2016 is a busy year so far for real estate mergers
A healthy-yet-slowing demand for rental housing in some metropolitan areas may be contributing to a noticeable shift in the real estate market: consolidation.
So far this year, real estate is the third-busiest industry for mergers and acquisitions (M&A), with more than $247 billion of transactions globally, according to Dealogic. Technology takes the top spot, with deals totaling $449 billion, followed by healthcare at $251 billion.
One merger announced last month would create the largest multifamily real estate investment trust (REIT) by number of units in history. MAA of Atlanta and Post Properties, Inc. announced that the deal is expected to close in the fourth quarter. Post Properties will merge into MAA to create a publicly-traded Sunbelt-focused multifamily REIT with 105,000 multifamily units in 317 properties.
MAA chairman and CEO H. Eric Bolton, Jr. says the combined company will “capture a broader market and submarket footprint, with improved rental price-point diversification…,” according to a statement.
A Very Big Deal
“Given the current return environment, REITs like MAA and Post Properties see the opportunity to increase their market share, increase economies of scale, and satisfy investors,” says Michael VanderLey, senior managing director and leader of real estate capital markets practice for FTI Consulting Corporate Finance & Restructuring practice. “These are all reasons driving M&A activity.”
A low interest rate, moderate growth environment creates economic conditions that make business combinations more attractive, VanderLey says.
“When interest rates are low, the overall cost of capital tends to be lower. Likewise, in low interest rate environments, you see low relative rates of topline growth. When those two things happen, people are looking for ways to use their lower cost of capital for advantageous situations and create scale,” he says. “This merger is a perfect example of that.”
Publicly-traded REITs have become “one of the hottest investments of the past decade,” according to The Wall Street Journal. They have grown so much that S&P 500 split them from the financial stocks group and designated their own stock regrouping on Sept. 16. The new REIT category is the latest, 11th grouping, and it’s first time in about two decades that the S&P 500 added a new sector, The Wall Street Journal reported.
When it comes to M&A activity for REITS, VanderLey says all real estate is local, and some mergers may involve trying to neutralize threats from competitors in a particular region. He points to a similar merger on the West Coast that closed in 2014 between BRE Properties of San Francisco and Essex Property Trust of Palo Alto, California.
Rising rental prices lately in some regions may have led to an oversupply in new apartment construction.
Estimated rents rose by 1 percent in the second quarter of 2016, the same rate as the same period a year ago, according to Fannie Mae Multifamily Economics and Market Research.
However, demand for all types of rental housing is slowing in several metros. Data from CBRE Econometric Advisors shows that the vacancy rate fell in 33 out of 66 metros in the second quarter. Meanwhile, vacancies rose in 28 areas and stayed similar in five.
Rent growth may be slowing, but that’s somewhat expected because prices have been very high, according to Kim Betancourt, Fannie Mae’s director of Economics and Multifamily Research.
“Developers have a lot of supply coming online,” Betancourt says. “They’re all competing for the same group of renters and are in the same submarkets. For developers, it’s a question of finding the next submarket and the right tenant mix.”
Betancourt says she expects many developers are likely focusing on the Millennial market, a generation that slightly outnumbers Baby Boomers.
Based on demographics, Betancourt expects rental price growth will remain positive on a national basis.
“With homeownership being delayed by many people, including Millennials, there’s still demand for rentals,” she says.