Leverage Cycles in a Mature Asset Class: New Evidence From Commercial Property Markets

59 Pages Posted: 7 Oct 2018 Last revised: 24 Dec 2020

See all articles by Robert A. Connolly

Robert A. Connolly

Miami Herbert Business School - Department of Finance

Tobias Muhlhofer

University of Miami - Department of Finance

Date Written: December 23, 2020

Abstract

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

Suggested Citation

Connolly, Robert A. and Muhlhofer, Tobias, Leverage Cycles in a Mature Asset Class: New Evidence From Commercial Property Markets (December 23, 2020). Kenan Institute of Private Enterprise Research Paper No. 18-29, Available at SSRN: https://ssrn.com/abstract=3249677 or http://dx.doi.org/10.2139/ssrn.3249677

Robert A. Connolly

Miami Herbert Business School - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://https://drbobconnolly.com/

Tobias Muhlhofer (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://tobias.muhlhofer.com

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