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Economies of Scale and the Operating Efficiency of REITs: A Revisit

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Listed:
  • Michael J. Highfield

    (Mississippi State University)

  • Lily Shen

    (Clemson University)

  • Thomas M. Springer

    (Clemson University)

Abstract

Building on past research regarding the operating efficiency of Real Estate Investment Trusts (REITs) and recognizing the substantial changes in this industry since the turn of the millennium, we examine REIT efficiency over the period 2001–2015. Using both time-varying stochastic frontier and linear models of costs, revenues, and performance measures, we find evidence showing that the REIT industry is slowly moving away from both cost and revenue efficiency over time; however, size remains positively correlated with efficiency. Despite the rapid expansion of asset sizes and evidence of diminishing efficiencies of scale, larger REITs still enjoy comparative advantages over smaller REITs in both revenue (production) and costs. We also find evidence that post-recession efficiencies exceed pre-recession efficiencies, and we document modest evidence of the “weeding-out” of inefficient enterprises during the market downturn. The results suggest, through a diverse set of measures, that additional efficiency opportunities for REITs may be achievable through continued growth and consolidation.

Suggested Citation

  • Michael J. Highfield & Lily Shen & Thomas M. Springer, 2021. "Economies of Scale and the Operating Efficiency of REITs: A Revisit," The Journal of Real Estate Finance and Economics, Springer, vol. 62(1), pages 108-138, January.
  • Handle: RePEc:kap:jrefec:v:62:y:2021:i:1:d:10.1007_s11146-019-09741-9
    DOI: 10.1007/s11146-019-09741-9
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    References listed on IDEAS

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    Cited by:

    1. Joseph R. Nicholson & James A. Stevens, 2022. "REIT Operational Efficiency: External Advisement and Management," The Journal of Real Estate Finance and Economics, Springer, vol. 65(1), pages 127-151, July.
    2. Mansley, Nick & Wang, Zilong & Weng, Xiaoyu & Zhang, Wenjing, 2023. "Good growth, bad growth: Market reaction to capital raising for REIT expansion," International Review of Financial Analysis, Elsevier, vol. 86(C).
    3. Paul Anglin & Jianxin Cui & Yanmin Gao & Li Zhang, 2021. "Analyst Forecasts during the COVID-19 Pandemic: Evidence from REITs," JRFM, MDPI, vol. 14(10), pages 1-21, September.

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    More about this item

    Keywords

    REITs; Economies of scale; Operating efficiency;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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