Rating Agency Withdrawals and the Shifting Landscape of REIT Valuation: A Crisis of Credibility and Investor Caution

The recent wave of rating agency withdrawals from Real Estate Investment Trusts (REITs) has ignited a quiet but profound crisis of credibility in the real estate investment sector. In 2025, S&P Global Ratings abruptly withdrew its long-term issuer credit rating for CT REIT, a move that mirrored broader industry trends of agencies recalibrating their methodologies amid reputational risks and market pressures [1]. This withdrawal, coupled with similar actions against Starwood REIT—where $850 million in redemption requests forced asset sales and tighter liquidity controls—has exposed a critical vulnerability: the erosion of trust in traditional credit ratings as reliable risk indicators [2].

The Erosion of Market Credibility

Rating agencies have historically served as gatekeepers of risk, but their recent behavior suggests a shift toward self-preservation over rigorous analysis. The 2011 S&P CMBS withdrawal, which led to a reputational crisis and a subsequent softening of rating standards to regain market share, offers a cautionary precedent [1]. Today, agencies face similar pressures as REITs grapple with high office vacancies (20.4% in the U.S.), rising multifamily supply, and interest rate hikes that amplify borrowing costs [3]. When agencies withdraw ratings, they deprive investors of a key benchmark, forcing them to rely on fragmented data and speculative assumptions. This vacuum of information has already triggered a liquidity freeze in nontraded REITs, which hold $81 billion in assets but face redemption shortfalls exceeding 40% in Q1 2025 [2].

Investor Risk Assessment in a Post-Rating World

The withdrawal of ratings has forced investors to adopt a more fragmented approach to risk assessment. Traditional models, which once relied on agency ratings to gauge creditworthiness, now require supplementary due diligence. For example, J.P. Morgan Research notes that REITs’ 3% FFO growth in 2025 is expected to accelerate to 6% in 2026 as capital markets stabilize, but this optimism is tempered by the sector’s sensitivity to interest rates and economic shocks [4]. Tariff-driven volatility in early 2025 further exposed REITs’ fragility, with industrial and lodging REITs suffering disproportionate declines [3]. Investors must now weigh these macroeconomic risks against REIT-specific fundamentals, such as occupancy rates and debt structures, without the anchor of standardized ratings.

Valuation Challenges and the Role of ESG Factors

REIT valuations in 2025 appear stretched, with dividend yields failing to outperform safer assets like Treasuries [3]. This dynamic is exacerbated by the integration of ESG (environmental, social, and governance) metrics into credit risk frameworks, which now heavily influence investor perceptions [5]. While ESG factors enhance transparency, they also complicate valuation models by introducing subjective criteria that rating agencies may inconsistently apply. For instance, a 2025 study by Letdin et al. found that REIT returns are better explained by multifactor strategies—such as quality and momentum—than by traditional equity models [6]. This suggests that investors must diversify their analytical tools beyond ratings to capture the full spectrum of REIT risks and opportunities.

The Path Forward: Caution and Diversification

The current environment demands a recalibration of investment strategies. While REITs historically offered defensive characteristics—such as stable cash flows and low international exposure—their risk-reward profile has deteriorated in 2025 [3]. Investors are increasingly advised to avoid overreliance on REITs in a rising rate environment and instead explore alternative real estate vehicles, such as private equity funds or infrastructure debt, which offer more granular control over risk [7]. For those who remain invested, a diversified portfolio that balances REITs with inflation-hedging assets (e.g., commodities or TIPS) may mitigate the sector’s inherent volatility.

Conclusion

Rating agency withdrawals have not only disrupted REIT valuations but also exposed the fragility of market credibility in the real estate sector. As agencies prioritize market share over methodological rigor, investors must adopt a more independent and multifaceted approach to risk assessment. The lessons from 2025 underscore a broader truth: in an era of declining trust in institutional ratings, the onus of due diligence falls squarely on the investor.

Source:
[1] CT Real Estate Investment Trust Ratings Withdrawn, [https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/3383593?kw=%252525257bkeyword%252525257d%3Fkw%3D%252525257bkeyword%252525257d&utm_campaign=seekprosper&utm_content=LP-Seek-Prosper&utm_medium=website&utm_source=allmedia]
[2] Withdrawal Requests Climb at Starwood REIT, [https://www.credaily.com/briefs/withdrawal-requests-climb-at-starwood-reit/]
[3] The cautious case for REITs: Why I'm avoiding real estate stocks in 2025, [https://facet.com/investing/the-cautious-case-for-reits-why-im-avoiding-real-estate-stocks-in-2025/]
[4] Inside REITs: Will Growth Ramp Up? - Real Estate, [https://www.jpmorgan.com/insights/global-research/real-estate/inside-reits]
[5] Determinants of corporate credit ratings: Does ESG matter?, [https://www.sciencedirect.com/science/article/pii/S1057521924001601]
[6] Unlocking REIT Returns: Real Estate Investment Factors, [https://alphaarchitect.com/reit-returns/]
[7] What Are the Risks of Investing in REITs?, [https://smartasset.com/investing/why-not-to-invest-in-reits]