Apartment REITS, asymmetric information, and the consumer interest: Measuring dichotomous outcomes in tenant satisfaction Russell N. James III Dept. of Housing & Consumer Economics University of Georgia Athens, GA, USA

Note: Several large U.S. REITs were taken private in 2007, removing them from the market cap.

REIT Growth in Europe & Asia “ We’ve seen a tremendous outpouring of capital in Asia and Europe, where REIT regimes in the U.K and Turkey have helped the rest of the world surpass the US for the first time in total number of REITs.” Michael Frankel, Global Director of REIT Services for Ernst & Young November, 2007

“ We’ve seen a tremendous outpouring of capital in Asia and Europe, where REIT regimes in the U.K and Turkey have helped the rest of the world surpass the US for the first time in total number of REITs.”

Michael Frankel,

Global Director of REIT Services

for Ernst & Young

November, 2007

International growth Feb. 16, 2008 Wall Street Journal Headline “ Asian REITs market capitalization to be $500bn in 2016 ” Today, there are approximately 83 Asian based REITs with market capitalization of approximately $87 billion, comprising 10.6% of global REITs

Feb. 16, 2008 Wall Street Journal Headline

“ Asian REITs market capitalization to be $500bn in 2016 ”

Today, there are approximately 83 Asian based REITs with market capitalization of approximately $87 billion, comprising 10.6% of global REITs

Impact for housing One part of the REIT phenomenon in many countries is residential REITs. Created private apartment companies of a size not seen before in the U.S. Historically, U.S. private rental market ownership is quite fragmented One U.S. REIT reports that it houses nearly three-quarters of a million renters each year

One part of the REIT phenomenon in many countries is residential REITs.

Created private apartment companies of a size not seen before in the U.S.

Historically, U.S. private rental market ownership is quite fragmented

One U.S. REIT reports that it houses nearly three-quarters of a million renters each year

How does REIT ownership impact residential satisfaction?

Importance of residential satisfaction An important component of overall life satisfaction (Golant 1985) Can have direct impacts on physical and psychological health (Evans 2006) Residential satisfaction is also a major factor in decisions to move (Schachter 2001) Excessive transience => problems for families, community, society

An important component of overall life satisfaction (Golant 1985)

Can have direct impacts on physical and psychological health (Evans 2006)

Residential satisfaction is also a major factor in decisions to move (Schachter 2001)

Excessive transience => problems for families, community, society

Market framework Some characteristics of rental apartments are visible to prospective tenants Price discounts, appearance, advertising Some characteristics are not Responsiveness of management to maintenance issues in the unit Enforcement of community rules (noise, etc.) Professionalism/attitude of managers Tenants typically sign 12+ month agreements (pre-commitment norms)

Some characteristics of rental apartments are visible to prospective tenants

Price discounts, appearance, advertising

Some characteristics are not

Responsiveness of management to maintenance issues in the unit

Enforcement of community rules (noise, etc.)

Professionalism/attitude of managers

Tenants typically sign 12+ month agreements (pre-commitment norms)

Satisfaction and “invisible” factors Office staff professionalism #1 component of tenant dissatisfaction in internet comment site (James, Carswell, & Sweaney, forthcoming) Hearing noise through walls/floor was the dominant structure-oriented satisfaction factor (James, 2007) 43% of renters listed “quality of maintenance” as a problem. (Ahluwalia, Crowe, & Corletta, 1992) In 2005 AHS, multifamily tenants dissatisfied with building maintenance were over 36 times more likely to rate the unit as a 1 or 2 (on a 10 point scale).

Office staff professionalism #1 component of tenant dissatisfaction in internet comment site (James, Carswell, & Sweaney, forthcoming)

Hearing noise through walls/floor was the dominant structure-oriented satisfaction factor (James, 2007)

43% of renters listed “quality of maintenance” as a problem. (Ahluwalia, Crowe, & Corletta, 1992)

In 2005 AHS, multifamily tenants dissatisfied with building maintenance were over 36 times more likely to rate the unit as a 1 or 2 (on a 10 point scale).

Asymmetric information market Initially visible factors (recruiting) Initially invisible factors (retention) Long-term advanced commitment May create a profit incentive to minimize invisible retention factors

Initially visible factors (recruiting)

Initially invisible factors (retention)

Long-term advanced commitment

May create a profit incentive to minimize invisible retention factors

Effect of REITs If low-service is profit maximizing, REITs may lower satisfaction. Smaller owners may be motivated by personal relationships to provide special services beyond pure profit and loss analysis (Kemp and Rhodes 1997) Alternatively, REITs may solve asymmetric information through branding Atomistic market results in little effective branding in apartment housing (no brand-quality proxy).

If low-service is profit maximizing, REITs may lower satisfaction.

