Beyond Rent: Recent M&A Wave Highlights the Rise of Operating Platforms
This article analyzes recent M&A trends in the apartment industry, pointing out that operating platforms are becoming the core of competition. Milhaus expanded its national footprint by acquiring SRG Residential and Broadshore Capital Partners, while the merger of AvalonBay and Equity Residential pursues operational efficiency and scale advantages. Industry experts believe that future winners will be platforms that can operate efficiently and provide high-quality services.
Beyond the Rent is Multifamily Dive's analytical column on supply, demand, and operational trends in the apartment industry.Click hereto read the first column.
On June 14, Tadd Miller was unusually busy. As he networked with other multifamily leaders at Walker & Dunlop's summer conference in Sun Valley, Utah, a press release announced his company Milhaus's intention to expand beyond its Midwest roots, prompting the CEO to step away to handle media calls.
The Indianapolis-based multifamily firm is acquiring SRG Residential from California's Sares Regis, andacquiring Broadshore Capital Partnersto bolster investment and lending capabilities. In one fell swoop, Milhaus transformed from a regional player into an emerging powerhouse with a national footprint and ambition.
For Miller, the announcement marked both the end of one process and the beginning of another. With both deals now public, Milhaus can begin integrating the two multifamily companies to build a platform capable of starting 3,500 apartment units annually and managing 100,000 units within two years.
"We just opened up half the country for a third-party management company that could double in size over the next three years," Miller told me. "We just opened up California and Las Vegas for a development company that has capital."
Milhaus is not the only multifamily firm viewing M&A as a tool for growth and property management scaling. In the "merger of equals" between AvalonBay Communities and Equity Residential, both saw opportunities for efficiency gains on the operating platform.
Growth model
Miller clearly sees acquisitions as a growth path. Scale is also central to the multifamily merger that dominated headlines this summer—Equity Residential and AvalonBay. That merger also involves growth: the combined AvalonBay and Equity Residential, with 180,000 rental apartments, willrank first on the National Multifamily Housing Council's latest Top 50 Owners list。
This "merger of equals"will also create a development giant, with $4.4 billion in projects under construction (10,800 apartments) and a $4.2 billion development rights pipeline.
"From a development perspective, the baseline is to double the current activity levels of both companies," AvalonBay President and CEO Ben Schall said on the May 21 call announcing the merger.
But cost control is also part of the story. In the press release announcing the merger in May, the second and third bullet pointsdiscussed savings and efficiencies. The merger helps the REIT expand margins by extending proven operational innovations across a larger portfolio. According to the release, the merger is expected to generate $175 million in total synergies and achieve $125 million in net efficiency gains after property tax reassessments.
Advantages of scale
Morgan Properties Chief Operating Officer Greg Curci told me he sees the deal as "not purely a defensive move from a cost-efficiency standpoint," but rather as one that will "unlock" opportunities in operations. "Investing in technology and the people to deploy it is expensive, and teamwork can be more efficient," Curci said.
Miller expressed a similar view regarding his management portfolio. "In today's world, it's almost impossible to truly operate third-party management unless you reach 50,000 units," Miller said. But now, with SRG Residential, Milhaus can offer property management services to many of its clients that it previously had to turn away, Miller added.
Indeed, during the era of cheap debt in the 2010s and early 2020s, valuations soared, and it seemed anyone could buy apartments, hold them for a few years, and flip them for a profit. But as Curci noted, those days are over. The winners now will not be those who employ the most creative financial leverage, but those who can operate apartments efficiently and provide excellent customer service. This requires scale, which is why the M&A trend will not stop with AVB, EQR, Milhaus, and SRG Residential.
"For me, it's about the rise of the operating platform," Curci said.
Clickhereto subscribe and receive similar multifamily and apartment news every business day.