The Journal of Real Estate Finance and Economics
Volume 26, Issue 1, Article 4 (Abstract)
Title:	The Cost Efficiency of Real Estate Investment Trusts: An Analysis with a Bayesian Stochastic Frontier Model
Author:	Danielle Lewis, Thomas M. Springer and Randy Anderson
Abstract:	Using a stochastic frontier methodology that incorporates Bayesian statistics, this paper analyzes the cost efficiency of real estate investment trusts (REITs) by observing the deviations of the measured costs of individual REITs from a defined efficient cost frontier. Using 1995-97 data, we extend the previous research in this area and measure REIT efficiency more precisely by isolating random measurement error from the overall deviations from the efficient cost frontier. We calculate the magnitude of each REIT's managerial inefficiency, the industry inefficiency, and returns to scale. In addition, we assess specific characteristics of REITs for their contribution to inefficiency by calcluating the odds ratio that a REIT with a specific characteristic is more efficient than a REIT with an alternative characteristic. The results show that, for the years studies, REITs are relatively cost efficient with most REITs facing increasing returns to scale. Additionally, the REIT's use of debt and the REIT's management style significantly affect the cost performance of REITs during the aforementioned time period. Finally, diversification across property types, as measured, does not seem to influence REIT cost efficiency.
Keywords:	REIT efficiency, REIT economies of scale, stochastic frontier model, cost efficiency