Smaller owners may be motivated by personal relationships to provide special services beyond pure profit and loss analysis (Kemp and Rhodes 1997)

Alternatively, REITs may solve asymmetric information through branding

Atomistic market results in little effective branding in apartment housing (no brand-quality proxy).

Data Source ApartmentRatings.com©, the largest apartment ratings website in the US January 1, 2000 to January 1, 2007, respondents posted 458,142 apartment unit ratings Overall Office Staff Maintenance Construction Safety Grounds Noise Parking

ApartmentRatings.com©, the largest apartment ratings website in the US

January 1, 2000 to January 1, 2007, respondents posted 458,142 apartment unit ratings

Overall

Office Staff

Maintenance

Construction

Safety

Grounds

Noise

Parking

Value in on-line consumer ratings data? On-line consumer ratings successful in predicting sales in motion pictures (Dellarocas, Farag, and Zhang 2008) , video games (Bounie et al. 2005) , cameras (Jiang and Wang 2007) , and books (Chevalier and Mayzlin 2006; Huang and Chen 2006). Far more influential in consumer behavior than traditional advertising (Bickart and Schindler 2001) and have a significant effect on consumers’ evaluations of brand quality (Chiou and Cheng 2003)

On-line consumer ratings successful in predicting sales in motion pictures (Dellarocas, Farag, and Zhang 2008) , video games (Bounie et al. 2005) , cameras (Jiang and Wang 2007) , and books (Chevalier and Mayzlin 2006; Huang and Chen 2006).

Far more influential in consumer behavior than traditional advertising (Bickart and Schindler 2001) and have a significant effect on consumers’ evaluations of brand quality (Chiou and Cheng 2003)

REITs definition Identified all apartment buildings owned by the 10 largest US residential REITs. These ten REITs constituted 92% of the total market capitalization for all publicly traded residential REITs 3 “branding” REITs (7,662 ratings) 7 “non-branding” REITs (29,930 ratings)

Identified all apartment buildings owned by the 10 largest US residential REITs.

These ten REITs constituted 92% of the total market capitalization for all publicly traded residential REITs

3 “branding” REITs (7,662 ratings)

7 “non-branding” REITs (29,930 ratings)

Branding REITs A branding residential REIT aggressively pursued a branding strategy including the consistent use of the company name in each local apartment community name. Post Properties buildings used names such as “Post Parkside,” “Post Corners,” and “Post Glen.” Avalonbay Communities used names such as “Avalon Bellevue,” “Avalon at Nob Hill,” and “Avalon Towers.” Camden Property Trust carried names such as “Camden Legacy,” “Camden Parkside,” and “Camden Vineyards.”

A branding residential REIT aggressively pursued a branding strategy including the consistent use of the company name in each local apartment community name.

Post Properties buildings used names such as “Post Parkside,” “Post Corners,” and “Post Glen.”

Avalonbay Communities used names such as “Avalon Bellevue,” “Avalon at Nob Hill,” and “Avalon Towers.”

Camden Property Trust carried names such as “Camden Legacy,” “Camden Parkside,” and “Camden Vineyards.”

Categories REIT Apts. Branding REIT Apts. Non-branding REIT Apts. Non-REIT Apts. Recommend to a friend 41.8%*** 43.5% 41.3%*** 43.1% Overall rating 2.72 2.84*** 2.69*** 2.73 Office staff 2.75*** 2.8 2.73*** 2.79 Maintenance 3.00*** 3.14*** 2.96 2.97 Construction 2.79 2.93*** 2.76*** 2.8 Safety 2.91 3.02*** 2.88*** 2.91 Grounds 3.09*** 3.27*** 3.05** 3.02 Noise 2.87*** 2.87 2.87*** 2.9 Parking 2.85*** 2.84*** 2.85*** 2.92

Other descriptive stats Categories REIT Apts. Branding REIT Apts. Non-branding REIT Apts. Non-REIT Apts. Rent (2006 $) $1,119*** $1,311*** $1,070*** $901 Bedrooms 1.68*** 1.63*** 1.69*** 1.73 Bathrooms 1.35*** 1.36*** 1.35*** 1.32 Number of ratings 37,592 7,662 29,930 420,550

Ordered logit regression Control for rent, bedrooms, and bathrooms Intercepts not reported here Version 1: REITs v. Non-REITs Dummy Version 2: Branding REITs, Non-Branding REITs, Non-REITs Dummies

