By Rebecca Picciotto

A megamerger agreement last week to create America's largest apartment owner followed years of sluggish industry profits and a rent slowdown.

Now, the deal looks like the beginning of greater consolidation for the struggling apartment sector.

AvalonBay Communities and Equity Residential's $69 billion agreement to combine firms is the most extreme sign of landlords rushing to cut costs and impress Wall Street while their market capitalizations languish below the actual value of their properties.

The need to get bigger is the same for large public apartment owners and smaller ones, said Jonathan Morgan, co-chief executive of Morgan Properties, currently the second-largest apartment owner in the U.S.

"Everyone is in that grow or die mode," he said.

Developers' margins have been squeezed by the rising prices of materials, labor and insurance. At the same time, apartment rents have been flat or declining. That is mostly because of the historic oversupply of new apartments in the Sunbelt and Mountain West that has made it difficult for landlords to raise rents.

Landlords are itching for the moment when supply ebbs and they can increase rents again. That is unlikely to come soon. Roughly 480,000 apartments will come online this year and about 450,000 more a year will be delivered in the years to come, according to real-estate data firm Yardi Matrix.

"Real estate is getting very little respect on Wall Street," said John Burns, chief executive of John Burns Research and Consulting. "So you're going to see more combinations so they can get more respect from investors."

Merging with a rival offers one of the few quick fixes to the bottom line. AvalonBay and Equity Residential expect to save $175 million in costs within 18 months after the merger closes later this year.

The combined firm is poised to become by far the largest apartment owner in the market with more than 180,000 units across the country, surpassing the current leader Greystar Real Estate Partners, which has about 119,000 units.

Equity Residential and AvalonBay have more than 20,000 homes in various stages of development and planning, and they expect that pipeline to grow even more. The combined company will be run by AvalonBay CEO Benjamin Schall.

By merging, the firms said they hope to rely less on pricey debt and instead use more of their own revenue to finance projects. They also want to trim down on costs by providing their own property insurance, combining their data and using artificial intelligence more.

"We're going to have a lower cost of capital than anyone else," said Equity Residential CEO Mark Parrell, who plans to retire once the merger is completed .

AvalonBay and Equity Residential have a small presence in the Sunbelt and primarily own higher-end apartments in coastal cities such as New York, Boston and Los Angeles. Still, they weren't immune from the rent slump and have had to offer concessions such as months of free rent to fill empty units.

AvalonBay and Equity Residential's stock returns have lagged behind other apartment real-estate investment trusts for years.

In an era of weak landlord pricing power, this merger is the latest in a series of deals as these firms seek scale and greater efficiencies to survive. The number of public REITs in the U.S. devoted to the apartment business has shrunk from more than 20 in the 1990s to about a dozen today.

In 2021, Independence Realty Trust and Steadfast Apartment REIT, both with a high concentration of Sunbelt apartments, combined in a $7 billion merger. Blackstone has taken a number of multifamily firms private, including AIR Communities in 2024. Several other apartment firms have started liquidating and selling off their properties.

Though the new AvalonBay-Equity Residential behemoth will be the largest owner in the country, it will still own a relatively small share of the overall market.

The new company isn't expected to gain much pricing power because of this merger. But with housing affordability at the top of voters' minds ahead of the midterms, analysts are still watching to see if this move attracts antitrust scrutiny from the Trump administration.

AvalonBay and Equity Residential's announcement didn't send either of their stocks surging, but so far investors are cautiously optimistic.

The merger "should help the companies' valuation and cost of capital versus peers," Green Street Advisors analysts said. "But we are not holding our breath for a sea change."

Write to Rebecca Picciotto at Rebecca.Picciotto@wsj.com

(END) Dow Jones Newswires

May 25, 2026 05:30 ET (09:30 GMT)

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