The Impact of Tenant Diversification on Spreads and Default Rates for Mortgages on Retail Properties

Posted: 8 Feb 2018 Last revised: 27 Feb 2018

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University

Michael Shafer

Providence College

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: January 30, 2018

Abstract

We use an empirical model of commercial mortgage spreads to examine how tenant diversification impacts credit spreads for mortgages on retail properties. We find that mortgages on properties with a highly diversified tenant base have spreads that are up to 7.1 basis points higher than spreads on mortgages for single-tenant properties, but that mortgages on properties with moderate levels of tenant diversification have spreads that are up to 5.2 basis points lower than mortgages on single-tenant properties. The spread discount for mortgages on properties with moderate levels of tenant diversification disappears when the lease of the property's largest tenant expires before the loan matures. Despite the spread discount that is given to properties with moderate levels of tenant diversification, we find the likelihood with which a mortgage goes into default increases as tenant diversification increases.

Keywords: Commercial Mortgages; Mortgage Spreads; Mortgage Default Rates; Tenant Diversification

JEL Classification: G21; R30

Suggested Citation

Ambrose, Brent W. and Shafer, Michael and Yildirim, Yildiray, The Impact of Tenant Diversification on Spreads and Default Rates for Mortgages on Retail Properties (January 30, 2018). Journal of Real Estate Finance and Economics, Vol. 56, No. 1, 2018; Baruch College Zicklin School of Business Research Paper No. 2018-02-07. Available at SSRN: https://ssrn.com/abstract=3113563

Brent W. Ambrose (Contact Author)

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Michael Shafer

Providence College ( email )

1 Cunningham Square
Providence, RI 02918
United States
401-865-1928 (Phone)

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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