Commercial Real Estate Lending Research Articles

Risk Perception and Loan Underwriting in Securitized Commercial Mortgages

We use model-implied volatility to proxy for property risk perceptions in the commercial real estate lending market. Although loan-to-value ratios (LTVs) unconditionally decreased following the Global Financial Crisis, LTVs conditioned on implied volatility and other theoretically motivated fundamental determinants of optimal leverage show no conclusive trend before or after the crisis. Taking reported property and loan attributes at face value, we find no clear pattern of unwarranted credit being extended to commercial real estate assets. We conclude that systematically higher LTV decisions pre-crisis would have primarily stemmed from risk misperceptions rather than imprudent practices. Our findings suggest that the aggregate LTV level should be interpreted as a proxy for lending standards only after controlling for aggregate risk perceptions, among a host of asset and lending market factors. Our findings also highlight the importance of measuring and tracking aggregate risk perceptions in informing regulators and policymakers.

Is there a green discount in commercial real estate lending?

PurposeThis study examines whether green buildings enjoy more favorable financing terms compared to their non-green counterparts, exploring the presence of a green discount in commercial real estate lending. Despite the extensive research on green premiums on the equity side, lending has received limited attention in the existing literature, even as regulations have increased and ambitious net-zero targets have been set in the banking sector.Design/methodology/approachIn this study, the authors leverage a unique dataset comprising European commercial loan data spanning from 2018 to 2023, with a total loan value exceeding €30 billion. Hedonic regression analysis is used to isolate a potential green discount. Specifically, the authors rely on property assessments conducted by lenders to investigate whether green properties exhibit lower interest rate spreads and higher loan-to-value (LTV) ratios.FindingsThe findings reveal the existence of a green discount in European commercial real estate lending, with green buildings enjoying a 5.35% lower contracted loan spread and a 3.92% lower target spread compared to their non-green counterparts. However, this analysis does not indicate any distinct advantage in terms of LTV ratios for green buildings.Practical implicationsThis research contributes to a deeper understanding of the interaction between green properties and commercial real estate lending, offering valuable insights for both lenders and investors.Originality/valueThis study, to the best of the authors’ knowledge, represents the first of its kind in a European context and provides empirical evidence for the presence of a green discount.

Big is beautiful: The impact of bank–borrower relationship and sponsor size on credit spreads and underwriting fees in commercial real estate lending

This study uses a granular dataset to examine the impact of relationships between banks and borrowers and sponsor sizes on the credit spread and the associated underwriting fees of commercial real estate loans. This study focuses on commercial real estate banks that keep the loans on their books and do not use commercial mortgage-backed securities to transfer the credit risk to the capital market. Our findings reveal that credit spreads are lower for borrowers with a prior relationship with the bank; however, the impact of repeated lending varies across sponsor sizes. The prior relationship primarily reduces fees for small and medium-sized sponsors, whereas loans with large sponsors experience a stronger beneficial relationship effect in the credit spread.

Residential House Prices, Commercial Real Estate Lending and Bank Failures

We investigate factors leading to bank failures during and after the Great Recession and banking crisis (2008–2015). The FHFA residential real estate house price index (HPI) for each of the 9 Census regions is used to interact with bank mortgage loans and bank financial statement variables. We find that these variables isolate different regional effects on the likelihood of a bank failing. Since we use changes from region to region, we find that regional location and HPI changes have an effect on banks’ commercial lending activity. Other more traditional and associated factors, like construction and land development lending or multifamily real estate lending, similarly explain bank failures during the main period of the banking crisis. By using this approach we better isolate the relationship between residential house prices and builders’ and land developers’ desire to borrow and the willingness of banks to concentrate portfolio lending in commercial real estate.

