Tenant Concentration in REITs

Ryan G. Chacon ()
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Ryan G. Chacon: University of Colorado

The Journal of Real Estate Finance and Economics, 2023, vol. 66, issue 3, No 3, 636-679

Abstract: Abstract To the extent that a property portfolio is dependent on a small number of tenants for a large proportion of rental revenue, the portfolio has a concentrated tenant base. This article investigates the impact of tenant concentration on property portfolio performance, risk, and the cost of debt. Utilizing the disclosure of major tenants by 152 Equity Real Estate Investment Trusts (REITs) from 2000 to 2017, I document a positive relation between tenant concentration and profitability. REITs with greater tenant concentration experience higher profit margins and lower expense ratios, suggesting the positive relation between tenant concentration and profitability is driven by increased operational efficiency. Although these REITs are more efficient, tenant concentration is often stated as a risk in public disclosures. Consistent with this view, I find that REITs with greater tenant concentration have greater idiosyncratic risk. Further, banks appear to price this risk into their rate setting process and penalize REITs with greater tenant concentration. Accounting for the quality of the tenant base, the positive effects of tenant concentration are prevalent in REITs with high quality tenants and the negative effects of tenant concentration are prevalent REITs with low quality tenants.

Keywords: REITs; Tenants; Portfolio management; Diversification; Risk; Performance (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11146-021-09829-1

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