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

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.