Working Paper

CRE Redevelopment Options and the Use of Mortgage Financing

Abstract: A significant share of commercial real estate (CRE) investment properties---about half by our estimates---are purchased without a mortgage. Using comprehensive microdata on transactions in the U.S. CRE market, we analyze which types of properties are purchased without a mortgage, highlighting the important role of renovation or redevelopment options. We show that mortgage-financed properties are less likely to be subsequently redeveloped, and that owners anticipate these redevelopment frictions and avoid mortgage financing for properties with greater redevelopment options. These effects were even stronger during the COVID-19 pandemic, when uncertainty increased redevelopment option values.

Keywords: Commercial real estate; Cash buyers; Redevelopment;

JEL Classification: G21; G22; G23; R33;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2024-06-21

Number: 2024-046