The Increasing Trend in Commercial Real Estate Lending by Community Banks: The Role of Deliberate Risk-Taking, 2001-2017

Much attention focuses on the role of real estate lending by banks as a precipitating factor in past financial crises, and especially with respect to the 2007-2008 crisis. Over the past five years, U.S. banks have increased their commercial real estate lending dramatically, raising concern among regulators about the potential for another financial crisis. In this paper, we analyze post-recessionary trends to determine whether the same dangerous pre-recessionary risk-taking trends are emerging. Regulators devote most of their attention to the banking sector with little regard to the role played by its various subgroups. This may explain why there is little research analyzing the specific role of community banks in sparking a financial crisis. In this study, we present a disaggregated analysis that focuses on the potential risks of increased commercial real estate lending from a comparative perspective, examining community banks vis-a-vis larger banking institutions, paying particular attention to the role of deliberate bank risk-taking as a causal factor in increased community bank commercial real estate CRE lending since the Great Recession.

The role of specific heritage among Hispanic-owned banks in America

PurposeSpecific types of Hispanic-owned banks (HOBs), including those related to Brazilian, Cuban, Mexican or Puerto Rican heritage, have not be analyzed to date. There are important differences between the relevant communities, including geographic location, language barriers, population size and the importance of remittances to foreign nations. The analysis here sheds light on these differences.Design/methodology/approachHOBs with the Federal Deposit Insurance Corporation (FDIC)-designated minority-owned depository institution (MDI) designation are identified, along with bank ownership heritage. Financial data, a measure of market competition, and demographics of depositors from 2003 to 2017 are utilized in an exploratory analysis comparing banks by HOB type, with random effects regressions for the pre-collapse (2003–2006) and post-collapse (2009–2017) periods.FindingsAlthough each of the four types of HOBs serve Hispanic and poor communities, there are substantial differences. For example, Brazilian and Puerto Rican banks on the island held high levels of nonperforming loans (NPLs) post-collapse, with the Brazilian and Mexican banks expanding levels of risky commercial real estate (CRE) lending post-collapse, while the Cuban banks contracted CRE lending. Differences in terms of return on assets (ROAs), the cost of borrowed funds and the tier-1 risk-based capital ratio are also identified.Social implicationsHOBs, like Latinos in the USA, are culturally heterogeneous and likely operate in different ways depending upon the culture and economic circumstances of the communities where they operate.Originality/valueAlthough there is substantial research on MDIs, this is the first analysis which treats HOBs as culturally heterogeneous. Further research of this type is warranted.

Does scale matter in community bank performance? Evidence obtained by applying several new measures of performance

We consider how size matters for banks in three size groups: small community banks with assets less than $1 billion, large community banks with assets between $1 billion and $10 billion, and midsize banks with assets between $10 billion and $50 billion. To illustrate the differences between these banks and larger banks whose business models are distinctly different, we examine large banks with assets between $50 billion and $250 billion and the largest banks with assets exceeding $250 billion. Community banks have potential advantages in relationship lending compared with large banks. However, increases in regulatory compliance and technological burdens may have disproportionately increased community banks’ costs, raising concerns about small businesses’ access to credit. Our evidence suggests several patterns: (1) while small community banks exhibit relatively more valuable investment opportunities, larger community banks, midsize banks, and larger banks exploit theirs more efficiently and achieve better financial performance; (2) average operating costs that include costs related to regulatory compliance and technology decrease with size; (3) unlike small community banks, large community banks have financial incentives to increase lending to small businesses; and (4) for business lending and commercial real estate lending, compared with small community banks, large community banks, midsize banks, and larger banks assume higher inherent credit risk and exhibit more efficient lending. Thus, concern that small business lending would be adversely affected if small community banks find it beneficial to increase their scale is not supported by our results.

Does Scale Matter in Community Bank Performance? Evidence Obtained by Applying Several New Measures of Performance

We consider how size matters for banks in three size groups: banks with assets of less than $1 billion (small community banks), banks with assets between $1 billion and $10 billion (large community banks), and banks with assets between $10 billion and $50 billion (midsize banks). Community banks have potential advantages in relationship lending compared with large banks. However, increases in regulatory compliance and technological burdens may have disproportionately increased community banks’ costs, raising concerns about small businesses’ access to credit. Our evidence suggests that: (1) the average costs related to regulatory compliance and technology decrease with size; (2) while small community banks exhibit relatively more valuable investment opportunities, larger community banks and midsize banks exploit theirs more efficiently and achieve better financial performance; (3) unlike small community banks, large community banks have financial incentives to increase lending to small businesses; and (4) for business lending and commercial real estate lending, large community banks and midsize banks assume higher inherent credit risk and exhibit more efficient lending. Thus, concern that small business lending would be adversely affected if small community banks find it beneficial to increase their scale is not supported by our results.

