Equity Residential and AvalonBay: Inside the $71B Mega Multifamily Merger – Commercial Observer
On May 21, shortly before Memorial Day weekend, participants in public real estate markets awoke to a truly remarkable headline.
AvalonBay Communities, the owner of 98,000 apartments and with a market capitalization of $25 billion, would be merging with Equity Residential, one of the oldest real estate investment trusts (REITs) in America, holding 85,000 apartments and $20.5 billion assets under management.
“The initial reaction was, ‘Holy cow, two of the largest, most storied apartment REIT companies nationally are choosing to merge,’” said Allan Swaringen, president and CEO of JLL Income Property Trust, a REIT. “These are the two biggest gorillas in the multifamily marketplace who decided to come together. It’s a true merger of equals.”
With a total enterprise value of roughly $71 billion, the deal marks the single largest public REIT merger ever, dwarfing the 2022 deal between Prologis and Duke Realty valued at $26 billion.
The two apartment firms announced in late July their new company will be called Vivmark Residential.
Once the all-stock merger is complete later this year, this new multifamily behemoth will own more than 180,000 rental apartments across more than 600 communities in the U.S. — mainly in the largest coastal cities — plus another 10,800 apartments and $4.4 billion under construction across 32 communities, of which 50 percent will hold an affordable or mixed-income component, the firms noted in a shared release.
“My first reaction is they should’ve done it a few years ago. It’s a very natural merger,” said Matt Frankel, a stock market analyst at the Motley Fool, who noted that roughly 95 percent of Equity Residential and AvalonBay’s businesses operate out of the same markets, mainly New York, San Francisco, Boston and Washington, D.C. Equity is headquartered out of Chicago, while AvalonBay calls Arlington, Va., home.
“This would be like if Visa or Mastercard were allowed to merge. They’re businesses of the same size and they specialize in the same markets and in the same price points on those apartments,” Frankel added. “The combination just makes a whole lot of sense.”
Timing matters, of course.
During the years before and after the COIVD-19 pandemic (think 2019 to 2022), Equity and AvalonBay had no need to merge, as capital remained cheap. That meant they could raise all the debt they needed for expansion through corporate bond notes, even as apartment rents rose faster than the cost of construction, which inflation hadn’t yet pummeled.
Moreover, as publicly traded REITs, the two firms are heavily sensitive to interest rate fluctuations, as their stock prices are often pressured by high interest rate environments, when debt costs are higher across the board and operations cost more.
“Now we have a high interest rate environment, rents are moderating in a lot of markets, so it becomes important to find efficiencies where you can,” said Frankel. “And that’s a big motivating factor behind this deal: to find efficiencies between the two businesses.”
The two firms noted that they anticipate $175 million in cost synergies, or savings, within 18 months of the deal closing. Equity Residential and AvalonBay Communities did not respond to requests for comment on the transaction.
David Auerbach, chief investment officer at Hoya Capital, an Securities and Exchange Commission-registered investment adviser and research firm, said the merger will improve operating density in core markets while broadening the growth runway across newer expansion regions, including a potentially improved access to capital from corporate bondholders.
“The only thing I see working against them is the loss of human capital. There will unfortunately be some expandable people when it comes to this,” said Auerbach.
But there are several complications that could put the merger at risk of eventually becoming a corporate cautionary tale.
“The immediate reaction is that this will be held up by the government. The government won’t let these two get together,” said Auerbach. “This deal wasn’t on anyone’s bingo cards when it was announced. This is Marriott and Hilton, the biggest of the biggest players coming together.”
Auerbach emphasized, however, that despite the two largest residential REITs forming their own company, the new firm will still own less than 1 percent of the U.S. housing market, making the marriage less onerous from a regulatory point of view, as the apartment market remains highly fragmented among institutional ownership, private ownership and mom-and-pop landlords.
But the merger comes at a time when REITs have been whipsawed by high Treasury yields (the 10-Year Treasury sits of 4.6 percent) and almost incessant disruption: up-and-down jobs numbers, stubborn inflation, war with Iran, the subsequent energy cost-spiking closure of the Strait of Hormuz, and a schizophrenic stock market — all of which have impacted REITs.
“The broad market investor reaction to the deal has been relatively neutral,” said Swaringen, who noted the stock performance of both firms has been exactly in line with the overall multifamily REIT sector.
Since the merger, Equity Residential’s stock moved from $65.76 per share on May 21 to approximately $67.57 by Aug. 4, an increase of 2.7 percent; AvalonBay’s stock has moved from $184.11 per share on May 21 to $188.81 by Aug. 4, an increase of 2.5 percent.
“No investors have jumped on this and said, ‘I have to get in now,’” Swaringen said. “The market has not piled into this as they did with SpaceX.”
The pressure is now on AvalonBay CEO Benjamin Schall, who will serve as president, CEO and trustee of Vivmark Residential, while Mark Parrell, CEO of Equity for the last eight years, retires at age 59 following the transaction’s close, according to CNBC.
