Market-level tenant default risk on residential REIT operational efficiency

Selecting which geographical markets a REIT serves is an important managerial decision that is expected to significantly impact firm performance. This paper investigates whether holding properties in areas with greater incidence of evictions impacts REIT operational efficiency. Using a comprehensive database of eviction lawsuits in the United States in combination with a time-series of residential REIT portfolio holdings, we construct REIT-year eviction exposure scores to analyse whether more exposure to areas with high aggregate eviction rates is a risk factor affecting REIT efficiency. We posit that market-level tenant default risk captures a locational risk dimension that should be considered in REIT portfolio management. Our results show that REITs with more exposure to markets with high tenant default risk observe higher operational inefficiencies after controlling for relevant firm characteristics and local market factors. These results are robust to multiple model specifications that control for potential endogeneity and omitted variable biases. Our findings have significant implications for REIT managers and investors, suggesting that the choice of property locations should consider aggregate tenant default risk as a determinant factor in residential REIT performance.