Essays on commercial real estate and commercial mortgages

This dissertation consists of three related essays on the dynamics of commercial real estate markets and the risk assessment of commercial mortgages. Chapter 1 examines the momentum effect in rental growth rates in the office-commercial markets. Using data from fourteen U.S. metropolitan office markets, the study finds that momentum effect exists but the degree of rental growth persistence varies significantly across markets. The study also finds that space market variables are more important than capital market variables in determining the implicit equilibrium rents. Furthermore, forecast simulations show that a parsimonious model structure behaves better and produces more consistent and plausible rent forecasts than would a more exhaustive structure.; Chapter 2 examines the default probabilities and loss severities of commercial construction loans. The study proposes a more realistic structured dynamic model of the commercial real estate market. The model consists of three key stochastic processes that are serially correlated: vacancy process, rent process, and cap rate process. NOI process and capital value process are then derived. The simulation results show significant variation in default probabilities of construction loans for different initial states of the commercial real estate market, suggesting that the simplified assumption without taking into account the persistence in commercial real estate markets may lead to inaccurate estimates of default probability, especially when the initial market is not flat.; Chapter 3 examines a previously unexplored aspect in the whole default process of commercial mortgages, that is the stage between the initial delinquency and eventual default. The study distinguishes the servicers' behavior from the borrowers' behavior. A multinomial logit model is applied to analyze the servicers' behavior and a proportional hazard model is applied to analyze the borrower's behavior. The empirical results show that cash flow condition is the most significant factor in the servicers' decision making process and that borrowers make default decisions based upon both the equity position in the mortgages and the cash flow condition in the space market. The study also finds that key real estate space market variables, such as market-level vacancy rates, provide useful information in explaining commercial mortgage defaults.