As the capital markets—similar to the rest of the economic sector—hesitates to declare that the U.S. economy is in a recession, at least formally, one fact is emerging about real estate entities: their outlook on aggregate is stable.
Analysts at Morningstar | DBRS took a recent look at tenant quality, which is what it calls one of the primary factors for business risk assessment. Issuers in its coverage universe, which includes real estate investment trusts (REITs) and real estate operating companies (REOCs), have high exposures to investment-grade rated tenants, or tenants associated with investment-grade parent companies, DBRS said.
That solid footing should allow tenants to maintain stable cashflow through the tenants' respective lease terms. Joe Shmigelsky, an assistant vice president at DBRS, led a group of analysts who noted their assessment of real estate issuers in "In a Recessionary Environment, Tenant Quality Makes a Difference."
The rating agency noted that, on average, 72% of its rated issuers' top 10 tenants, by rental revenue, either have investment-grade ratings or they are related to a parent company with an investment-grade rating. About 8% of tenants are publicly not investment grade and the remaining 20% are not publicly rated.
The language "recessionary environment" is also noteworthy. U.S. Gross Domestic Product was -0.6% in Q2, following a Q1 decline of 1.6%, according to the National Bureau of Economic Research. Such readings might have prompted many in the financial sector to declare that the U.S. economy is in a recession in times past.
Yet the National Bureau of Economic Research has not formally declared a recession. Economists routinely point to other strong indicators that offset recessionary fears, such as low unemployment, which had edged down to 3.5% in July according to the Bureau of Labor Statistics.
Consumer spending had ticked up 0.1% in July, according to the Bureau of Economic Analysis.
Among issuers by asset type, retail REITs/REOCs has the highest concentration of investment rated tenants. Meanwhile, pension fund REOCs, has the highest percentage of investment grade rated parent companies, at 18.3%.
