Intermediary Segmentation in the Commercial Real Estate Market

Abstract

Banks, life insurers, and commercial mortgage-backed securities (CMBS) lenders originate the vast majority of U.S. commercial real estate (CRE) loans. While these lenders compete in the same market, they differ in how they are funded and regulated, and therefore specialize in loans with different characteristics. We harmonize loan-level data across the lenders and review how their CRE portfolios differ. We then exploit cross-sectional differences in loan portfolios to estimate a simple model of frictional substitution across lender types. The substitution patterns in the model match well the observed shift of borrowers away from CMBS when CMBS spreads rose in 2016.

Commercial Real Estate Loans - Categorization of an Investment Segment

“…The loan documents should include cash trap or cash sweep mechanism to force borrower to partially repay the loan amount in case of non-compliance with the LTV covenant during the loan term. Glancy et al (2019) find that CMBS transactions exceed portfolio lender loan amounts by 200% on average. Black et al (2017) call up on this fact as well.…”

“…The OCC refers to the U.S. Census Bureau data provider in this context. Glancy et al (2019) collect information on geography based on the zip codes of the properties. Some sources refer to location as geographic location, geographic market or geographic region (Federal Register, 2015;Federal Register, 2006;ESRB Report, 2018).…”

“…Black et al (2017) find that construction loans are short-term loans. Glancy (2019) shows that banks usually provide short-term loans whereas life insurers tend to lend long-term with more than ten years until maturity. Bardzik (2019) finds that commercial banks may provide shorter term loans based on underlying properties with less stable cash flows in contrast to life insurance companies.…”

“…Commercial real estate (CRE) lending is intertwined with the financial economy through financial intermediaries like banks, insurance companies or CMBS lenders (Glancy et al, 2019). A downturn of the CRE markets might affect the financial industry through losses from CRE lending and spread into the real economy.…”

“…In this context, CRE finance is of specific interest to the regulatory authorities. One of the main features that separates CREL from other loan types like consumer loans, commercial and industrial loans (C&I loans), or residential real estate loans (RREL) is the linkage to the CRE that may serve as security for the loan (OCC Handbook, 2013;Glancy et al, 2019;Phillips, 2009). The commercial property represents simultaneously the collateral and the primary source of repayment of the loan which is generated by rental income or sale proceeds (Federal Register, 2006).…”