Economies Of Scale

Abstract

Efficiency grows, in production and in operations, as size increases. This incentive has led to recent record levels of mergers, acquisitions, and global consolidation in such diverse industries as railroads, oil and gas refining, cement, steel, and brewing. The consolidation of the banking industry after deregulation in the 1980s has had significant ramifications for the real estate industry. Real estate investment surged initially through debt provided by banks and savings and loans. But, since 100 percent loans have disappeared, and large amounts of equity are needed to own real estate, it is likely that the real estate industry will follow the example of other capital-intensive industries and enter a period of consolidation. Evidence based on capital costs for equity REITS from 1997 and 1998 indicates that the REIT industry continues to enjoy significant economies of scale, and it appears that capital costs are the primary factor determining REIT growth.