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The Halting Consolidation Revolution

Working paper #422
Lynne B. Sagalyn

The logic of consolidation became a controversial mantra of the real estate industry dur-ing the late 1990s. Five years later, the empirical research on economies of scale cannot resolve the debate. In an industry as fragmented as real estate, market dominance and pric-ing power is exceedingly hard to establish. That more consolidation did not take place dur-ing the REIT bear market of the late 1990s appears to weaken the essential thread of the consolidation logic, yet there is no definitive benchmark on which to evaluate what should have been a threshold level of public-to-public merger activity. The longer-term stumbling blocks to consolidation in the public real estate sector are less insurmountable structural barriers to further consolidation than intervening complications in a halting process. For the real estate industry, the analogy with other capital-intensive industries is not exact. A historic dependence on debt capital, a duality of local property markets and national cap-ital markets, special tax-advantaged ownership vehicles, and a large private market with arbitrage opportunities all make the path toward consolidation distinctive in its pattern and timing. Progress need not be sweeping to be significant.

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