Abstract: We develop a new approach to understand the joint dynamics of transaction prices and trading volume in the market for commercial real estate. We start from a micro-founded model in which buyers and sellers differ in their private valuation of building characteristics, such as size, location, and quality. Consistent with the decentralized nature of the commercial real estate market, we model the probability that a seller meets a particular buyer, where the meeting probability depends on the characteristics of the buyer, the seller, and the building. In equilibrium, the mapping from building characteristics to observed transaction prices depends on the identity of the buyer and the seller, which is missed by traditional hedonic valuation models. We estimate the model using granular data on commercial real estate transactions, which contain detailed information on the identity of buyers and sellers. Our central finding is that the identity of buyers and sellers has a first-order effect on transaction prices and trading volume. We show how the model can be used for counterfactual analyses. As a concrete example, we find that the Manhattan office market would have seen 10% lower valuations if it had not been for a large inflow of foreign buyers in 2018–2021. Our methodology directly extends to other private markets, including private equity, private credit, and infrastructure.
Discussant: Christophe Spaenjers, University of Colorado-Boulder
Abstract: We show that business development companies (BDCs) — closed-end funds that provide asignificant share of nonbank loans to middle market firms — are very well capitalized accordingto bank capital frameworks. They have median risk-based capital ratios of about 36% and,under the Federal Reserve’s stress testing framework, median excess capital in the severelyadverse scenario of about 26%. Our evidence thus cuts against the view that private credit hasgrown because nonbank financial intermediaries have to hold less capital than banks. Instead,we argue that, for plausible parameters, banks find lending to middle-market lenders such asBDCs and private credit funds more attractive than middle-market lending itself. This is, inpart, because over-collateralized loans to BDCs and other nonbank financial intermediaries getrelatively favorable capital treatment, enabling banks to exploit their low-cost funding. We alsopresent a model to explain banks' observed preference for making middle-market sponsored loansvia affiliated BDCs or private credit funds rather on balance sheet. For plausible parameters,banks would be willing to forgo less expensive balance sheet funding to avoid the extra regulatoryand supervisory costs of managing a risky loan portfolio on the bank’s balance sheet. Finally,we examine the financial stability risks of private credit. While there is little risk to the solvencyof BDCs, they may deleverage during periods of stress to remain in compliance with the SECregulatory leverage limits and bank loan covenants. Our baseline estimates suggest that overeight quarters the median (25th percentile) BDC would reduce outstanding loan balances by9.5%, about half by using free cash flows to pay down debt rather than reinvest in new loansand half by selling assets.
Christophe Spaenjers, University of Colorado-Boulder
Eva Steiner, Pennsylvania State University
Abstract: We study asset-level investments by non-profit and for-profit investors in the U.S. housing market over the past two decades. We show that non-profits favor affordable properties and less affluent neighborhoods, consistent with a focus on social impact investments. When comparing similar investments, we find that non-profit investors earn lower capital gains than do for-profit investors. These results cannot be fully explained by non-profit investors’ preferences for social impact investments or for impact-oriented asset management choices. Rather, we show that non-profit investors bargain less in the transactions they complete. Our results suggest that impact-driven investors may leave money on the table.
Discussant: Adair Morse, University of California-Berkeley
