Today’s edition sponsored by: JPI, Authentic, Robora, Berkadia’s “Inside the Deal” CRE podcast, and Foxen.
Who saw this coming?
Uh, WOW! Didn’t see this one coming: Equity Residential and AvalonBay are discussing a potential merger, according to Bloomberg.
On the one hand, it feels like the kinda thing that some activist investors push and then leak to media. On the other hand, REITs are getting beat up right now in the (irrational?) public markets. Their stocks trade below net asset value, which means the real estate owned by AVB and EQR is worth far more than the sum of the parts, the companies themselves. (Quick disclaimer: This is not investment advice at all. Just informational.)
A merger could drum up some fresh enthusiasm among investors who tend be story-driven. (It would also further erode the number of publicly traded apartment REITs, already down by ~20 over the last 15 years and by even more from early 2000s peaks). On cue, Wall Street is already cheerleading the news, boosting stock prices for EQR and AVB when the news broke after hours.
Could a combined company bring some synergies? Absolutely, especially on the expense side. But would a combined AVB+EQR command more pricing power on rents? Eh, that seems far-fetched, but that’s the spin we’re already getting.
The Bloomberg article states such a merger “would have broad implications for the US housing market as affordability has become a top political and economic issue in the country.” We’ll likely see many more such comments, and it’s an absolutely terrible take. It’s instant armchair analysis totally detached from data (even if some policymakers start parroting the same narrative, which wouldn’t be terribly surprising in today’s climate.)
[Continued below]
Here’s the reality (with no inside knowledge of potential deal):
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First, if you don’t already know, this is critical context: Equity and AvalonBay cater to the very high end of the rental market, the true “renters by choice” demographic making six-figures and spending ~20% or less on rent. This isn’t where affordability issues are concentrated, and pretending like that’s the problem distracts from the real issue – a severe shortage of low-income housing for low-income families.
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But what about market share? Equity and AvalonBay are big names, sure, but – like everyone else in rental housing – they’re small in terms of market share. Both own less than 0.5% of U.S. apartments despite ranking high on NMHC’s Top 50 leaderboard.
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Some quick math (using market counts from their most recent 10-K filings) shows the combined entities would own less than 4% of apartments in every market they operate. At the high end, they’d combine for 3.6% to 3.8% in the metro areas of Boston, D.C., Bay Area and Seattle, 2% in Southern California and nearly 1% in New York. (Both companies pivoted heavily to big coastal MSAs in the 2010s, and have only recently started re-entering markets like Denver, Dallas, Atlanta, Austin and South Florida.)
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Of course, market share will vary by submarket/neighborhood – and will be higher at the Class A level catering to high-income renters. But no matter how you break it down, it’s still a far more fragmented market than probably any other major industry. Class A renters have ample options today thanks to ample supply in the market, only a small fraction of which was built by AVB and EQR. And again, remember: Class A isn’t where the affordability challenges are concentrated at all.
That said, we’re seeing more and more evidence that higher geographic concentrations reduces operating expenses. REITs and their private sector peers have been saying this for a long time. Scale in a metro area allows for pooling of shared resources (leasing, maintenance, vendor contracts, etc.), which reduces costs and boosts NOI.
Expense management — not pricing power — is the more likely potential advantage here.
BTW: It’s worth noting that EQR and AVB worked together to acquire a former big name REIT – Archstone (then privately owned under Lehman Brothers) – back in 2012, each taking a subset of the Archstone portfolio. A potential merger would be something of a bow on the relationship, bringing together what are/were three big names in the apartment REIT world.
Anyway, I have no idea whether this potential merger will go through. But should be interesting to watch.
— My Latest Posts on LinkedIn —
Here are some recent posts if you missed them:
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Give “mainstream media” some credit for getting the facts out there on build-to-rent and institutional SFR investors.
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While apartment completions are dropping off, there are still a LOT of active lease-ups trying to reach stabilized occupancy.
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Encouraging sign: 76 members of Congress signed onto a letter opposing the ROAD to Housing’s limits on build-to-rent construction.
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If you just trended 3.5% annualized rent growth from pre-COVID to today, you’d land right at today’s average effective rents in the Sun Belt and Mountain markets.
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There’s suddenly very little pricing premium for apartments built in the 2020s compared to those built in the 2010s.
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Apartment supply is falling especially hard in urban submarkets.
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A former U.S. solicitor general published a paper concluding that the ROAD to Housing Act’s investor bans are “constitutionally flawed thrice over.”
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Aimco founder and multifamily legend Terry Considine is still at it.
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The latest NMHC Top 50 rankings show that multifamily ownership remains incredibly fragmented.
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Peak apartment completions are now in the rearview mirror.
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Early numbers on the spring leasing season are ho-hum: not bad, not great.
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The build-to-rent construction pipeline is shut down thanks to potential legislation.
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Every Midwest apartment investor should have this slide in their decks.
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Camden is promoting its next generation of homegrown leadership into the C-suite.
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Senator Warren is expanding her sights to apartments and manufactured housing.
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Could the ROAD to Housing Act die on the vine? The latest news suggests it’s possible.
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Rental affordability is a deeply bifurcated issue of haves and have nots, as the latest Harvard report on rental housing shows.
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Who remembers ranch apartments? Equity Residential used to have a lot of them.
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Most policymakers (and most Americans, too) probably have no idea that the U.S. LOST more than 1 million single-family rental homes over the past decade.
— Now Spinning on The Rent Roll Podcast —
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Thank you to everyone who’s made The Rent Roll part of your weekly routine! New episodes are released every Thursday morning.
Find us on YouTube, Spotify, Apple and Amazon. Recent episodes:
Episode 82: Spring Leasing + PropTech Update with 20 for 20’s Dom Beveridge
Episode 81: Finding Under-Loved Markets with Bonaventure’s Dwight Dunton
Episode 80: Terry Considine Isn’t Done: The Multifamily Legend’s Next Act with Big 4’s Terry Considine
Episode 79: Q2 Multifamily Update & Outlook with Cushman & Wakefield’s Sam Tenenbaum
Episode 78: The Bizarre Push to Eliminate BTR with Quinn Residences’ Richard Ross and Up for Growth’s Mike Kingsella
Episode 77: Sub-Institutional Multifamily Update, with Adaptive Realty’s Moses Kagan and ReSeed Partners’ Rhett Bennett
Episode 76: Affordable Housing Isn’t What You Think with Dominium’s Nick Andersen
Episode 75: The Evolution of Equity Residential with EQR’s Mark Parrell
Episode 74: Inside Multifamily’s Biggest Family Business with Morgan Properties’ Jason Morgan
Episode 73: Takeaways from SFR REIT Calls + the Outlook for Rental Housing Investment with Principal’s Rich Hill
