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The Dynamic Relationship between Delinquency Rates, Funding and Market Liquidity and Asset Prices in Private Commercial Real Estate Markets

Author

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  • Dorinth van Dijk
  • Marc Francke
  • Yumei Wang

Abstract

We employ a panel vector auto-regressive model to analyze the dynamic interactions between delinquency rates on bank loans, funding and market liquidity, and asset price movements in regional U.S. commercial real estate (CRE) markets. Our findings indicate that rising delinquency rates lead to tighter funding liquidity, which in turn negatively impacts asset prices and market liquidity. Importantly, funding liquidity and market liquidity reinforce one another, demonstrating that “liquidity spirals†are also relevant in CRE markets. Additionally, there is a negative feedback loop between market liquidity and default rates: good market liquidity allows borrowers with financially distressed loans to sell properties before becoming delinquent. This highlights the crucial role of market liquidity in CRE markets. Based on these insights, we recommend counter-cyclical loan policy standards. In hot markets, tighter funding liquidity may reduce future delinquency rates, while in cold markets, more relaxed lending standards could enhance market liquidity. This may facilitate restructuring and refinancing of distressed loans, helping to mitigate liquidity spirals.

Suggested Citation

  • Dorinth van Dijk & Marc Francke & Yumei Wang, 2025. "The Dynamic Relationship between Delinquency Rates, Funding and Market Liquidity and Asset Prices in Private Commercial Real Estate Markets," Working Papers 835, DNB.
    • Handle: RePEc:dnb:dnbwpp:835
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    More about this item

    Keywords

    Funding liquidity; Market Liquidity; Commercial Real Estate; Delinquency Rates;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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