Moody’s See Strong Fundamentals for U.S. Apartments, But Little Development Ahead

New York—In the wake of the unprecedented Standard & Poor’s downgrade of long-term U.S. sovereign debt late Friday, other rating agency news largely went unnoticed, including a new report on REITs by Moody’s Investors Service. According to the report, all major U.S. REIT property sectors have stable rating outlooks, since their operating fundamentals are expected to stabilize or improve. Multifamily REITs in particular are strong.

Moody’s tracks nine U.S. REITs that specialize in multifamily properties, and according to the rating agency, all of them currently hold a “stable” rating outlook. More broadly, the rating agency affirms that the widespread and generally optimistic outlook currently felt within the industry is justified. “The outlook for multifamily fundamentals is decidedly positive,” the report says. “The economic environment, while uncertain, will continue to favor apartment landlords.”

The rating agency notes that while the U.S. employment market is weak, it is nevertheless stronger than it was a year ago, which is creating new households. At the same time, there’s no strong recovery for the single-family housing market on the horizon, “a situation the pushes some households to rent rather than own,” the report says.

“Moreover,” it continues, “other than the relatively modest development pipelines of the multifamily REITs, there is little sign of widespread construction of new apartments, setting the stage for rent increases, which in turn flow through to improved credit metrics.”

“Multifamily REITs just reported their second-quarter earnings,” Chris Wimmer, a vice president and multifamily specialist at Moody’s, tells MHN. “Our takeaway with respect to development is that REITs are the only ones participating in a meaningful way. Private developers are interested, but without a balance sheet or capital access, which the REITs thoroughly enjoy, the private guys will have to remain on the sideline.”

Investors and lenders are well aware of the positive trends in the sector, Wimmer adds, but even that isn’t going to translate into massive development any time soon. “They’re angling to get involved, but it’s mostly in stabilized product, not new development,” he says. “And given what’s going on in the world right now, I think lenders are going to take a step back. Our sense is that there’s not going to be any competition from new multifamily product before 2013.”