With plenty of cash flow currently available, the recent merger between Essex Property Trust and BRE Properties is expected to be one of many REIT consolidations this year.
“It makes sense for REITs to consolidate. I wouldn’t be surprised if there was more REIT consolidation,” says Ben Thypin, Director of Market Analysis at Real Capital Analytics (RCA), a global data and analytics firm focused exclusively on commercial real estate. “The advantage of the REIT model is liquidity. The bigger you are, the more you can take advantage of the REIT’s model,” Thypin adds. “You can borrow more cheaply—both secured or unsecured debt.”
Essex reportedly paid $4.3 billion for BRE, leading to the formation of a new larger portfolio with nearly 56,000 housing units within 239 communities. The new Essex portfolio largely consists of assets in leading West Coast metros like Seattle, where the average multifamily property sold for $181,000 per unit in 2013, according to RCA data.
The BRE portfolio consisted of properties from mainly suburban areas in Los Angeles, San Diego and San Francisco. According to RCA data, the average price per unit in 2013 was $198,000 in Los Angeles, $209,000 in San Diego, and $287,000 in San Francisco. 48 of the 72 properties purchased by Essex from BRE were from garden apartment communities.
The newly merged company is expected to generate $1.2 billion in annual revenue and $10.4 in equity market capitalization. The larger REIT not only helps the new company save money on property expenses and gain access to more efficient financing, but also creates a new commercial real estate giant for the U.S. apartment market, specifically in the West Coast.