REITs & market power : an analysis of market power theory and antitrust policy

Abstract

During the late 1980's and early 1990's, Real Estate Investment Trust ("REITs") accumulated large portfolios of properties. During this period, REITs were able to grow through acquisitions alone, arbitraging their low cost of capital relative to private asset valuations. This changed the real estate industry and for the first time, real estate entities have concentrated ownership in an industry traditionally characterized by fractionalized ownership. Today, there is tremendous pressure from the public markets for REITs to continue to grow. This has lead the management of REITs to seek alternative growth strategies. These strategies include cost economies of scale, branding, growth of non-real estate related revenue, vertical integration, and exertion of market power. This thesis studies market power in real estate, focusing specifically on whether REITs are currently exerting market power. The first part of the paper reviews the economic theory of market power and the antitrust laws. Economic concepts such as elasticity of supply, elasticity of demand, barriers to entry and market contestability are examined in a real estate context. The antitrust laws and the government's definitions of market power and relevant markets are reviewed and applied to the real estate industry.