The 2025 Horizon for REITs – Jan. 20, 2025
In 2024, S&P Global downgraded 18 U.S. REITs and upgraded five. Most of the downgrades were because office REITs faced operating pressure from secular headwinds, and higher borrowing costs deteriorated their credit metrics. By contrast, the rating agency upgraded three retail REITs due to “solid performance, increasing demand for high quality spaces, and improving credit metrics.”
What’s on the horizon for 2025? Fewer downgrades, for one thing, thanks in part to lower interest rates, improving access to capital and asset values stabilizing for most property types.
However, as part of its 2025 Industry Outlook: Real Estate report covering the REIT sector here and globally, S&P Global also predicts we’ll see fewer rate cuts from the Federal Reserve than were expected recently.
“Despite a cumulative 100-basis-point rate cut in 2024, interest rates remain elevated and could pressure credit metrics as debt maturities are refinanced at higher rates,” according to the report. “Therefore, refinancing risk for debt maturities over the next two years remains high, particularly for struggling property types.” The higher cost of capital could also dull the appetite for acquisitions.
Notwithstanding those struggling property types, the S&P Global team expects NOI growth to remain “modestly positive” in 2025, given resilient demand. With limited new supply, leasing activity has been robust for retail REITs, with healthy rent growth and high occupancy levels as a result.
Moving over to the apartment sector, the report says an increase in supply—expected to begin moderating over the next year or so—could constrain rent growth for multifamily REITs with exposure to Sunbelt markets. Nonetheless, “we expect rental housing will remain resilient given home prices remain high, and the 30-year mortgage rate is around 7%.”
When it comes to the potential for NOI growth, there are haves and have-nots in each of the major property types. Nowhere is this truer than in office. “Most office REITs reported relatively stable operating results in recent periods due to some recovery in leasing and relatively stable occupancy,” the report states. “Higher-quality office assets show signs of stability, and tenants are focusing on landlords with more robust financial health and ability to invest in property improvements. By contrast, conditions remain more challenging for speculative-grade office REITs with lower quality assets.”
Since other metrics appear likely to continue trending upward, it follows that sale transactions are expected to do likewise. The report cites data from CBRE showing that commercial real estate investment volume stabilized in the third quarter at $90 billion, down 2% year over year. Q4 transaction data weren’t available yet as the S&P Global report was finalized.
“Access to capital has improved for real estate companies because of narrowing bond spreads and higher equity prices,” according to S&P Global. “This led to higher debt and equity issuance in 2024, with public REITs issuing about $44 billion of debt through November 2024, compared to $37 billion a year ago. We expect transaction volumes will continue to increase in 2025.”
S&P Global also cites potential risks around its baseline forecast. Higher-than-expected interest rates could delay credit metrics improvement, for one. Another risk is that landlords may fail to monetize assets to deleverage on a timely basis. There’s also the possibility that REITs’ aggressive growth plans could jeopardize credit quality. Check back a year from now to see whether these risks materialized to a meaningful degree.