Leverage Cycles in a Mature Asset Class: New Evidence From Commercial Property Markets
59 Pages Posted: 7 Oct 2018 Last revised: 24 Dec 2020
Date Written: December 23, 2020
Unifying significant elements in real estate finance, we use the Bernanke-Gertler framework to model leverage cycles in US commercial real estate. We model capital-market yields, as conditioned by market-wide leverage, an indicator of debt availability, and jointly model investment, leverage, debt terms, and the aggregate appetite for risk. Our VAR framework delivers variance decompositions and impulse-response functions which show that leverage and its investment-related effect constitutes the primary driver of innovations in capital-market yields and vice versa. We further find evidence for flight to quality as well as knock-on effects that affect low-leverage investors in commercial real estate.
Keywords: Leverage Cycle, Loan-to-Value, Commercial Real Estate, VAR
JEL Classification: E32, R30, G12, G23
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