significant time for the sector to once again reach pre-pandemic prosperity.

Stephen Boyd, CFA, is a senior director in Fitch Ratings’ Corporates group.