Real Estate in the Time of COVID-19: A REIT Perspective

The impact of COVID-19 will be felt across all property types as the effects of social distancing, travel restrictions, and economic recession will deteriorate the financial health of tenants. During a recent Risk Readiness Special Coverage webinar, Keven Lindemann, CFA Real Estate Director and Industry Head, S&P Global Market Intelligence, and Ana Lai, CFA, Senior Director, Real Estate Sector Lead, S&P Global Ratings​ discussed ongoing developments in multiple property types, as well as key financial considerations as REITs weather through this pandemic.

As coronavirus and mitigation efforts continue throughout the U.S., S&P Global Economics forecasts the U.S. economy will contract 5.2% this year – including a historic (annualized) decline of almost 35% in the second quarter. Unemployment could reach 19% in May, which would be closer to the depression-era peak of 25% than to the 10% high during the global financial crisis. Recovery will be gradual as fears linger and social distancing endures, but Lindemann and Lai expect the economy to at least partially reopen in the third quarter. Under their base case, they expect GDP to grow 6.2% in 2021.

REITs are better positioned than during the last recession and balance sheets remain in good shape, much improved from the last downturn. Although the speakers do not see upgrades in the next few months, liquidity is good and access to the bond market remains open.

Leisure and gaming is one of the most heavily affected sectors and could see a high level of default. Malls and retail strip centers have experienced the most negative rating actions and an increased risk of liquidations with Q2 looking to be the worst quarter for rent collections.

The office sector will be an interesting space to watch over time as successful work-from-home endeavors for companies have questioned the need for existing office spaces. As leases come up for renewal, companies will be rethinking their geographic footprint and possibly considering downsizing.

Rental housing REITs could see a modest decline in same store NOI (SS NOI), but risks are mitigated by the high quality of assets owned and more favorable demographics. Multifamily REITs also have lower debt leverage versus other REITs. While landlords have extended rent relief programs to tenants, rent collections for rated REITs have been relatively good in April, but a prolonged recession and lack of recovery in jobs could result in more meaningful deterioration of NOI for rental housing REITs into 2021.

A recording of the webinar is available for download here.