Cost of Debt at Various Leverage Ratios

This analysis examines the relationship between financial leverage and annual interest rates across four key real estate property types: Apartment, Office, Retail, and Industrial as well as the Core portfolio. Using quarterly data from 1996 through the first quarter of 2025, it explores how interest rates evolve across different leverage ratios and time periods. The goal is to help real estate investors, analysts, and policymakers better understand how capital structure decisions interacts with property type and market conditions.

Quarterly Estimates of the Annual Interest Rate at Various Leverage Ratios for the Year 1996 through 1Q2025 - CORE  

Quarterly Estimates of the Annual Interest Rate at Various Leverage Ratios for the Year 1996 through 1Q2025 - APARTMENT  

Quarterly Estimates of the Annual Interest Rate at Various Leverage Ratios for the Year 1996 through 1Q2025 - OFFICE  

Quarterly Estimates of the Annual Interest Rate at Various Leverage Ratios for the Year 1996 through 1Q2025 - RETAIL  

Quarterly Estimates of the Annual Interest Rate at Various Leverage Ratios for the Year 1996 through 1Q2025 - INDUSTRIAL  

METHODOLOGY:

• This analysis investigates the relationship between loan-to-value (LTV) ratios and gross credit spreads in the commercial mortgage market, using quarterly data from 1996 through Q1 2025. For each quarter, observed gross spreads are paired with their corresponding LTV levels. To estimate the pricing curve of credit risk, a linear regression is applied using a transformed version of the LTV.
• The independent variable is calculated as the leverage ratio, defined as LTV / (1 − LTV), to capture the nonlinear increase in credit risk as borrower leverage rises. The dependent variable is the gross credit spread, measured in basis points. A base point is included at LTV = 0% with an assumed spread of 30 basis points, representing structural features unrelated to credit risk such as servicing costs, origination fees, and liquidity premiums.
• The regression model is specified as:
  Spread = β₁ × (LTV / (1 − LTV)) + β₀
  
  Where:
  • β₁ is the slope coefficient, capturing the incremental spread attributable to rising leverage.
  • β₀ reflects the baseline spread from structural costs.
• The fitted equation is used to estimate gross spreads at standard LTV thresholds. These estimates are then added to the contemporaneous risk-free rate (e.g., Treasury or swap rate) to compute the implied mortgage interest rate. This approach enables consistent time-series analysis of how markets have priced credit risk at varying leverage levels.

DATA SOURCES:

These analyses are intended solely for academic purposes. No warranty or representation is made with regard to their accuracy.