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

29 Pages Posted: 17 Feb 2015

See all articles by Libo Sun

Libo Sun

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

Sheridan Titman

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

Garry Twite

University of Texas at Austin - Red McCombs School of Business

Date Written: Spring 2015

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.

Suggested Citation

Sun, Libo Alice and Titman, Sheridan and Twite, Garry, REIT and Commercial Real Estate Returns: A Postmortem of the Financial Crisis (Spring 2015). Real Estate Economics, Vol. 43, Issue 1, pp. 8-36, 2015. Available at SSRN: https://ssrn.com/abstract=2566014 or http://dx.doi.org/10.1111/1540-6229.12055

Libo Alice Sun (Contact Author)

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

United States

Sheridan Titman

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 Twite

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

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