The rating Outlook for U.S. REITs in 2021 is Negative, but the sector Outlook is improving, according to Fitch Ratings.

Roughly 34% of U.S. REITs have Negative Rating Outlooks, outnumbering Positives (3%) by over a 20 percentage point margin and supporting the Negative sector Rating Outlook. Nearly two-thirds of Fitch-rated REITs have a Stable Rating Outlook, and the remaining issuers are rated 'CCC' and have not been assigned Outlooks.

However, REIT operating performance has generally been in-line with our rating case expectations developed early in the coronavirus pandemic, which when combined with better than expected liquidity could support stabilizing Outlooks at current ratings in many cases. The pandemic drove a number of rating downgrades and Negative Outlooks based on cash flow volatility, tenant and geographic exposure and the amount and duration that issuers were likely to exceed previously established negative ratings sensitivities.

The 2021 U.S. REIT sector Outlook is improving, although fundamentals will remain well off of 2019 levels for most property types and setbacks are likely for select property types, such as retail and multifamily assets, particularly during 1H21. "Fitch expects a bounce in same-store net operating income for most property sectors during 2021. However, many traditional property sectors, such as retail, multifamily and office, are unlikely to surpass 2019 prior-cycle peak cash flows until 2023 or later," said Stephen Boyd, Senior Director and U.S. REIT Sector Head.

Positive vaccine news suggests everyday life may look more normal as early as next fall. However, ongoing virus spread and inadequate stimulus could weigh on near-term performance for sectors with high exposure to pandemic-related disruption.