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Economies Of Scale

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  • Brent W. Ambrose
  • Michael J. Highfield
  • Peter Linneman

Abstract

Efficiency grows, in production and in operations, as size increases. This incentive has led to recent record levels of mergers, acquisitions, and global consolidation in such diverse industries as railroads, oil and gas refining, cement, steel, and brewing. The consolidation of the banking industry after deregulation in the 1980s has had significant ramifications for the real estate industry. Real estate investment surged initially through debt provided by banks and savings and loans. But, since 100 percent loans have disappeared, and large amounts of equity are needed to own real estate, it is likely that the real estate industry will follow the example of other capital-intensive industries and enter a period of consolidation. Evidence based on capital costs for equity REITS from 1997 and 1998 indicates that the REIT industry continues to enjoy significant economies of scale, and it appears that capital costs are the primary factor determining REIT growth.

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Bibliographic Info

Paper provided by Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania in its series Zell/Lurie Center Working Papers with number 358.

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Handle: RePEc:wop:pennzl:358

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Cited by:
  1. Stephen M. Miller & Terrence M. Clauretie & Thomas M. Springer, 2005. "Economies of Scale and Cost Efficiencies: A Panel-Data Stochastic-Frontier Analysis of Real Estate Investment Trusts," Working papers 2005-21, University of Connecticut, Department of Economics.
  2. Stephen M. Miller & Thomas M. Springer, 2007. "Cost Improvements, Returns to Scale, and Cost Inefficiencies for Real Estate Investment Trusts," Working papers 2007-05, University of Connecticut, Department of Economics.

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