The impact of credit risk on commercial property leases - An empirical investigation on the Swedish property market

Abstract: This study consists of an empirical investigation of the impact of credit risk on the rent level in commercial property leases. In particular, we test whether a higher tenant credit risk as well as a positive correlation between the housing market and the industry the tenant is operating in results in a higher required rent. We make use of an extensive proprietary data set of commercial lease agreements drawn from the Stockholm property market over the time period 2007-2009. While our results partially confirm that a higher credit risk is reflected in a higher rent level, we find statistical confirmation for the notion that a higher correlation between the lessee's cash flow and the underlying market value is reflected in a higher rent level.