Modest leverage levels and generally strong real estate fundamentals will help produce stable conditions for U.S. real estate investment trusts and real estate operating companies in 2018, Moody's Investors Service said in a note.
Real estate companies will benefit from access to multiple sources of capital, and most REITs are expected to generate positive earnings growth in 2018, the rating agency said.
Property sectors with strong fundamentals include metro industrial, cell towers, data centers, laboratory and medical office, Moody's Associate Managing Director Philip Kibel said in a news release. Sectors facing "material challenges" include class B and C malls, suburban office and skilled nursing. In particular, though REITs own high-quality assets and long-term leases in the retail sector, e-commerce's growing market share will hurt weaker properties.
The office sector is bolstered by low unemployment, and companies have improved their portfolios in recent years by disposing of some properties — though Washington, D.C., and Houston remain difficult markets, Moody's said.
For industrial REITs, the rise of e-commerce and the continued evolution of supply-chain distribution models will help push national vacancy rates to new lows, though speculative development in some markets will present a challenge, the agency said.
In multifamily, Moody's expects continued solid growth in operating income to weaken to long-term averages of 2% to 3%, with new supply peaking in 2018.
Fundamentals for lodging REITs are solid but decelerating, with lower demand and growing supply expected to affect the industry in 2018, Moody's said.