Did Saving Wall Street Really Save Main Street? The Real Effects of TARP on Local Economic Conditions

We investigate whether saving Wall Street through TARP really saved Main Street during the recent financial crisis. Our difference-in-difference analysis suggests that TARP statistically and economically significantly increased net job creation and net hiring establishments and decreased business and personal bankruptcies. The results are robust, including accounting for endogeneity. The main mechanisms driving the results appear to be increases in commercial real estate lending and off-balance-sheet real estate guarantees. These results suggest that saving Wall Street via TARP may have helped save Main Street, complementing the TARP literature and contributing to the cost–benefit debate.

Minority‐Owned Banks and Bank Failures After the Financial Collapse

Minority‐owned banks (MOBs) are small banks, which often serve disadvantaged communities of color, and failed at high rates after the financial collapse. The U.S. Census and FDIC data are used to analyse bank failures for 2009–2014, with predictors from 2008, using logistic regression for estimation. Failure rates were high among Black and Asian American–owned banks; these are related to bank failures in African American communities and concentration in commercial real estate lending; policy responses to the collapse were generally ineffective for small banks. We conclude that policy support for MOBs operating in disadvantaged communities of color is warranted.

Did Saving Wall Street Really Save Main Street? The Real Effects of TARP on Local Economic Conditions

We investigate whether saving Wall Street through the Troubled Assets Relief Program (TARP) really saved Main Street during the recent financial crisis. Our difference-in-difference analysis suggests that TARP statistically and economically significantly increased net job creation and net hiring establishments and decreased business and personal bankruptcies. The results are robust, including accounting for endogeneity. The main mechanisms driving the results appear to be increases in commercial real estate lending and off-balance sheet real estate guarantees. These results suggest that saving Wall Street via TARP may have helped save Main Street, complementing the TARP literature and contributing to the cost-benefit debate.

TROUGH TO PEAK: A NOTE ON RISK‐TAKING IN THE PACIFIC NORTHWEST'S BANKING SECTOR, 2001–2007

Using a cohort of 157 Federal Deposit Insurance Corporation insured banks based in the Pacific Northwest, this paper examines regional bank risk‐taking over the 2001–2007 economic expansion. The focus is on on‐balance sheet assets that carry a 100% risk weighting in the calculation of regulatory capital ratios. This study finds that Pacific Northwest banks significantly increased their share of 100% risk‐weighted assets between 2001 and 2007, largely through commercial real estate lending. Asset size, market concentration, age, metropolitan statistical area‐location, and balance sheet capacity for risk‐taking are statistically significant predictors of the change in the share of 100% risk‐weighted assets over the period of interest. (JEL G21, R11)

Capital City Bank Group, Inc.>

AbstractCommercial Banking (MIC: SIC: 6022 NAIC: 522110)Capital City Bank Group is a financial holding company. Through its bank subsidiaries, Co. provides traditional deposit and credit services, asset management, trust, mortgage banking, merchant services, bank cards, data processing, and securities brokerage services through 70 full service banking locations in Florida, Georgia, and Alabama. Co. also has a two mortgage lending offices located in Florida and one additional Georgia community. Co.'s principal banking services include business banking, commercial real estate lending, residential real estate lending, and retail credit. As of Dec 31 2007, Co. had total assets of $2.62 billion and total deposits of $2.14 billion.

Corus Bankshares, Inc.

AbstractCommercial Banking (MIC: SIC: 6021 NAIC: 522110)Corus Bankshares is a bank holding company with total assets of $8.93 billion and total deposits of $7.62 billion as of Dec 31 2007. Co., through its wholly‐owned banking subsidiary, Corus Bank, N.A. (the Bank), is primarily focused on commercial real estate lending and deposit gathering. The third, and smaller, business of the Bank is servicing the check cashing industry. As of Dec 31 2007, the Bank had 11 branches in the Chicago metropolitan area that provides general banking services such as checking, savings, money market, and time deposit accounts as well as safe deposit boxes and a range of additional services.

