Does Credit Supply Affect Real Estate Cap Rates? 

Does credit availability explain large cross-sectional variation in commercial real estate valuations? Financial theory and industry participants emphasize that cap rates reflect investor expectations of cash flow risk and growth. Yet, properties with observationally similar cash flows experience considerably different cap rates. I document that significant variation in property cap rates can be explained by the supply of local credit. Properties in markets with greater credit supply have significantly higher valuations; exogenous exit of a local lender predicts decreased property values of 5.5%. On the intensive margin, variation in average originator underwriting standards explains economically important differences in property cap rates and valuations across markets. Competition for lending business appears to explain originator behavior. Originators underwrite loans more aggressively when competitors have looser underwriting standards.

Overbilling and Killing? An Examination of the Skilled Nursing Industry (with John M. Griffin)

Skilled Nursing Facility (SNF) systems that provided excess rehab therapy just above revenue thresholds quickly begin upcoding previously unidentified comorbidities under the new PDPM billing regime. Patients at these opportunistic systems develop more than 50% greater preventable conditions and have twice as many verified reviews indicating abuse. Opportunistic systems mask adverse outcomes through underreporting to CMS. Instrumental variable estimates indicate that opportunistic SNF systems are responsible for an additional 35,000 hospitalizations and 30,000 deaths since PDPM was enacted, while overbilling Medicare $4.3 billion. Opportunistic SNF systems are spreading with more than 2.5 times the acquisition rate of accurate billing systems. 

Is COVID Revealing a Virus in CMBS 2.0? (with John M. Griffin)

Journal of Finance, Volume 78, Issue 4 (2023)

Media Coverage: Wall Street Journal, The Intercept

Commercial loan valuations crucially depend on accurate loan income, but underwritten income on CMBS loans is commonly overstated relative to actual property income. Consistent with these differences being originator specific, income overstatement in CMBS 2.0 deals varies widely and persistently across originators, is priced by originators, related across property types within an originator, predictable ex-ante, and accompanied by inflation of past financials. Risk-retention and associated regulation had no discernable effect on income overstatement. Originator income overstatement is highly predictive of pre- and COVID-period loan distress. Overall, recent market stresses reveal large systemic differences in underwriting standards across originators. 

Are Low Cap Rate Properties Less Risky? Evidence from Property-Level Cash Flows