Local Economy, Asset Location and REIT Firm Growth

Abstract

This paper empirically examines the extent to which and how local economic growth and asset location affect firm growth based on a sample of US equity real estate investment trusts (REITs) from 2001 to 2016. Using the GDP growth rate by MSA and individual property data of REITs, we construct an aggregated measure of local economic growth for each REIT based on its asset locations in different metropolitan areas. We find that REIT firm growth (measured using both book value and market value of assets) is positively correlated with the lagged firm-level economic growth measure, indicating that REITs allocating assets in areas with higher economic growth tend to experience higher firm growth. Moreover, local economic growth enhances REIT growth mainly through the growth of equity (not through the growth of debt), as REITs with more assets in higher economic growth areas provide higher stock returns to shareholders. These findings suggest that local economic conditions have a significant impact on REIT firm growth and a REIT’s asset allocation strategy can play an important role in its long-term prospects.