Fund Flows and Commercial Real Estate Investment: Evidence from the Commercial Mortgage Market

By Donohue, Ron; Hendershott, Patric H. | The Journal of Real Estate Research, October-December 2004 | Go to article overview

Fund Flows and Commercial Real Estate Investment: Evidence from the Commercial Mortgage Market


Donohue, Ron, Hendershott, Patric H., The Journal of Real Estate Research


Abstract This paper addresses the issue of the impact of fund flows on real investment. In the classical world, fund flows affect investment by changing the cost of funds or through the weighted average cost of capital. In a less perfect world, fund flows can directly alter investment though a rationing mechanism, where even presumably profitable investment is choked off.

This paper examines the commercial mortgage market over the last quarter century. The findings indicate an effect of constrained flows on investment in the early 1990s, but an independent impact of higher flows to the commercial mortgage market in the middle 1980s is not found.

Periodically concerns arise that commercial real estate activity is being choked off by a shortage of financial capital (Mejia, 1999). At other times, too much financial capital is alleged to cause overbuilding (Hendershott and Kane, 1992; and Giliberto, 1992). This paper analyzes the commercial mortgage market over the last quarter century to determine periods of credit crunches or credit gluts.

Commercial real estate is one of many real investments in the economy. And this investment is undertaken by a number of different types of business entities that are funded by a wide range of financial institutions, who themselves obtain funding from savers. Thus, understanding the funding of commercial real estate investment requires examination of the financial behaviors of many economic sectors. Presenting a broad framework for understanding the interactions of these behaviors and the funding of commercial real estate investment is the place to start. The U.S. flow of funds accounts constitutes the framework.

Under what circumstances do security flows determine (affect) the volume of commercial real estate investment? In general, the supply of funds can have an independent impact on commercial real estate investment only when "disturbances" emanate from the financial system or within the funds flows matrix. Such disturbances begin by affecting the distribution of saving and the portfolio decisions of financial institutions and then spill over onto real investment decisions. The different financial intermediaries |e.g., banks, thrifts, real estate investment trusts (REITs), insurance companies, etc.] have different proclivities to invest in commercial real estate either directly or indirectly; thus shocks that alter the distribution of funds among the intermediaries or the allocation of investments of the intermediaries will affect the financing of real estate unless the total supply of funds is completely elastic. Thus, the paper considers factors affecting the demands for commercial real estate equity and debt instruments.

The major debt vehicle for financing commercial real estate is commercial mortgages. clayton (2003) suggests that increases in net commercial mortgage issues lead to greater commercial property returns (as measured by the NCREIP Commercial Property Index), which presumably triggers greater commercial real estate investment. Thus, the paper analyzes sectoral issues and purchases of commercial mortgages over the last quarter century. The paper concludes with a brief summary and some thoughts on future work in this area.

The Flow of Funds Matrix and Commercial Real Estate Investment

The flow of funds in an economy can be viewed as a pipe system with water (saving) flowing in one end and out the other (as nonfmancial investment). Exhibit 1 pictures such a system, where the left inflow represents saving in the economy and the right outflow represents investment in real assets (nonfinancial capital). Because changes in inventories are defined as investment/disinvestment, the saving and investment flows are equal; an unanticipated increase/decrease in saving (decrease/increase in consumption) increases/decreases inventories equally.

Both investment and saving consist of a number of component parts. Total saving is portioned into household (or personal), business and government plus foreign (henceforth called "other"). …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Fund Flows and Commercial Real Estate Investment: Evidence from the Commercial Mortgage Market
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.