The Effect of Commercial Mortgage Financing on Business Performance During the COVID Pandemic

One third of U.S. retail and hospitality firms have shut down since the onset of the Coronavirus Pandemic. Most of these firms pay a significant portion of their revenue in fixed rent expenses, leaving them with a stark choice of whether to defer their rent payments, risking eviction, or lay off workers, risking a further decline in revenue. Turning upstream, the commercial landlords of these firms themselves have fixed debt obligations, which they cannot meet without regular rent payments from their tenants. Together, these observations raise the question of whether expanding landlords' access to commercial real estate (CRE) lending can enable them to reduce their tenants' rent burdens and so mitigate the pandemic's impact on the economic wellbeing of communities. Our goal is to assess whether and how access to CRE lending can promote downstream growth in business activity and, in particular, how policy interventions in the CRE loan market can best expand such access. We pursue this question using a broad collection of datasets with rich details on a representative set of commercial landlords and their tenants. The logic of our exercise is to compare landlords whose loan terms enabled them to obtain liquidity just prior to the pandemic's onset (e.g., January or February 2020), when liquidity was abundant, with landlords whose terms constrained them to obtain liquidity just after the pandemic's onset (e.g. April or May 2020), when liquidity was scarce. We hope to assess whether landlords with greater liquidity can stay current on their own debt obligations and whether they pass this liquidity onto their tenants in the form of deferred rent collection, reduced eviction, and better maintenance of property quality. Finally, we trace the effect of liquidity downstream to study whether such tenants can better survive and maintain employment throughout the pandemic. The results of this research will have direct implications for a number of newly introduced policies that aim to promote CRE lending, such as the Federal Reserve's TALF 2.0 program. However, to date, little is known about the effectiveness of these policies. Our research will make progress on these important questions, and we are grateful for the Peter G. Peterson Foundation's generous support in enabling us to do so.