Steven Marks, managing director with Fitch Ratings, joined REIT.com for a video interview at REITWorld 2016: NAREIT’s Annual Convention for All Things REIT at the JW Marriott Phoenix Desert Ridge.
Marks stated that development risk across most of the REIT industry is “pretty well boxed and under control.” According to Marks, development risk in terms of the cost to complete projects relative to gross asset values has declined in recent years.
“You would have thought that with the growth in the economy, there would have been more development or risk taking, but we’ve seen just the opposite,” he said. Marks noted that the only area that has seen an uptick in development is the office sector. Much of that comes from build-to-suit projects, rather than speculative development.
Turning to REIT borrowing trends, Marks noted that companies have increased their bank borrowing exposure, rather than their access to the unsecured bond market.
“Companies like to access a lower form of capital. Term loans are much cheaper and in some ways are much more flexible,” he said.
Nevertheless, Marks said he is surprised by the trend.
“It’s something we’re watching more closely because it could become an issue as companies become more tapped out,” Marks said. “If there are liquidity concerns, there may be one less place to turn,” he added.
Although REIT bank borrowing exposure has increased, Marks noted that REIT liquidity overall has improved by accessing the unsecured bond market – and the private placement market, in particular. REITs now account for 15 percent to 20 percent of the private placement market, compared with virtually no activity a couple of years ago, according to Marks.
“We view the unsecured bond markets as a very strong source of capital,” Marks said.