In its 2011 Outlook for U.S. equity REITs, Fitch Ratings maintains a "stable" outlook for industrial REITs, although with (in my own opinion) a perceptible sense of "watching closely."
As for access to capital,The stable outlook is driven by recent reductions in leverage that have strengthened industrial REITs' balance sheets, coupled with generally solid liquidity positions via capital market transactions, net proceeds from property sales, and retained operating cash flows that are enabling issuers to meet ongoing funding needs. Even though new supply remains muted, operating fundamentals continue to be challenging for warehouse landlords.
Two major indicators that Fitch will monitor throughout 2011 relate to industrial REITs' land portfolios and the general health of the U.S. economy. Industrial REITs' strategies regarding the sale of a portion of their land portfolios will indicate how quickly these issuers can delever by selling non-cash flow producing assets; alternatively, these issuers may hold onto land until values recover. GDP growth should spur more demand for space and thereby give landlords more pricing power; however, muted economic growth and declines in global trade volumes would stem any upswing in positive fundamentals.
Firth anticipates that limited new supply should lead to year-over-year rental rate increases and a bottoming out of same-store NOI declines in 2011. According to Property & Portfolio Research (NYSE:PPR), NOI across the major 54 industrial property markets is expected to decline in 2011 and increase in 2012. According to PPR, vacancy rates across the 54 major markets are projected to decline further by year-end 2010 and in 2011. Certain industrial REITs have historically outperformed their markets because they own more recent vintage assets in more prime locations, so Fitch anticipates that certain issuers will outperform these market indicators.
The eight publicly traded industrial REITs (from largest to smallest) are ProLogis (NYSE:PLD), AMB Property (NYSE:AMB), EastGroup Properties (NYSE:EGP), DCT Industrial Trust (NYSE:DCT), First Potomac Realty Trust (NYSE:FPO), First Industrial Realty Trust (NYSE:FR), Monmount Real Estate Investment (NYSE:MNR), and Terreno Realty (NYSE:TRNO). Fitch's rating universe includes PLD, AMB, EGP, FR, and Duke Realty (NYSE:DRE), which NAREIT classifies as a "mixed" industrial-office REIT.Liquidity positions have been bolstered by unrestricted cash, increased borrowing capacity under committed revolving credit facilities, and retained cash flows after dividend payments, which generally exceed ongoing funding needs such as debt maturities and recurring maintenance capital expenditures. The ability to monetize assets is becoming more abundant to industrial REITs because of a healthier secondary trading market between property buyers and sellers. Access to capital via the bond market remains solid. Moreover, the presence of unencumbered assets in industrial REITs' portfolios provides additional financial flexibility to reposition assets in 2011.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Author is long Vanguard REIT Index Fund and ING Real Estate Fund.