REIT economies of scale: Fact or fiction?

The real estate industry has recently witnessed significant and pervasive c onsolidation with further growth and consolidation generally viewed as inev itable. For example, between 1990 and 1997, growth in average net real esta te investments by large REITs outpaced growth in average net real estate in vestments by small REITs by 13 percent. However, no systematic study of the benefits of this consolidation exists. This research studies whether or no t there are gains to consolidation due to economies of scale from size, bra nd imaging, and informational gains from geographic specialization. Our sam ple consists of 41 multifamily equity REITs, for whom financial and propert y level data are available in the SNL REIT Database. Using this data, we co nstruct shadow portfolios that mimic each REIT's exposure to changes in loc al market conditions. Our results show no size economies, that branding in real estate is allusive, and that geographic specialization, in agreement w ith Gyourko and Nelling (1996), has no significant benefit.