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    FED Paper Examines Segmentation in the Commercial Real Estate Market

    November 15, 2019

    FED published a working paper that examines the intermediary segmentation in the commercial real estate, or CRE, market. The study shows that bank, life insurer, and commercial mortgage-backed securities (CMBS) lender originations differ substantially by interest rate, loan-to-value (LTV), size, property type, and time to maturity at origination. Lenders differ in regulation, funding structure, and other institutional characteristics affecting their incentives to originate particular types of loans and these institutional differences can explain the segmentation in the data. For instance, short-duration liabilities incentivize banks to make short-term, floating-rate loans; risk-sensitive capital requirements incentivize life insurers to make safer loans; and greater diversification enables CMBS to make larger loans.

    The study examines the dimensions along which commercial real estate loan originations differ by lender type, the sources of segmentation in the market, and the implications of segmentation for how the market responds to a shock. Banks, life insurers, and CMBS lenders originate the vast majority of U.S. commercial real estate 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. The authors harmonize loan-level data across the lenders and review how their CRE portfolios differ. Three intermediary types provision most CRE lending in the United States: banks, life insurers, and CMBS lenders.

    For this study, the authors harmonize comprehensive loan-level data sources across lender types and identify key loan terms and property characteristics along which intermediaries segment themselves. The data include granular details on loan terms and property characteristics for the commercial real estate loan portfolios of nearly 30 of the largest banks in the United States, all life insurers, and all loans in publicly issued, non-Agency CMBS deals. They then build a simple model that is informed by the incentives facing the lender types and estimate how various loan terms and property characteristics differentially affect the required return across the lender types. The model allows to estimate the value to borrowers of having access to different types of lenders that vary in how they are regulated and funded. 


    Related Link: Working Paper (PDF)

    Keywords: Americas, US, Banking, Insurance, Credit Risk, Commercial Real Estate, LTV, FED

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