Once revered amongst their peers, apartment REITs are now taking a hit.

Out of 10 REITs that Standard & Poor's (S&P) Ratings Services recently took rating actions upon, four were in the apartment sector. Overall, it put 16 percent of the 62 companies it covers on the list. The ratings agency put Denver-based AIMCO, San Francisco-based BRE, and Highlands Ranch, Colo.-based UDR on its CreditWatch list. It had previously placed Birmingham, Ala.-based Colonial Property Trust on the list.

S&P said the ratings were prompted by constrained access to debt and equity capital and concern that the struggling economy will put even greater pressure on cash flow. The agency said "heavy credit revolver usage (in excess of 50 percent), weak debt service coverage, and an over-reliance on earnings from fee-driven and/or asset sales activity are key areas of focus." It also views the common dividend coverage as a "drawback," given the need for REITs to preserve liquidity.

"Fundamentals in the multifamily sector are coming under pressure," says George Skoufis, a director for Standard & Poor's. "Their debt protection measures are kind of weak. In the previous cycle, they came in with a little bit more of a cushion. Their numbers are a little weaker, and their leverage is a little higher."

Fitch Ratings is also taking a bear-ish stance on the apartment sector. The agency thinks that the public apartment companies will get hit harder than their peers in the office, industrial, retail, and hospitality sectors over the next year. The main issue: declining fundamentals.

"A multifamily lease is just one year," says Steven Marks, a managing director at Fitch and head of its U.S. REITs group. "So, in a down cycle, multifamily reprices more frequently than other types of leases and other property types."

Skoufis doesn't necessarily agree. "We think retail will probably be a little more under pressure than multifamily, just from a tenant perspective," he says. "Last time around, retail came out relatively unscathed because the consumer kept spending. This time around, that's clearly different."

Demand will also be a concern. "Job growth is the primary driver for multifamily space," Marks says. "Because we expect a substantial amount of job losses in 2009, that will affect multifamily disproportionally than other property types."

Still, other than rating Rochester, N.Y.-based Home Properties as affirmative, Fitch hasn't issued many changes and doesn't expect to downgrade the sector to a negative outlook. That's mainly because of the financial positions of most apartment REITs and the presence of Fannie Mae and Freddie Mac as liquidity partners. Marks doesn't see most apartment balance sheets facing distress until 2011.

"While we're negative on the underlying property performance of multifamily, the flip side is, because multifamily REITs are still able to get GSE financing on relatively attractive terms, in our view that offsets the anticipated negative property performance," Marks says.