Control for rent, bedrooms, and bathrooms

Intercepts not reported here

Version 1: REITs v. Non-REITs Dummy

Version 2: Branding REITs, Non-Branding REITs, Non-REITs Dummies

Dependent Variable REIT Branding REIT Non-brand REIT Rent ($100 units) Bedroom Bathroom Overall -0.052 *** 0.014 *** -0.156 *** 0.209 *** 0.111 *** -0.095 *** 0.015 *** -0.155 *** 0.209 *** Office staff -0.049 *** -0.007 *** -0.097 *** 0.105 *** 0.065 * -0.078 *** -0.007 *** -0.096 *** 0.105 *** Maintenanc -0.005 0.011 *** -0.166 *** 0.191 *** 0.183 *** -0.054 *** 0.010 *** -0.164 *** 0.191 *** Building -0.056 *** 0.020 *** -0.192 *** 0.250 *** 0.147 *** -0.107 *** 0.019 *** -0.191 *** 0.249 *** Safety -0.086 *** 0.035 *** -0.131 *** 0.198 *** 0.039 -0.117 *** 0.034 *** -0.130 *** 0.198 *** Grounds 0.007 0.038 *** -0.202 *** 0.288 *** 0.237 *** -0.052 *** 0.037 *** -0.201 *** 0.288 *** Noise -0.059 *** 0.004 *** -0.157 *** 0.153 *** -0.023 -0.068 *** 0.004 *** -0.157 *** 0.153 ***

Zip Code (postcode) Fixed Effects It may be that certain REITs simply choose better/worse areas. A zip code fixed effects analysis controls for all stable characteristics in zip code region, as comparisons are made only among properties located within the same zip code. Mean zip code population – 30,000

It may be that certain REITs simply choose better/worse areas.

A zip code fixed effects analysis controls for all stable characteristics in zip code region, as comparisons are made only among properties located within the same zip code.

Mean zip code population – 30,000

Zip Code (postcode) Fixed Effects Independent variables were the differences between a particular observation’s value and the average value within the zip code. Used a Generalized Estimating Equation to estimate the ordered logit model, with standard errors calculated using the robust method of White (1980). Disadvantage: lost information, as only intra-zip code variations are considered.

Independent variables were the differences between a particular observation’s value and the average value within the zip code.

Used a Generalized Estimating Equation to estimate the ordered logit model, with standard errors calculated using the robust method of White (1980).

Disadvantage: lost information, as only intra-zip code variations are considered.

Deviations from Zip Code Averages Dependent Variables Branding REIT Non-branding REIT Rent ($100 units) Bedroom Bathroom Overall 0.413 *** -0.083 * -0.023 * -0.094 * 0.192 *** Office staff 0.437 *** -0.010 -0.029 ** -0.037 0.118 ** Maintenanc 0.414 *** -0.099 ** -0.023 * -0.101 ** 0.188 *** Building 0.384 *** -0.123 *** -0.010 -0.148 *** 0.197 *** Safety 0.328 ** -0.093 * -0.004 -0.122 ** 0.199 *** Grounds 0.439 *** -0.157 *** 0.002 -0.147 *** 0.212 *** Noise 0.261 * 0.002 -0.025 * -0.086 * 0.160 *** Parking 0.075 0.001 -0.024 ** -0.093 ** 0.159 *** Recomm. to a friend 0.370 *** -0.034 -0.045 *** -0.058 0.204 ***

Comments In a market with asymmetric information, low-quality products may drive out higher-quality products except where some reputation or branding mechanism can be effectively implemented to communicate quality (Akerloff 1970; Rothschild and Stiglitz 1976) REITs may indeed be choosing to pursue one of these two theoretically profit-maximizing pathways. High-service branding Hidden low-service

In a market with asymmetric information, low-quality products may drive out higher-quality products except where some reputation or branding mechanism can be effectively implemented to communicate quality (Akerloff 1970; Rothschild and Stiglitz 1976)

REITs may indeed be choosing to pursue one of these two theoretically profit-maximizing pathways.

High-service branding

Hidden low-service

Solutions? Minimum standards Beneficial, but require ongoing enforcement expense and persistent political will Don’t help the renter living in a unit that is physically “habitable,” but where poor management makes the residential experience undesirable

Minimum standards

Beneficial, but require ongoing enforcement expense and persistent political will

Don’t help the renter living in a unit that is physically “habitable,” but where poor management makes the residential experience undesirable

Solutions? Incorporate the negative community externalities into the provider’s cost structure. Dissatisfaction => excessive transience has negative impacts for families and communities. Differential property tax system based upon the resident’s length of occupancy. Resident residing for over 1 or 2 years, generates a reduced property tax bill. This differential cost would then incentivize the retention of residents over recruiting. Can be revenue neutral

Incorporate the negative community externalities into the provider’s cost structure.

Dissatisfaction => excessive transience has negative impacts for families and communities.

Differential property tax system based upon the resident’s length of occupancy.

Resident residing for over 1 or 2 years, generates a reduced property tax bill.

This differential cost would then incentivize the retention of residents over recruiting.

Can be revenue neutral