Journal of Real Estate Finance and Economics, 28:1, 81±95, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Performance of REIT-owned Properties and the
Impact of REIT Market Power
PETER J. BRADY
U.S. Department of Treasury
MICHAEL E. CONLIN
Using a unique, detailed panel dataset of lodging properties, this paper tests whether properties owned by real
estate investment trusts (REITs) perform differently than other properties and whether the concentration of real
estate ownership brought about by REITs has increased market power. Our results demonstrate that REIT-owned
properties, which are primarily mid-scale and high-end hotels, did not perform signi®cantly better, on average,
than other mid-scale or high-end hotels in the same geographic area. However, because of the superior overall
performance of mid-scale and high-end hotels, REIT properties as a whole did perform better, on average, than
non-REIT properties. From these results we conclude that the superior performance of REIT properties was due to
the fact that REITs tended to acquire properties in market segments that performed well; REIT ownership in itself
does not appear to have increased performance. Our results also suggest that the superior performance of the
market segments in which REITs have a signi®cant presence is not attributable to the market power of the REITs.
Key Words: REITs, hotels, competition, market power
Real estate investment trusts (REITs) are corporations, trusts or associations that meet
certain criterion stipulated in the tax code and which elect to be treated as a REIT for tax
purposes. Similar to mutual funds, REITs pay no corporate income tax on earnings
distributed to shareholders.
Between 1990 and 2002, REIT market capitalization
increased from $9 billion to $154 billion.
Over the same period, assets under management
have grown from $44 billion to $340 billion.
REIT growth was accomplished primarily
by acquiring existing income-producing properties from individuals and partnerships. By
funneling new funds into real estate, REITs are credited with helping the commercial
property sector recover after the credit crunch of the early 1990s. REITs now hold a
sizeable share of income-producing properties and play an important role in the real estate
However, the full signi®cance of such a large transfer of commercial property
from private individuals and partnerships to publicly traded REITs is not well understood.
When REITs were rapidly growing in the mid-1990s, a popular belief was that the
transfer of property to large, publicly traded REITs would improve the management of the