The Cap Rate Spread: A New Metric for Commercial Underwriting
Real Estate Economics, Forthcoming
Posted: 22 Jul 2014
Date Written: July 6, 2014
This study introduces the cap rate spread as a novel metric for underwriting commercial mortgages. Cap rate spread is the difference between the cap rate and the fixed coupon rate. The spread predicts performance risk in a sample of 24,951 CMBS loans during 1993-2011. We demonstrate that the cap rate spread includes crucial information about performance risk. The results arise from the role of the cap rate spread in generating positive or negative leveraged returns to equity in situations where additional equity is required. Incorporating simplistic cap rate spread requirements in commercial underwriting is expected to reduce loan performance risk.
Keywords: Default risk, underwriting, commercial real estate
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