NEW YORK--(BUSINESS WIRE)--Further improvement in REIT debt capital access is expected following a challenging start to the year, according to Fitch Ratings. Deteriorating global economic outlooks, capital markets volatility and geopolitical events have crimped lender appetites, but narrowing CMBS spreads should draw conduit lenders back into the marketplace.
Debt capital availability remains bifurcated, with some companies possessing healthy access and others only mediocre. REITs have selectively tapped the public bond markets, but public bond issuance remains challenging for less-seasoned REIT issuers at attractive prices, although conditions are improving. Unsecured private placement notes and bank term loans remain far more economical for less established and some seasoned low-investment-grade-rated issuers, with all-in interest costs anywhere from 0.5% (private placement) to 3.0% (bank term loans) below comparable public market rates.
Following the record high level of unsecured term loan issuance in 2015, REITs have navigated the first half of 2016 with continued heavy reliance on this secondary source of capital. REIT capital issuance is down 11.6% from the same period last year, and elevated unsecured term loan issuance as a percentage of total capital raised to date (26.3%) in 2016 has prevented the margin from widening further.
Additionally, the unsecured bond market has continued to pressure lower rated REITs to either accept wider risk premiums or find alternative sources of capital, such as private placements.
Meanwhile, some favorable trends continue amid capital markets volatility and the maturation of this cycle. Unsecured lines of credit renewed by US equity REITs from Feb. 18, 2014 to May 18, 2016 were approximately 19% larger relative to prior commitment sizes, which have taken some pressure off most issuers' liquidity profiles.
US REIT portfolio performance continues to be tethered to macroeconomic factors including GDP and unemployment. Fitch expects commercial real estate fundamentals to remain healthy in 2016 and cap rates to increase modestly, primarily for lower physical and/or market quality assets, as REITs adjust their bids for a higher cost of capital and marginal buyers remain on the sidelines. Solid employment growth and disciplined bank construction lending should keep demand ahead of supply for most property types, allowing for modest occupancy gains and low-to-mid single-digit rent growth.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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