Geographic Proximity and Competition for Scarce Capital: Evidence from U.S. Reits

Abstract

The question of whether or not REITs compete for scarce capital across geographic space is deserving of attention. In this study we consider the issue of spatial competition among REITs across U.S. states in terms of the degree of interdependencies in financial capital demand. First, we motivate the issue with a theoretical model of cost minimization by a representative REIT in a given U.S. state and demonstrate that a priori it is unclear whether a REIT’s capital demand depends on capital demand of REITs in other states. Then we use spatial econometrics techniques and find empirically that REITs compete for financial capital with REITs in other states. We also find evidence of feedback (or indirect) effects, implying amplified crowding out of financial capital when other REITs in nearby states increase financial capital demand. Our findings are aligned with the Predation Hypothesis, which suggests that REIT managers might exploit neighboring REITs’ and/or investors’ financial distress as an opportunity to steal market share from them. Another key contribution of this study is that we focus on capital liquidity as opposed to stock liquidity.