The Impact of Tenant Diversification on Spreads and Default Rates for Mortgages on Retail Properties
Posted: 8 Feb 2018 Last revised: 27 Feb 2018
Date Written: January 30, 2018
We use an empirical model of commercial mortgage spreads to examine how tenant diversification impacts credit spreads for mortgages on retail properties. We find that mortgages on properties with a highly diversified tenant base have spreads that are up to 7.1 basis points higher than spreads on mortgages for single-tenant properties, but that mortgages on properties with moderate levels of tenant diversification have spreads that are up to 5.2 basis points lower than mortgages on single-tenant properties. The spread discount for mortgages on properties with moderate levels of tenant diversification disappears when the lease of the property's largest tenant expires before the loan matures. Despite the spread discount that is given to properties with moderate levels of tenant diversification, we find the likelihood with which a mortgage goes into default increases as tenant diversification increases.
Keywords: Commercial Mortgages; Mortgage Spreads; Mortgage Default Rates; Tenant Diversification
JEL Classification: G21; R30
Suggested Citation: Suggested Citation