Journal of Real Estate Finance and Economics, 26:1, 65±80, 2003
# 2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Cost Ef®ciency of Real Estate Investment
Trusts: An Analysis with a Bayesian Stochastic
Department of Marketing and Finance, Southeastern Louisiana University, Hammond, LA 70402, USA
THOMAS M. SPRINGER*
Department of Finance and Real Estate, Florida Atlantic University, John MacArthur Campus,
5353 Parkside Drive, Jupiter, FL 33458, USA
RANDY I. ANDERSON
Department of Economics and Finance, Baruch College, Zieklin School of Business, New York, NY 10010, USA
Using a stochastic frontier methodology that incorporates Bayesian statistics, this paper analyzes the cost
ef®ciency of real estate investment trusts (REITs) by observing the deviations of the measured costs of individual
REITs from a de®ned ef®cient cost frontier. Using 1995±1997 data, we extend the previous research in this area
and measure REIT ef®ciency more precisely by isolating random measurement error from the overall deviations
from the ef®cient cost frontier. We calculate the magnitude of each REIT's managerial inef®ciency, the industry
inef®ciency, and returns to scale. In addition, we assess speci®c characteristics of REITs for their contribution to
inef®ciency by calculating the odds ratio that a REIT with a speci®c characteristic is more ef®cient than a REIT
with an alternative characteristic. The results show that, for the years studied, REITs are relatively cost ef®cient
with most REITs facing increasing returns to scale. Additionally, the REIT's use of debt and the REIT's
management style signi®cantly affect the cost performance of REITs during the aforementioned time period.
Finally, diversi®cation across property types, as measured, does not seem to in¯uence REIT cost ef®ciency.
The owners and managers of real estate investment trusts (REITs) have a vested interest in
evaluating and understanding the operating ef®ciency of their organizations. Better
information on REIT ef®ciency and the characteristics that determine cost performance
can assist managers in improving the returns of the real estate portfolio. This paper
analyzes the X-inef®ciencies of REITs, overall industry inef®ciencies, economies of scale
and the effects that leverage, the type of management and diversi®cation across property
types have on REIT cost performance.
This paper makes three signi®cant contributions to the existing literature in this area
(see Anderson et al., 2000, for a review of the literature). First, the paper establishes a
methodology that has never been used to estimate X-ef®ciencies for REITs. Next, the
*Author for correspondence.