The Latest Problem for Office REITs: Credit Downgrades


Real estate investment trusts (REITs) have already lost some of their credibility in the stock market, and now they’re losing it with lenders. 

Office REITs have faced slow leasing, high interest rates and dwindling stock prices, but now several have had their credit ratings downgraded over the past year and more could be on the way, with Moody’s Investors Service placing SL Green (SLG) Realty’s rating on watch for a downgrade May 22, thanks to its high debt load and large New York City office holdings.

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Credit downgrades signal a higher likelihood of a firm defaulting on its obligations and can also hamstring a REIT’s ability to land a new loan or refinance existing debt, potentially contributing to that default risk, said Tomasz Piskorski, a professor of real estate at Columbia University Business School.

“This is not something to take lightly,” Piskorski said.

“It’s a feedback effect,” he added. “If you get downgraded, it might be even harder for you to refinance your debt, and if it becomes harder for you to refinance the debt you might have to start missing payments on some of the debt instruments.” 

In December, S&P Global Ratings dropped SL Green from an high-credit, investment-grade rating to a speculative grade category, a group of lower ratings associated with a higher risk of default and indicating the company faces “large uncertainties or major exposure” or exposure to conditions that could hamper its ability to pay its debts. It was also put into the speculative ranking by Moody’s last year. 

But SL Green was far from the only REIT to drop.

Office Properties Income Trust, a REIT focused on office buildings leased to single tenants, saw its S&P rating fall into speculative territory in March. Meanwhile, Vornado Realty Trust (VNO) faced drops from Fitch Ratings and Moody’s, while the latter also downgraded Hudson Pacific Properties, but both retained their high-quality investment grade labels. (None of the REITs responded to requests for comment except for SL Green, which declined to comment.) 

While the first drop into a speculative rating from one agency is a significant sign of trouble, similar downgrades from multiple agencies could show market agreement on a REIT’s creditworthiness and give potential investors pause, Ana Lai, S&P’s real estate sector lead, said. 

“If all three agencies are aligned, that means that there’s more of a consensus on the trajectory of the credit for investors to contemplate,” Lai said. “The first downgrade may have more of an impact, and the second maybe will add to it.”

S&P already indicated that more downgrades may be on the way for REITs of every asset class, but office owners are faring much worse.

Half of the office REITs tracked by S&P received a negative outlook from the agency, meaning there’s a roughly one in three chance of a downgrade in the next 12 to 24 months, compared to 15 percent of all REITs getting the same outlook, Lai said. In March, five more U.S. office REITs got the same label.

That negative outlook is a result of broader problems in the office market, including a potential recession and a stalled return to office, which has shrunk demand for office space and cut into REITs’ bottom lines, Piskorski said. Those issues led Vornado to suspend its dividends for the rest of the year, a worrying sign for the REIT.

At the same time, high interest rates have made debt harder to come by and more expensive — even for firms that have not been hit by a credit downgrade — which can result in a 1 to 2 percent interest rate premium on new debt, Lai said.

But there are some bright spots in office REITs. Those with newer properties have points in their favor because they’re more likely to be leased up quicker and generate more revenue, said Michael Souers, a director on S&P’s real estate team. SL Green’s $3 billion bet on the office market, One Vanderbilt, opened during the pandemic at 70 percent leased, and occupancy increased to 99 percent in September.

“For premier office spaces within New York City, which is generally what a lot of our REITs do own, the performance has still been solid,” Souers said. “Generally we don’t dislike New York, but a concentration in that market is always something that could be a negative.”

Piskorski also expected that REITs with higher-quality office holdings would be more likely to survive the current office market. Many REITs, including SL Green and Vornado, faced a similar interest rate and high-debt environment during the Great Recession and came back stronger.

But the 2008 recession lacked one unique challenge facing REITs today: remote work. While Piskorski said he was bullish on REITs in general, the risk that office demand may never return to pre-pandemic levels could hamper the ability of certain REITS, particularly those with lower-quality office stock, to survive. 

“During the Great Recession the problem was high leverage and unemployment, but unemployment was a transitory shock,” Piskorski said. “Everybody understood that in five or 10 years people will go back to work. I’m not sure that work from home is necessarily a transitory shock. …  I couldn’t rule out that some of these companies might get into very serious trouble.”

Celia Young can be reached at