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Discussion Paper
How Did Banks Fund C&I Drawdowns at the Onset of the COVID-19 Crisis?
Banks experienced significant balance sheet expansions in March 2020 due to unprecedented increases in commercial and industrial (C&I) loans and deposit funding. According to the Federal Reserve's H.8 data, "Assets and Liabilities of Commercial Banks in the U.S.", C&I loans increased by nearly $480 billion in March—the largest monthly increase in the history of this series, surpassing the nearly $90 billion increase in C&I loans in the six weeks following Lehman Brothers' collapse in 2008.
Working Paper
Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans
We study the role that recourse plays in the commercial real estate loan contracts of the largest U.S. banks. We find that recourse is valued by lenders and is treated as a substitute for conventional equity. At origination, recourse loans have rate spreads that are at least 20 basis points lower and loan-to-value ratios that are around 3 percentage points higher than non-recourse loans. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Recourse loans were half as likely to receive accommodation during the COVID-19 pandemic, ...
Working Paper
Intermediary Segmentation in the Commercial Real Estate Market
Banks, life insurers, and commercial mortgage-backed securities (CMBS) lenders originate the vast majority of U.S. commercial real estate (CRE) loans. While these lenders compete in the same market, they differ in how they are funded and regulated, and therefore specialize in loans with different characteristics. We harmonize loan-level data across the lenders and review how their CRE portfolios differ. We then exploit cross-sectional differences in loan portfolios to estimate a simple model of frictional substitution across lender types. The substitution patterns in the model match well the ...
Working Paper
Determinants of Recent CRE Distress: Implications for the Banking Sector
Rising interest rates and structural shifts in the demand for space have strained CRE markets and prompted concern about contagion to the largest CRE debt holder: banks. We use confidential loan-level data on bank CRE portfolios to examine banks' exposure to at-risk CRE loans. We investigate (1) what loan characteristics are associated with delinquency and (2) to what extent the portfolio composition of major CRE lenders determines their exposure to losses. Higher LTVs, larger property sizes, and greater local remote work tendencies are all associated with increased delinquency risk, ...
Working Paper
Loan Modifications and the Commercial Real Estate Market
Banks modify more CRE loans than CMBS, contributing to better loan performance when property incomes decline. However, banks have higher delinquency rates for less-stressed loans, consistent with modification policies encouraging strategic default. Motivated by these facts, we develop a tradeoff theory model in which lenders vary in their modification technologies. Modification frictions discourage strategic renegotiation, enabling CMBS to offer higher LTV loans and attract borrowers seeking higher leverage. The model produces cross-lender differences in LTVs and spreads consistent with the ...
Working Paper
Lease Expirations and CRE Property Performance
This study analyzes how lease expirations affect the performance of commercial real estate (CRE) properties and how these patterns changed during the COVID-19 crisis. Even before the pandemic, lease expirations were associated with a notable increase in the downside risk to a property’s occupancy or income, particularly in weaker property markets. These risks became more pronounced during the pandemic, driven mostly by office properties. During the pandemic, the adverse effect of lease expirations on office occupancy increased more than 50 percent overall, and it doubled for offices in ...
Working Paper
On Commercial Construction Activity's Long and Variable Lags
We use microdata on the phases of commercial construction projects to document three facts regarding time-to-plan lags: (1) plan times are long—about 1.5 years—and highly variable, (2) roughly 40 percent of projects are abandoned in planning, and (3) property price appreciation reduces the likelihood of abandonment. We construct a model with endogenous planning starts and abandonment that matches these facts. The model has the testable implication that supply is more elastic when there are more "shovel ready" projects available to advance to construction. We use local projections to ...