Alexander Goldfarb, managing director and senior research analyst at investment bank Piper Sandler, observed that apartment REITs had excess growth over the last few years, and that both companies suffered from their big city, coastal exposure during the pandemic shutdowns and associated rent moratoriums. He emphasized that the merger might be dilutive if they double the size of the company, double cash flow, and also double a capital-intensive development pipeline.
“The rationale for a merger can’t just be bigger is better. It has to be faster earnings growth, and that’s still to be determined,” said Goldfarb. “But the onus is on the combined entity to show that one plus one equals three, not just one plus one equals two — then it’s no different than the companies standing alone.”
Sam Zell’s baby
Equity Residential’s origins stretch back to Ann Arbor in the 1960s. That’s when a scrappy Jewish kid whose parents barely escaped Nazi-invaded Poland began managing local apartment properties in exchange for free room and board at the University of Michigan.
That student, Sam Zell, later earned his law degree from the school and eventually turned the 4,000 apartments he owned and operated in Ann Arbor by his mid-20s into the foundation he needed to purchase larger apartment buildings and condominiums in Toledo, Ohio; Chicago; and Reno, Nev.
In 1968, this portfolio became Equity Residential. By 1993, the company owned 22,000 units and went public as a REIT. Through numerous mergers and acquisitions — Wellsford Residential, Evans Withycombe Residential, Lincoln Property Company, Merry Land, Lexford Residential Trust — Equity owned more than 220,000 apartment units by 2001. By the time he died in 2023, the 81-year-old Zell was one of the richest men in America.
“When I heard the announcement [about Avalon and Equity], in my head I said, ‘This is a classic Sam Zell move,’ a true tribute to one of real estate’s greatest minds and greatest thinkers,” said Vince Norris, executive managing director of multifamily investment sales at Northmarq. “It’s a classic Sam Zell move because he’s a self-proclaimed deal junkie, and creating the largest multifamily REIT in the country doesn’t get much better than that.”
The origins of AvalonBay, while not quite as swashbuckling, are no less significant.
In 1978, entrepreneur Mike Meyer formed Bay Apartment Communities in San Jose, Calif., going public in 1994 with only 2,400 units during the early 1990s REIT boom. In 1993, Richard Michaux and Chuck Berman led the multifamily development spinoff of Avalon Properties from the venerable Trammell Crow Company, going public the next year, and merging with Bay Apartment Communities in 1998 to create AvalonBay Communities, a bicoastal apartment REIT with 40,500 units.
“Avalon is an upper middle-class operator, they’re known more for client services, residence services, they have a bigger development pipeline and are more ground up on new product,” explained Norris. “Equity Residential was more focused on buying existing apartment communities in high barrier to entry markets.”
Ironically, the seeds of the merger were planted in an earlier deal, when Equity and AvalonBay bought the Archstone apartment portfolio from Tishman Speyer and Lehman Brothers Holdings for $16 billion in 2012. The two firms split the deal 60-40, with Equity scooping up 23,110 apartment units and AvalonBay walking away with 22,222 apartment units.
“The two groups bought and divided the Archstone portfolio 13 years ago. They have prior experience in working together and did so successfully with Archstone,” said Norris. “It’s a merger of equals, and it’s a continuation of a partnership where each one brings separate strengths to the table.”
If Equity has always been known across the industry as the most cost-efficient and expense-focused operator in the industry — a tribute to Zell’s legacy as a massive cost-cutter — AvalonBay made its name in the upper market, acquiring and developing more luxurious properties, newer assets and true Class A properties. Now that the two are one firm, it will be imperative that their two-tiered management figures out which assets to invest in, and hold onto, without harming each other’s existing assets in the same geographies.
“They overlap in like 95 percent of their geographies, and the entire industry, the bear market of the last four years, has been focused on generating alpha through operations components, and that’s usually done through local scale,” explained Brad Dillman, founder and principal of Florey Street Advisors, who emphasized that the enormous coastal exposure across both firms positions them away from the lucrative Sun Belt, which each came rather late to in the 2020s.
“It’s a huge concentration, with even more exposure to the coast, and they will have to make a pivot back to the Sun Belt as it ascends in the future,” Dillman said. “They will need to turn and make that execution, but can they? They’ll be in a more difficult position. Either group might have merged with Camden [Property Trust], which has Sun Belt exposure, but they decided to double down on the coasts.”
But the benefits of the deal are manifold — perhaps to Vivmark Residential renters more than anyone.
“Cost efficiencies will allow the combined organization to keep a handle on rents and carve out expense savings at a site level from internal management and strike better deals through lower operating expenses,” said Norris. “Those reductions will allow the combined organization to keep a lid on rents and maybe, in some cases, lower rents.”
While Auerbach mused that the late Sam Zell would likely be wondering, “Did this deal maximize shareholder returns? Did they get the best deal they possibly could?” he would likely be pleased that his oldest REIT is walking off into the sunset as the largest apartment firm in the country.
