FBR Capital Markets cut its rating on two apartment-focused real estate investment trusts, AvalonBay Communities Inc (AVB.N) and Equity Residential (EQR.N), to market perform, citing declining rentals and negative net operating income that could stretch to 2010.

Rents should continue to fall on both new and renewal leases until at least the second-half of 2010 and potentially first-half of 2011, analyst Wilkes Graham said in a note to clients.

The U.S. apartment sector has seen valuations and rentals nosedive for more than a year, as landlords, up against rising unemployment, slash rents and offer concessions to retain existing tenants along with enticing new entrants.

Graham said the apartment REITs' 2010 net operating income was likely to be slightly better than their corresponding numbers in 2009, although they would still remain in the negative.

Separately, the analyst also lifted his rating on commercial REITs Boston Properties Inc (BXP.N) and BioMed Realty Trust (BMR.N) to outperform, citing lesser volatility due to longer lease periods, which spread out their economic risks.

For 2010 to 2012, we see a very slow growth period driven by incremental upticks in occupancy, muted overall rent growth and stable operating margins, Graham noted. (Reporting by Biswarup Gooptu in Bangalore)