NEW YORK CITY—In contrast to the development overexposure US REITs faced on the eve of the 2008-2009 downturn, the post-downturn watchword has been prudence, Fitch Ratings said Tuesday. Aside from multifamily and industrial, modest growth in tenant demand for space is keeping development opportunities in check. “Development exposure is manageable and REITs are not likely to deviate from current levels anytime soon,” says Steven Marks, managing director with Fitch.
There are other factors, as well, that have curbed REITs' appetites for development. One is funding, with lenders making smaller allocations to commercial real estate construction. Currently, the total of outstanding construction and land loans from US bank holding companies is more than $70 billion below the 2005 peak of $331 billion.
In addition, Fitch says, banks have lowered loan-to-value ratios, requiring borrowers to invest more equity or seek out alternative lending sources, often at greater cost. “This has fostered an extended period of favorable supply-demand dynamics and property fundamentals in much of the country well beyond what the typical economic recovery would anticipate,” according to a Fitch report.
The ratings agency notes that REITs in recent years have been measured in their external growth, “with a mix of acquisitions and developments, for which collective costs in this upcycle have often been matched with disposition proceeds, split between joint venture partnerships, or funded with common equity issuance. Select REITs planning to develop are facing qualified labor shortages, particularly multifamily. The labor impact has been a limiting factor on new project starts and those ongoing have protracted timelines.”
Recently, the office sector has seen something of a surge in development expenditures, although Fitch attributes that in part to the launch of a single project: SL Green Realty Corp.'s $3.3-billion One Vanderbilt tower near Grand Central Terminal in Midtown Manhattan. That's in keeping with the office REIT profile, which finds the major players constructing multibillion-dollar assets. Most of the exposure can be attributed to a handful of the largest coastal REITs, including SL Green as well as Vornado Realty Trust and Boston Properties, the latter currently developing the $1.1-billion Salesforce Tower in San Francisco.
One development concern Fitch sees is the extent of industrial speculative development. “With nearly 70% of development pipelines unleased, these levels are akin to what we saw heading into the last recession,” the report states. Offsetting this is significant decline in total industrial development exposures, with unfunded costs representing 3.6% of gross assets as of the first quarter, compared to 10% in Q1 '08.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
