REIT Economies of Scale: Fact or Fiction?

Brent Ambrose, Steven R. Ehrlich, William T. Hughes and Susan Wachter

Zell/Lurie Center Working Papers from Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania

Abstract: We test whether consolidation leads to increased profits through increased operating economies of scale. For a sample of apartment REITs, we find that economies of scale with respect to portfolio acquisitions existed in 1994 and 1995, however, this advantage has declined over time. While growth in units owned increased NOI growth more than proportionally in 1994-1995, the most recent evidence does not support a finding of increased earnings due to economies of scale. We also test and find no impact for branding or market power in increasing apartment REIT earnings. Individual REIT property and portfolio composition data are used to separate their NOI growth into the components attributable to overall market increases in rent and greater management ability. We find that REIT NOI growth rates exceed their shadow market portfolio NOI growth rates and thus REITs do generate revenue at rates that exceed the overall market.

Date: 1998-09-08
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Journal Article: REIT Economies of Scale: Fact or Fiction? (2000)
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