Search Results
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
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
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
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 ...
Working Paper
CRE Redevelopment Options and the Use of Mortgage Financing
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 US 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 ...
Working Paper
The other (commercial) real estate boom and bust: the effects of risk premia and regulatory capital arbitrage
The last decade?s boom and bust in U.S. commercial real estate (CRE) prices was at least as large as that in the housing market and also had a large effect on bank failures. Nevertheless, the role of CRE in the Great Recession has received little attention. This study estimates cohesive models of short-run and long-run movements in capitalization rates (rent-to-price-ratio) and risk premiums across the four major types of commercial properties. Results indicate that CRE price movements were mainly driven by sharp declines in required risk premia during the boom years, followed by sharp ...
Working Paper
Asset Price Declines and Real Estate Market Illiquidity: Evidence from Japanese Land Values
We examine the pattern of price depreciation in Japanese land values subsequent to the 1990 stock market crash. While all land values fell heavily, the data indicate that Japanese commercial land values fell much more quickly than residential land values. Using an error-correction specification, we confirm that Japanese commercial land prices exhibited faster convergence to steady state values than residential land prices. We then develop an overlapping-generations model with two-sided matching and search to explain this disparity. In the model, old agents own real estate and are matched each ...
Working Paper
Estimating Aggregate Data Center Investment with Project-level Data
Data center investment in the U.S. has increased rapidly in the post-pandemic era, and plans for future investment have surged further. Forecasting investment at such a turning point is an important but potentially fraught exercise, especially given lags in aggregate data availability. We develop a straightforward method to forecast aggregate investment using project-level microdata and a small number of parameters: specifically, abandonment rates, time from planning to start, and time from start to completion. As a key validation of our approach, we generate estimates that match the recent ...
Working Paper
Pretend or Amend? On Evergreening in CRE
Loan modifications can either amplify or mitigate credit losses depending on the strategy lenders employ. Using detailed supervisory data and a model accounting for competing extension motivations (temporary repayment difficulties, foreclosure costs, and loss recognition costs), I assess why banks extend CRE loans. I find that extensions predominantly address temporary payment frictions, both in normal times and following the Spring 2023 bank stress episode. Contrary to banks "extending-and-pretending" during that episode, banks increased income and principal paydown requirements for ...
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 ...