Webster Financial Corp (Waterbury, Conn)

AbstractCommercial Banking (MIC: SIC: 6021 NAIC: 522110)Webster Financial, through its Webster Bank subsidiary and various non‐banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout southern New England and eastern New York State. Co. also offers equipment financing, commercial real estate lending, asset‐based lending, and insurance premium financing on a regional or national basis. Also, through Webster Bank, Co. provides commercial banking, retail banking, consumer financing, mortgage banking, trust and investment services through 181 banking offices, 343 automatic teller machines and its internet website As of Dec 31 2007, Co. had total assets of $17.20 billion.

Washington Mutual Inc.

AbstractOther Depository Banking (MIC: SIC: 6035 NAIC: 522120)Washington Mutual is a bank and thrift holding company. Co. has four operating segments for management reporting purposes: the Retail Banking Group, which as of Dec 31 2007, operated a retail bank network of 2,257 stores across 15 states throughout the U.S.; the Card Services Group, which operates a nationwide credit card lending business; the Commercial Group, which conducts a multi‐family and commercial real estate lending business in selected markets; and the Home Loans Group, which engages in nationwide single‐family residential real estate lending, servicing and capital markets activities. As of Dec 31 2007, Co. had total assets of $327.91 billion and deposits of $181.93 billion.

Webster Financial Corp (Waterbury, Conn)

AbstractCommercial Banking (MIC: SIC: 6021 NAIC: 522110)Webster Financial, through its Webster Bank subsidiary and various non‐banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout southern New England and eastern New York State. Co. also offers equipment financing, commercial real estate lending, asset‐based lending, and insurance premium financing on a regional or national basis. Also, through Webster Bank, Co. provides commercial banking, retail banking, consumer financing, mortgage banking, trust and investment services through 181 banking offices, 343 automatic teller machines and its internet website As of Dec 31 2007, Co. had total assets of $17.20 billion.

Capital City Bank Group, Inc.

AbstractCommercial Banking (MIC: SIC: 6022 NAIC: 522110)Capital City Bank Group is a financial holding company. Through its bank subsidiaries, Co. provides traditional deposit and credit services, asset management, trust, mortgage banking, merchant services, bank cards, data processing, and securities brokerage services through 70 full service banking locations in Florida, Georgia, and Alabama. Co. also has a two mortgage lending offices located in Florida and one additional Georgia community. Co.'s principal banking services include business banking, commercial real estate lending, residential real estate lending, and retail credit. As of Dec 31 2007, Co. had total assets of $2.62 billion and total deposits of $2.14 billion.

Corus Bankshares, Inc.

AbstractCommercial Banking (MIC: SIC: 6021 NAIC: 522110)Corus Bankshares is a bank holding company with total assets of $8.93 billion and total deposits of $7.62 billion as of Dec 31 2007. Co., through its wholly‐owned banking subsidiary, Corus Bank, N.A. (the Bank), is primarily focused on commercial real estate lending and deposit gathering. The third, and smaller, business of the Bank is servicing the check cashing industry. As of Dec 31 2007, the Bank had 11 branches in the Chicago metropolitan area that provides general banking services such as checking, savings, money market, and time deposit accounts as well as safe deposit boxes and a range of additional services.

Washington Mutual Inc.

AbstractOther Depository Banking (MIC: SIC: 6035 NAIC: 522120)Washington Mutual is a thrift holding company providing financial services to consumers and small businesses. Co. has four operating segments for management reporting purposes: the Retail Banking Group, which as of Dec 31 2007, operated a retail bank network of 2,257 stores across 15 states throughout the U.S.; the Card Services Group, which operates a nationwide credit card lending business; the Commercial Group, which conducts a multi‐family and commercial real estate lending business in certain markets; as well as the Home Loans Group, which engages in single‐family residential real estate lending, servicing and capital markets activities.