Factors such as tightening of commercial real estate lending conditions, higher interest rates and macroeconomic headwinds led Fitch Ratings to reduce its 2023 outlook for the real estate investment trust sector outlook from “neutral” to “deteriorating.” That’s according to a new Fitch Ratings 2023 REIT sector outlook report released Monday.
In December, the outlook for continuing care retirement / life plan communities also was given as “deteriorating,” due to continued labor challenges and a “softening broader economy.” Apart from the end of the COVID-19 public health emergency, “nothing has changed as far as Fitch’s point of view regarding the sector since publication of the December report, Fitch told the McKnight’s Business Daily on Tuesday.
Bank lending is a prime factor in the REIT sector’s downgrade. Fitch noted that commercial lending dropped by 20% between February and April of this year, according to the Federal Reserve’s May 2023 Senior Loan Officer survey.
“Moreover, loan officers reported further tightening in April. At minimum, this will lead to further contractions in CRE [commercial real estate] credit, further limiting conditions for property transactions,” Fitch said.
The analysts at Fitch are expecting the United States to slip into recession before the end of the year. Previously, the finance and insurance company was forecasting a mid-year recession, as “fundamentals for stronger performing property types have generally exceeded our expectations, while struggles are mounting for weaker performing sectors.”
The experts noted that REITs with de-levering strategies that depend on favorable capital market conditions and a robust disposition environment could face downward rating pressure.
