Empirical Evidence
The foregoing is theory. One might reasonably ask if the evidence supports the theory. A reality check involves looking at what lenders actually do. The simple question is: When capitalization rates fall do lenders actually lower LTVs? We graph the data on the leveraged sale of 5331 US office buildings that took place between January, 1997 and February, 2003.* This was a period of strong recovery for real estate in general following the recession of the mid-1990s and the stock market decline of the late 1990s. The average capitalization rate and ltv has been computed for each year and is reflected in the graph below.