“It is going to work. I don’t see any reason why it won’t work. It’s two long-tenured residential platforms that are established, firing along, and got the playbook in place,” Auerbach said. “This is about as boring as it gets: It’s owning, managing and developing apartment properties. This isn’t rocket science.”
Risks and rewards
And, yet, if history has taught us anything, it’s that major corporate mergers in the United States of America can always go wrong.
The question for Equity Residential and AvalonBay Communities, is how this might turn for the worse. The first and largest and most obvious risk is heightened regulatory scrutiny stemming from antitrust concerns, especially at a time when Washington is emboldened to improve the affordability situation surrounding America’s existing housing crisis.
“Both parties have evoked populist tones, so there will be a lot of political pressure, if not oversight, on the deal,” said Piper Sandler’s Goldfarb.
Swaringen noted that Congress just passed the 21st Century ROAD to Housing Act, a law that made a particular example of private equity’s institutional ownership of single-family houses. The law limits the industry in what it can own and for how long in an attempt to cater to traditional ownership of single-family housing.
“Owning 1 percent of the market is not a true antitrust risk. But in the current climate in Washington, housing is quite a lightning rod for legislation,” said Swaringen. “Institutional ownership of single-family rentals is less than 3 percent [of the market] but [legislators] limited that, and it was totally about optics.”
But Frankel at the Motley Fool and Goldfarb both noted that while the Hart-Scott-Rodino Antitrust Improvements Act of 1976 does not fully exempt real estate from its purview, the law does provide exemptions to direct real estate asset acquisitions of office buildings, apartments and hotels, giving these deals broad consideration that ownership of those assets does not harm competing businesses.
“In submarkets in New York and San Francisco, [Vivmark Residential] will control over 30 percent of the supply of apartments, and that could trigger an anticompetitive review,” said Frankel. “But, on a local level, we don’t see [the government] block deals. If anything, they might need to unload apartment buildings or units to get below a certain threshold [to satisfy] regulators.”
There are other potential pitfalls beyond government interference.
Both Swaringen and Dillman considered how these are two firms whose corporate cultures have been autonomous as public companies for 30 years, and that merging them together could be culturally challenging, with organizational friction emerging from a dual headquarters model, a split board, and the resentment that will undoubtedly emerge from the impending layoffs in the name of avoiding corporate redundancies.
Goldfarb, on the other hand, pointed to the threat that pressure from within could eventually emerge if the new entity doesn’t show faster earnings growth right out the gate.
“Just because it’s a bigger share of the index, that in and of itself doesn’t mean that the company should command a premium valuation or outperform others,” he said. “There’s a lot of big companies out there that underperform smaller companies, and ultimately it comes down to cash flow.”
This cash flow and valuation element will be crucial to any future success of Vivmark Residential.
Swaringen pointed out that for a while now private markets have appraised multifamily investments at lower cap rates and higher valuations than the public markets, so publicly traded real estate investment trusts like AvalonBay and Equity Residential have been trading below what the private equity value of their assets might be. Moreover, he added, both companies’ performance since 2016 has lagged, as their 10-year annualized returns have each been in the high 3 percent range.
“That’s generally not what public markets are looking for,” Swaringen said. “Private market returns of multifamily and apartment investments have been stronger than that. It’s unclear whether this merger was a combination of ‘We have to do something to improve performance,’ or maybe it’s just greater scale or simply a defense against privatization.”
That said, the merger occurs at a time when REITs as a whole are showing signs of resilience. Auerbach noted that REITs have been operating in a higher-for-longer interest rate environment for several years now. And, while conventional wisdom suggests REITs should trade low when the 10-Year Treasury is high, REITs as a whole have outperformed the S&P 500 this year, generating yearly returns of 21 percent through July 2026, compared to the S&P delivering 11 percent.
“It’s business as usual for these REITs, who have no control over the 10-Year Treasury, or the Straits of Hormuz, or AI and the shock and awe headlines,” said Auerbach. “They’re focusing on fundamentals: growing earnings, signing new leases. Fifty REITs have raised dividends this year.”
Others dismissed the possibility of the government — especially one led by President Donald Trump — stepping in to block a major real estate merger.
“It’s not a monopoly, and because it’s not a monopoly there shouldn’t be a fear or concern that the 800-pound gorilla will just come across the country and raise rents arbitrarily,” said Northmarq’s Norris. “If anything, it creates enormous efficiencies to keep downward pressure on rents by lowering and focusing on expenses.”
In fact, Norris believed it would get the blessing of Sam Zell, a master market manipulator.
“Sam was known as the Grave Dancer, because when markets would dramatically change and businesses were dying, he’d go in and snap them up,” said Norris. “The irony is, as he’s now passed, he’d be dancing on his grave with this one, smiling in his blue jeans.”
Brian Pascus can be reached at bpascus@commercialobserver.com.
