By Nancy Amdur
When Essex Property Trust and BRE Properties Inc. completed their merger last month, the Bay Area-based companies formed one of the West Coast’s largest multifamily real estate investment trusts and deepened their reach into some of the country’s highest-performing markets in Northern and Southern California and the Seattle metropolitan area.[contextly_sidebar id=”94d466d79d6119ecd3846b7f2e98356f”]The combined company, with a total market capitalization of $16.2 billion, is now the “dominant” multifamily REIT in the region, said Steven Weilbach, senior managing director and national head of multifamily capital markets at Cushman & Wakefield in San Francisco.
But the merger was not surprising to industry watchers. “You had two entities that were similarly structured and geographically were identical models and [which] were running completely parallel, so it was the most logical pairing out there,” Weilbach said.
The newly formed company, operating under Essex’s name, provides “substantial value for our stockholders through enhanced operations, improvements in the costs of capital and synergistic opportunities,” said Constance Moore, CEO of BRE.
Integrating the two portfolios also will result in a “stronger platform for sustainable growth,” said Michael Schall, president and CEO of Essex.
The combined portfolios comprise 233 multifamily properties with another 15 under development, including the 172-unit BRE project known as MB360 in San Francisco’s Mission Bay district, which caught fire in March. A portion of that building containing 188 units was not affected, according to a statement made last month by BRE.
Also in the Essex pipeline is the 289-unit Epic apartment community in San Jose and the 309-unit Connolly Station in Dublin, Calif., both of which were in the leasing stage at the end of January, according to the REIT’s fourth quarter 2013 report. Essex seeks properties in supply-constrained, high-growth West Coast markets in major metropolitan areas.
Multifamily REITs in the Bay Area recently have been quiet on the acquisitions side, Weilbach said. BRE traditionally was more of a builder and Essex was more of a buyer and “it will be interesting to see if they will mirror the same strategy,” he said.
Further, the merger might make it even more difficult for other REITs to step into the West Coast market, desirable for its high rents and occupancy rates.
“Neither [Essex or BRE] historically has been a significant seller of product,” Weilbach said, adding that Essex likely will not look to sell assets right away as the companies focus on creating economies of scale.
Unlike some markets where merchant builders build and immediately sell, much of the West Coast multifamily development is done by investors who put the assets into longer-term portfolios, Weilbach said.
“It ties up a lot of product. A lot of capital would like to get into the West Coast multifamily [market], so it gets harder for everybody to acquire buildings,” he said.
Bulking up a multifamily portfolio in the region seems to be a sound investment. Despite a healthy pipeline of new development slated to come online in 2014 and 2015, the area’s strong economy helps maintain demand.
“Every developer jumping into the game is considering [if] there is enough demand to put up another building, and every indication is there is demand,” said Nick Grotjahn, a spokesman at Novato, Calif.-based RealFacts LLC, which tracks national apartment trends.
In the Bay Area, Cushman & Wakefield reports that more than 4,900 apartment units are expected to be complete this year, but sparse development between 2009-11 left much room for new supply, Grotjahn said. The area’s average occupancy now stands at 95 percent or better, according to RealFacts.
Additionally, Bay Area apartment rents have steadily increased since 2010 and are at an all-time high, Grotjahn said. The average apartment rent in San Francisco is $3,057 and in San Jose it drops to $2,066. Average rents in Seattle, also part of Essex’s geographic area, are $1,623. All of these markets are well above the national average apartment rate of $1,108, according to a first quarter 2014 report by RealFacts.
“Above average job growth and a vibrant economy” keep West Coast rents rising, Schall said.
Following the Essex and BRE merger, former BRE Chairman Irving Lyons III and former BRE directors Thomas Robinson and Thomas Sullivan joined the Essex board of directors. George Marcus, Essex’s founder, will serve as chairman of the board of the combined company. Schall, Essex’s president and CEO, maintains his position for the combined company.
Former Essex stockholders hold approximately 63 percent of the combined company’s common stock, and former BRE stockholders hold about 37 percent.
Top Essex shareholders include The Vanguard Group, Inc.; BlackRock Institutional Trust Company, N.A.; and Invesco Advisers, Inc.