Title
The other (commercial) real estate boom and bust: The effects of risk premia and regulatory capital arbitrage
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.
Repository Citation
Duca, John V., and David C. Ling. 2020. "The other (commercial) real estate boom and bust: The effects of risk premia and regulatory capital arbitrage." Journal of Banking & Finance 112: 105317.
Publisher
Elsevier
Publication Date
3-1-2020
Publication Title
Journal of Banking & Finance
Department
Economics
Document Type
Article
DOI
10.1016/j.jbankfin.2018.03.006
Keywords
Asset pricing, Equity premiums, Bank deregulation, Institutional investors, Alternative asset classes, Commercial real estate
Language
English
Format
text
- Citations
- Citation Indexes: 26
- Policy Citations: 14
- Usage
- Abstract Views: 31
- Captures
- Readers: 60
