Academic journal article Journal of Real Estate Literature

Operating Efficiencies in Real Estate: A Critical Review of the Literature

Academic journal article Journal of Real Estate Literature

Operating Efficiencies in Real Estate: A Critical Review of the Literature

Article excerpt

Abstract

Both the real estate brokerage and the real estate investment trusts (REIT) industries have experienced dramatic structural and institutional changes in the last few years. These changes have brought the issue of operating efficiencies to the forefront. In this article, we summarize and critically review the operating efficiency literature for the real estate industry. In particular, we focus on X-efficiency, economies of scale and economies of scope for the real estate brokerage services market and for REITs. In addition, we attempt to identify future research paths that may extend and improve the current literature on real estate managerial efficiencies.

Introduction

Due to the rapidly changing market structure of the financial services industry, academics and practitioners regard this sector as an important one to monitor. The structural changes to the real estate industry represent some of the most dynamic transformations in the financial services sector.

Some of the important structural changes to the real estate brokerage industry include the rapid consolidation of the industry and new intermediary relationships such as the buyer's agency, disclosed dual agency, facilitators and other non-agency brokerage contracts. The market has become more reliant on interactive multimedia marketing tools like the Internet and email. Finally, brokerage firm managers must make difficult decisions such as whether or not to franchise their organization or to participate in affinity programs. Changes and decisions such as these are likely to alter the product mix and competitiveness in the market, which will in turn, affect the performance and efficiency levels of brokerage firms.

In the real estate investment industry, real estate investment trusts (REITs) have become a dominant form of real estate equity ownership.1 In recent years, the REIT industry has both grown and consolidated. Compared to the recent past, there are more REITs and they are larger in size. Insight into the economics of this activity can be gained through a study of REIT efficiency. If REITS are becoming more efficient through expansion, then the expansion process is likely to continue.

The purpose of this article is to critically examine existing research relating to the operational efficiency of real estate firms and REITs.2 Efficiency studies in real estate have, for the most part, focused on residential brokerages, REITs and real estate lending. In addition, we try to identify future research paths that may extend and improve the current literature on real estate managerial efficiencies.

A Primer on Economies of Scale, Economies of Scope and X-Efficiency

Economies of Scale: Traditional Estimation

To estimate economies of scale traditionally entails estimation of a cost function with empirical data and measuring the slope of the cost function for a given level of firm output. Economies of scale for an industry can be measured both by overall scale economies and product specific scale economies. For a multi-product firm, overall economies of scale exist when total costs increase disproportionately less than output. To be scale efficient, a firm must operate at the minimum of a Ushaped average cost curve. At this point, a firm cannot decrease its average costs by either increasing or decreasing output levels. If markets are competitive, firms that are not optimally sized will alter their output until they are scale efficient. Product-specific economies of scale examine the impact on cost by altering the production of a particular output.

There are several problems associated with estimating economies of scale from a cost function. First, a specified functional form may not sufficiently incorporate the technologies of different firm types into the model. For instance, a franchise brokerage may have different technologies than an independent firm. Also, if important variables are omitted from the model, or if additional variables need to be included to control for differences between firms, the estimated scale economies may not be robust. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.