Abstract
The real estate industry has recently witnessed significant and pervasive consolidation with further growth and consolidation generally viewed as inevitable. 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 financial 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 (1996), has no significant benefit.
Similar content being viewed by others
References
Allen, B. T. (1983). “Concentration, Scale Economies, and the Size Distribution of Plants,” Quarterly Review of Economics and Business 23(4), 6–27.
Bell, F. W., and N. B. Murphy. (1968). Costs in Commercial Banking: A Quantitative Analysis of Bank Behavior and Its Relation to Bank Regulation. Research Report No. 41, Federal Reserve Bank of Boston.
Benston, G. J. (1965). “Branch Banking and Economies of Scale,” Journal of Finance 20, 312-331.
Bers, M., and T. M. Springer. (1998). “Sources of Scale Economies for REITs,” Real Estate Finance 14(4), 47-56.
Campbell, R. D., C. Ghosh, and C. F. Sirmans. (1998). “The Great REIT Consolidation: Fact or Fancy?,” Real Estate Finance 15(2), 45-54.
Capozza, D., and P. Seguin. (1998). ""Managerial Style and Firm Value,” Real Estate Economics 26(1), 131-150.
Carey, M., M. Post, and S. A. Sharpe. (1998). ""Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting,” Journal of Finance 53(3), 845-878.
Carey, M., S. Prowse, J. Rea, and G. Udell. (1993). ""The Economics of Private Placements: A New Look,” Financial Markets, Institutions and Instruments 2, 1-66.
Clark, J. A. (1988). ""Economies of Scale and Scope at Depository Financial Institutions: A Review of the Literature,” Federal Reserve Bank of Kansas City Economic Review 73, 16-33.
Comanor, W. S., and T. A. Wilson. (1967). ""Advertising, Market Structure, and Performance,” Review of Economics and Statistics 423-440.
Crocker II D. (1998). ""Inside the Revolution,” Wharton Real Estate Review 2(2), 28-33.
DeBrabander, B., and E. Vanlommel. (1978). ""Economies of Scale, Minimum Optimal Plant Size and Effectiveness of Market Structure in Belgian Industry Anno 1970,” European Economic Review 11(4), 363-378.
Dicer, G. N. (1971). ""Economies of Scale and Motor Carrier Optimum Size,” Quarterly Review of Economics and Business 11(1), 31-38.
Fama, E. F. (1980). ""Agency Problems and the Theory of the Firm,” Journal of Political Economy 88(2), 288-307.
Gyourko, J., and E. Nelling. (1996). ""Systematic Risk and Diversi®cation in the Equity REIT Market,” Real Estate Economics 24(4), 493-515.
Jensen, M. C., and W. H. Meckling. (1976). ""Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics 3, 305-360.
Linneman, P. (1997). ""Forces Changing the Real Estate Industry Forever,” Wharton Real Estate Review 1-12.
Noulas, A. G., S. C. Ray, and S. M. Miller. (1990). ""Returns to Scale and Input Substitution for Large U.S. Banks,” Journal of Money, Credit, and Banking 22(1), 94-108.
Pacelle, M. (1998). ""REITs Plan Merger Aimed at National Branding,” Wall Street Journal A4.
Scherer, F. M. (1973). ""Investment Variability, Seller Concentration, and Plant Scale Economies,” Journal of Industrial Economics 22(2), 157-160.
Scherrer, P. S. (1995). ""The Consolidation of REITs Through Mergers and Acquisitions,” Real Estate Review 23-26.
Schmalensee, R. (1974). ""Brand Loyalty and Barriers to Entry,” Southern Economic Journal 40(4), 579-588.
Zell, S. (1997). ""Liquid Real Estate,” Wharton Real Estate Review 1(2), 40-45.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Ambrose, B.W., Ehrlich, S.R., Hughes, W.T. et al. REIT Economies of Scale: Fact or Fiction?. The Journal of Real Estate Finance and Economics 20, 211–224 (2000). https://doi.org/10.1023/A:1007881422383
Issue Date:
DOI: https://doi.org/10.1023/A:1007881422383