Development pipelines for U.S. REITs have been on the rise following a quiet couple of years, according to Fitch Ratings in a new report.
After remaining flat in 2010 and first quarter-2011, development pipelines have been on the rise the last four quarters.
"Multifamily REITs are currently developing most actively as demand in the sector has clearly diverged from other property types," said Steven Marks, a Fitch managing director.
Fitch observed that REITs across property type sectors have had varying approaches to the build-versus-buy decision. For example, many health care REITs have opted to grow via large-scale corporate and property acquisitions due to industry consolidation and the ability to capitalize on economies of scale. Datacenter REITs have taken a different approach and have grown rapidly through both speculative and build-to-suit developments due to the dynamic needs of their unique tenant base.
Office REITs have had modest levels of development over the past 10 years, compared with other sectors. Unfunded pipeline commitments made up less than 1% of gross assets at March 31, 2012. These commitments are comprised almost exclusively of a few large-scale developments in top-tier central business district (CBD) markets, such as New York City.
U.S. REIT development pipelines have been volatile over the last 10 years. After peaking at nearly $34 billion in the fourth quarter of 2007, development programs decreased sharply over the next two-and-a-half years. This decrease was due to a significant demand slowdown combined with REITs seeking to preserve liquidity and reduce leverage.
"While surging in recent months, development exposure remains fairly muted and not a meaningful credit risk for equity REITs," said Marks.
The total publicly-traded REIT development pipeline is currently 55% smaller than its peak in 2007. Further, total development pipelines represented only 2.7% of total undepreciated assets as of March 31, 2012, down from a peak of 7.6% as of 2007.
Public companies have leveraged their access to capital and good liquidity positions to fund their development programs, while construction financing for private developers has been highly constrained over the past several years, Fitch said. REITs will face greater competition for development opportunities, and supply will increase should construction financing become more readily available.
Keep up weekly on national news, trends and property leads with the Watch List Newsletter,
a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert
. A new issue is published late each Wednesday.