REIT and Commercial Real Estate Returns: A Post Mortem of the Financial Crisis

Real Estate Economics, Forthcoming

Posted: 2 Oct 2013

See all articles by Sheridan Titman

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Garry J. Twite

University of Melbourne - Department of Finance; University of Melbourne - Faculty of Business and Economics; Financial Research Network (FIRN)

Libo Sun

California State Polytechnic University, Pomona - Finance, Real Estate and Law Department

Multiple version iconThere are 2 versions of this paper

Date Written: September 27, 2013

Abstract

In the years surrounding the financial crisis, the share prices of equity Real Estate Investment Trusts (REITs) were much more volatile than the underlying commercial real estate prices. To better understand this phenomenon we examine the cross-sectional dispersion of REIT returns during this time period with a particular focus on the influence of their capital structures. By looking at both the debt ratio and the maturity structure of the debt we separate the pure leverage effect from the effect of financial distress. Consistent with leverage and financial distress costs amplifying the price decline, we find that the share prices of REITs with higher debt to asset ratios and shorter maturity debt fell more during the 2007 to early 2009 crisis period. Although REIT prices rebounded with the bounce back in commercial real estate prices, financial distress costs had a permanent effect on REIT values. In particular, we find that REITs with more debt due during the crisis period tended to sell more property and issue more equity in 2009, when prices were depressed.

Keywords: REIT, Leverage, Debt Maturity, Financial Distress

Suggested Citation

Titman, Sheridan and Twite, Garry J. and Sun, Libo Alice, REIT and Commercial Real Estate Returns: A Post Mortem of the Financial Crisis (September 27, 2013). Real Estate Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2334884

Sheridan Titman (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Garry J. Twite

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

University of Melbourne - Faculty of Business and Economics ( email )

Department of Finance
Melbourne, VIC 3010
Australia
+61 3 90356172 (Phone)

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Libo Alice Sun

California State Polytechnic University, Pomona - Finance, Real Estate and Law Department ( email )

United States

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