Feb 24 Goldman Sachs maintained its "cautious" stance on the U.S. commercial real estate investment trust (REIT) industry, and said it was shifting its concerns to retail REITs given the challeges that affect U.S. consumers in the near term.
While the commercial REIT industry faces refinancing risks, falling rents and continued dividend cuts on top of high leverage, retail REITs have to contend with retailers forced to close underpeforming stores or, worse, file for bankruptcy, analyst Jonathan Habermann wrote in a note to clients.
Commercial real estate trends were eroding at a pace that suggests occupancy and rental declines should match the deep recession of the early 1990s, Habermann said, adding that the industry was likely to enter a prolonged downturn, exacerbated by high leverage.
For retail REITs, the brokerage said it was concerned over the reduced demand for space and rent reductions and an oversupply of community and power centers in growth markets in the U.S. and retailer bankruptcy risk.
"While we like the long lease terms of retail REITs, we believe the risk of sharply higher vacancy exists with rising store closing as retailers scale back their store counts," he noted.
Habermann also warned that fundamentals for apartment REITs would worsen far more compared to other property types over the near-term and said he expects a sharp decline in earnings with FFO forecasts to fall roughly 30 percent over the next two years.
Haberman, however, had a "neutral" rating on office REITs, selectively favoring downtown office REITs over companies with more suburban office exposures.
Haberman said that a change in rating for the industry, would largely depend on investment returns, or the spread between returns on invested capital as against the weighted average cost of capital.
For rating and price target changes, please click on [nWNAB6103].
(Reporting by Biswarup Gooptu in Bangalore; Editing by Vikram S Subhedar)