Pamplin research finds spillover from Paycheck Protection Program prevented billions in commercial losses
Research by Pamplin College of Business’s Xue Xiao and a team of coauthors shows that the government program helped avert $36 billion in commercial mortgage delinquencies during the COVID-19 pandemic.
At the onset of the COVID-19 pandemic, world governments responded with a series of measures designed to curtail the spread of the novel virus, including international travel bans, quarantines, and business shutdowns. Xue Xiao wondered what the ramifications of a global shutdown of physical space to the world’s economy would be.
What began as an academic curiosity for the then-Ph.D. student soon transformed into a pursuit to understand the greater socio-economic repercussions of the world grinding to a halt.
In her coauthored research “Did the Paycheck Protection Program Help Small Businesses? Evidence from Commercial Mortgage-backed Securities,” Xiao, now assistant professor in the Blackwood Department of Real Estate, delves into the widespread economic consequences of the U.S. federal government’s Paycheck Protection Program in the early stages of the pandemic. As the pandemic forced extensive closures and economic turmoil, this research sheds light on the program's impact on the greater economy by examining the performance of securitized commercial mortgages.
Through the analysis of commercial mortgage-backed securities, Xiao and her coauthors estimated that the Paycheck Protection Program had averted $36 billion in mortgage delinquencies in 2020 alone. The lifeline extended to small businesses resonated across all commercial real estate sectors with the most significant occurring in the areas of hospitality and retail.
Paycheck Protection Program
In April 2020, the federal government established the Paycheck Protection Program as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security Act to provide economic relief to small businesses and certain other entities that were adversely impacted by the pandemic.
The program allowed business entities to apply for low-interest and forgivable private loans to pay for payroll costs, interest, utilities, and rent. Initially, these loans were implemented in two rounds that lasted from April to August 2020 and provided more than $525 billion in federal loans in 2020.
Securitized commercial mortgages
The emergence of the Paycheck Protection Program offered a glimmer of hope for the struggling economy. Yet Xiao and her coauthors realized a potential channel for the true efficacy of such policies to be extended far beyond the direct financial assistance to small businesses and labor market, and there was the potential for “spillover” into other segments of the economy.
“Early on, I realized the larger economic impact of the pandemic because of the shutting down of most physical space from offices to hotels to retail stores,” said Xiao. “I began to worry about the pandemic’s effect on commercial real estate and the commercial real estate credit market.”
Because of their perceived significant financial strength, there is little in the way of public sentiment for commercial real estate landlords. However, according to Xiao, this group holds a lot of debt from the capital-intensive nature of real estate and is vulnerable to economic turbulence, as most of commerical landlords rely on ongoing rental income to pay back debt.
A significant portion of the debt is held in nonresidential commercial mortgage-backed securities (CMBS) loans. A CMBS is a financial vehicle that pools mortgages collateralized by commercial properties and originating from many lenders into a single trust that is sold to multiple investors in different sections, or tranches, with different risk exposure. A CMBS is one of the common channels to provide credit and liquidity to commercial real estate investors.
Spillover effect
Although the Paycheck Protection Program (PPP) explicitly prohibited commercial real estate landlords and investors from participation, there were channels by which its funding could indirectly benefit these passive investors. One of these channels was identified by Xiao as a “tenant channel,” whereby tenants could continue making their rent payments after receiving loans. This spillover, which was made possible by PPP loans, was then measured by Xiao and her coauthor in their research.
“The most significant impact on delinquency rates occurred in areas hardest hit by the pandemic, where banks overperformed in providing PPP loans,” said Xiao. “If commercial real estate was located in an area with higher chances of getting PPP loans, there was a greater positive impact on delinquency rates.”
Xiao's research findings extend beyond demonstrating the effectiveness of Paycheck Protection Program loans in averting financial crises. It also underscores the significance of evaluating outcomes beyond immediate goals when assessing the effectiveness of government interventions.
“When analyzing the impact of a program, we need to look at different aspects beyond primary targets,” said Xiao.
