Credit Restrictions and the Market for Commercial Real Estate Loans

Abstract

This paper develops a model of the market for commercial real estate loans based on the variables used by investors and lenders in property decision-making: the income capitalization (cap) rate, the debt-coverage ratio and the loan-to-value ratio. Empirical results for aggregate United States real estate originations and commitments for 1970-93 indicate that loan demand is sensitive to the cap rate and to building permit issuance. The dominant criterion used by lenders is the debt-coverage ratio as opposed to the loan- to-value ratio, a finding which may have implications for underwriting standards and credit policy.

JEL Classification: E51