Daily Business Buzz: Goldman sees long road to recovery for REITs

Goldman Sachs said it is cautious on real estate investment trusts (REITs) as it sees a long road to recovery, and downgraded SL Green Realty Corp and AvalonBay Communities Inc.

Commercial real estate (CRE) refinancing remains challenging, fundamentals will lag the economy, and loan defaults should rise sharply, the brokerage said, adding that CRE trends are just starting to soften and will remain weak into 2011.

"We anticipate a decline in funds from operations of more than 10 percent for REITs next year, on top of the 15 percent to 20 percent expected decline in 2009," the brokerage wrote in a note to clients. "Hence, 2011 should be the bottom with growth resuming thereafter."

Goldman, which downgraded SL Green to "neutral" from "buy," said shares of the midtown Manhattan's largest office landlord have exceeded its new six-month price target of $24.

"Having seen a large spike in the shares, we still believe SL Green is well positioned for long-term growth as NYC office rents eventually recover from the 30 percent to 40 percent decline amid the current downturn," the brokerage said.

On AvalonBay, the brokerage said the stock is now trading at one of the highest multiples in the REIT universe. It downgraded the owner and builder of apartments to "sell" from "neutral."

"We have been cautious on apartments for all of 2009 and continue to expect weak operating results in the next few quarters," Goldman said.

Public REITs are in a much better position compared with the private commercial real estate market, given lower leverage and the ability to issue common shares to deleverage, even as asset sales are still difficult to complete, the brokerage said.

"We remain cautious on industrial and apartment REITs, and favor regional malls and select downtown office REITs," Goldman said.

The brokerage expects industrial demand to remain anemic in the second half of 2009, but said a rebound in the inventory cycle and minimal near-term supply levels bode well for moderating rent and occupancy declines.

Goldman added Taubman Centers Inc to its conviction buy list and raised its six-month price target on the stock of the luxury mall owner and developer to $33 from $28.

Taubman's quality regional mall portfolio with high credit tenants should aid a faster recovery than peers, the brokerage said, adding: "Taubman is our best buy idea due to its conservative balance sheet."

Goldman upgraded AMB Property Corp to "neutral" from "sell," saying the owner and developer of warehouses and distribution centers is the best positioned industrial REIT for an improving global economy. The brokerage raised its price target on the stock to $20 from $15.

It kept its "sell" ratings for Duke Realty Corp and ProLogis , saying it sees higher potential dilution from each company's ongoing efforts to deleverage.