REIT Economies of Scale: Fact or Fiction?

Abstract

The real estate industry has recently witnessed significant and pervasive consolidation with further growth and consolidation generally viewed as a foregone conclusion. For example, between 1990 and 1997, growth in average net real estate investments by large REITs outpaced growth in average net real estate investments by small REITs by 13 percent. However, no systematic study of the benefits of this consolidation exists. This research studies whether or not there are gains to consolidation due to economies of scale from size, brand imaging, and informational gains from geographic specialization. Our sample consists of 41 multifamily equity REITs, for whom finanical and property level data are available in the SNL REIT Database. Using this data, we construct 'shadow' portfolios that mimic each REIT's exposure to changes in local market conditions. Our results show no size economies, that branding in real estate is allusive, and that geographic specialization, in agreement with Gyourko and Nelling (1993), has no significant benefit.

Keywords: REITs, Economies of Scale

JEL Classification: G34