Structural changes, market growth and productivity gains of the US real estate investment trusts in the 1990s

Abstract

The 1990s were tumultuous times for the US Real Estate Investment Trusts (REITs) industry. Significant structural changes occurred during the decade, especially after the 1993 Revenue Reconciliation Act, which tremendously boosted the flow of funds into the system by allowing the participation of institutional investors in REITs. As a result, the industry experienced remarkable asset growth during the decade, with a large number of initial public offerings and substantial increases in market capitalization. Employing the Data Envelopment Analysis-type Malmquist index approach, this paper explores the impact of such environmental changes on productivity growth, efficiency change, and technological progress of REITs. Our results indicate that while efficiency of the REITs significantly increased, their average productivity declined and technology regressed during this decade. It appears that the typical REIT has failed to improve technically, but exerted substantial effort to catch up with the best practice ones relying mainly on aggressive growth strategies. However, our empirical results indicate that they might have overextended themselves as most began to suffer from diseconomies of scale.