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The other (commercial) real estate boom and bust: The effects of risk premia and regulatory capital arbitrage

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  • Duca, John V.
  • Ling, David C.

Abstract

In the 2000 s, U.S. commercial real estate (CRE) prices experienced a boom and bust as dramatic as the more widely analyzed swings in house prices and contributed significantly to bank failures. We model short-run and long-run movements in capitalization rates (rent-to-price-ratio) and risk premia for office building and apartments. In the mid-2000s’ boom, CRE prices were mainly driven by declines in required risk premia that stemmed from a weakening of capital requirements. In the bust, CRE price declines were initially driven by a jump in general risk premia and later by a tightening of effective capital requirements on commercial mortgage-backed securities (CMBS) from the Dodd-Frank Act. The subsequent recovery in CRE prices was induced and sustained by unusually low real Treasury yields. We conclude that macro-prudential regulation of leverage may help limit asset price booms by preventing sharp declines in risk premia.

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  • Duca, John V. & Ling, David C., 2020. "The other (commercial) real estate boom and bust: The effects of risk premia and regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, vol. 112(C).
    • Handle: RePEc:eee:jbfina:v:112:y:2020:i:c:s0378426618300633
    DOI: 10.1016/j.jbankfin.2018.03.006
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    Cited by:

    1. Das, Prashant & Füss, Roland & Hanle, Benjamin & Russ, Isabel Nina, 2020. "The cross-over effect of irrational sentiments in housing, commercial property, and stock markets," Journal of Banking & Finance, Elsevier, vol. 114(C).
    2. Marton Lotz & Daniel Ruf & Johannes Strobel, 2023. "Uncertainty premia in REIT returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(2), pages 372-407, March.
    3. Thomas L. Hogan, 2021. "A Review of the Regulatory Impact Analysis of Risk-Based Capital and Related Liquidity Rules," JRFM, MDPI, vol. 14(1), pages 1-29, January.
    4. Roland Füss & Daniel Ruf, 2018. "Office Market Interconnectedness and Systemic Risk Exposure," Working Papers on Finance 1830, University of St. Gallen, School of Finance.
    5. Antoniades, Adonis, 2015. "Commercial bank failures during the Great Recession: the real (estate) story," Working Paper Series 1779, European Central Bank.
    6. Füss, Roland & Ruf, Daniel, 2022. "Information precision and return co-movements in private commercial real estate markets," Journal of Banking & Finance, Elsevier, vol. 138(C).
    7. Füss, Roland & Ruf, Daniel, 2021. "Bank systemic risk exposure and office market interconnectedness," Journal of Banking & Finance, Elsevier, vol. 133(C).
    8. John V. Duca & Patric H. Hendershott & David C. Ling, 2017. "How Taxes and Required Returns Drove Commercial Real Estate Valuations over the Past Four Decades," National Tax Journal, National Tax Association;National Tax Journal, vol. 70(3), pages 549-584, September.
    9. Michael D. Bordo & John V. Duca, 2020. "How New Fed Corporate Bond Programs Dampened the Financial Accelerator in the Covid-19 Recession," NBER Working Papers 28097, National Bureau of Economic Research, Inc.
    10. Duca, John V., 2017. "The Great Depression versus the Great Recession in the U.S.: How fiscal, monetary, and financial polices compare," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 50-64.
    11. Martin Hoesli & Richard Malle, 2022. "Commercial real estate prices and COVID-19," Post-Print hal-03611776, HAL.
    12. Michael D. Bordo & John V. Duca, 2023. "Money Matters: Broad Divisia Money and the Recovery of Nominal GDP from the COVID-19 Recession," Working Papers 2306, Federal Reserve Bank of Dallas.
    13. John V. Duca & Lilit Popoyan & Susan M. Wachter, 2019. "Real Estate And The Great Crisis: Lessons For Macroprudential Policy," Contemporary Economic Policy, Western Economic Association International, vol. 37(1), pages 121-137, January.
    14. Bordo, Michael D. & Duca, John V., 2022. "How new Fed corporate bond programs cushioned the Covid-19 recession," Journal of Banking & Finance, Elsevier, vol. 136(C).
    15. Daniel Lo & Yung Yau & Michael McCord & Martin Haran, 2022. "Dynamics between Direct Industrial Real Estate and the Macroeconomy: An Empirical Study of Hong Kong," Land, MDPI, vol. 11(10), pages 1-23, September.
    16. Jaccard, Ivan, 2021. "Leveraged property cycles," Working Paper Series 2539, European Central Bank.
    17. Martin Hoesli & Richard Malle, 2021. "Commercial Real Estate Prices and Covid-19," Working Papers hal-03186131, HAL.
    18. Nadia Balemi & Roland Füss & Alois Weigand, 2021. "COVID-19’s impact on real estate markets: review and outlook," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 35(4), pages 495-513, December.
    19. Lilit Popoyan, 2020. "Macroprudential Policy: a Blessing or a Curse?," Review of Economics and Institutions, Università di Perugia, vol. 11(1-2).
    20. Bordo, Michael D. & Duca, John V., 2023. "How the new fed municipal bond facility capped municipal-treasury yield spreads in the Covid-19 recession," Journal of the Japanese and International Economies, Elsevier, vol. 67(C).
    21. Steffen Heinig & Anupam Nanda & Sotiris Tsolacos, 2016. "Which Sentiment Indicators Matter? An Analysis of the European Commercial Real Estate Market," ICMA Centre Discussion Papers in Finance icma-dp2016-04, Henley Business School, University of Reading.

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    More about this item

    Keywords

    Asset pricing; Equity premiums; Bank deregulation; Institutional investors; Alternative asset classes; Commercial real estate;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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