Scot Sellers had built Archstone-Smith into one of the biggest, most admired apartment companies in the land. But, when an offer came in to buy the company, the first thing  he had to do was step back. 
“As the CEO of a public company, the most important thing to remember is that it is not ‘your’ company; it belongs to the shareholders, and your job is to manage the business so as to maximize the value of their investment,” he says. “If a qualified buyer makes an offer to purchase the company for a price that exceeds the value of the assets you own, it’s your job to carefully evaluate the offer and present it to your board.”
In 2007, when Tishman Speyer and Lehman Brothers Holdings came in with a “very full price” for the REIT, Sellers had to throw all emotions out the window, survey the significant economic risk ahead, and make the best decision for the company’s owners—its shareholders.
“Looking back to early 2007, we felt that values were very inflated, and that there was a lot more downside to pricing than upside, so when a qualified buyer approached us with an offer to purchase the company at a price materially in excess of the aggregate value of our assets, the right thing to do was to agree to sell the company,” Sellers says. 
Though large portfolio sales followed before the market collapsed in 2008, Archstone’s eventual sale to Tishman and Lehman represented the top of the acquisitions market in the past cycle. And the sale of Archstone’s assets to Equity Residential (EQR) and AvalonBay (AVB) kicked off a new era of consolidation in 2012. In 2013, in a pair of regionally complementary M&As, Memphis, Tenn.–based MAA bought Southeastern peer Birmingham, Ala.–based Colonial Properties Trust, and Palo Alto, Calif.–based Essex Property Trust purchased its California competitor San Francisco–based BRE Properties. 
Jeffrey Friedman of Associated Estates Realty Corp. 
Andrew Spear/Aurora Select Jeffrey Friedman of Associated Estates Realty Corp. 
“The consolidation we’ve been talking about is finally starting to happen,” says Dave Woodward, head of multifamily at Brookfield Property Group, whose Brookfield Asset Management arm restarted the privatization engine this year with the $2.5 billion purchase of Cleveland-based REIT Associated Estates Corp. “I think people are seeing that the smaller platforms are going to be in play and should be in play.”
On the surface, this cycle shares some similarities with the last industry wave of consolidation when Sellers’ Archstone was taken private. While the similarities are easy to see, including a flood of capital looking to enter the market, there are significant differences, as well, including what appears to be more conservative underwriting and the rise of the activist investor, which may mean only the strongest REITs survive. But the big difference might be that, Sellers and a lot of others contend, the industry isn’t staring off the edge of a precipice this time. 
A decade ago, the apartment market went through a period similar to what’s happening today. In a span of three years, the market saw one REIT M&A—Houston-based Camden Property Trust buying Summit Properties—and four REIT privatizations, with tiny, Baltimore-based Town & Country Trust; Chicago-based AMLI Residential; Atlanta-based Gables; and Archstone (Tishman Speyer Properties and BlackRock’s mammoth expenditure of $5.4 billion for Stuyvesant Town/Peter Cooper Village actually topped all but the Archstone deal).
The driver was capital ... lots of it. By 2007, apartment transaction volume exceeded $100 billion. Money from pension funds, life insurance companies, private equity, and foreign investors bombarded the market. Overseas money, in fact, constituted about a third of the fund that bought Gables. 

“The privatization deals reflect the flood of capital looking for a home in real estate,” Craig Leupold, a principal with Green Street Advisors, said at the time (Leupold is now president at Green Street). “Premiums are being paid for portfolio transactions versus one-off deals, given the efficiency of putting out large sums of capital in a single transaction.”
The story remains much the same this cycle, as volume has topped $100 billion the past two years, peaking at $112 billion last year.  “There is a strong appetite from private capital [for apartments],” says Conor Wagner, a research associate at Green Street.
And, once again, that money is putting a higher value on ­REITs than the public markets are. “There’s an enormous amount of capital that wants to own institutional real estate,” says Jonathan Litt, managing director and global real estate strategist at Land and Buildings, a boutique hedge fund manager he founded in Stamford, Conn. “And, there’s been a material disconnect between how the apartment ­REITs are trading and what the underlying value of their assets is.”
The names of those groups trying to get bigger in the space—The Blackstone Group in New York, Brookfield, and Dallas-based Lone Star Funds, for instance—aren’t a mystery. But the recent sales process of Gables Residential, which ended up being bought by current owner New York–based Clarion Partners, introduced some new names, including a joint venture between Charleston, S.C.–based Greystar and Newport Beach, Calif.–based Pimco; CalPERS and GID Investments; and a team of DRA Advisors of New York and the Abu Dhabi Investment Authority. “The bidding on Gables brought in some names we haven’t seen before,” Wagner says.
While the massing of capital at the gates certainly harkens back to the mid-2000s, Greg Mutz, CEO of AMLI, sees some differences. Today’s buyer, he says, will walk away from a low IRR. “There’s a lot of liquidity today,” Mutz says. “There was a lot of liquidity back then [too], but some of it was undisciplined and exuberant liquidity. Today’s liquidity is smarter, more disciplined, and more focused. Underwriting remains grounded and fact based.”
Sellers agrees. “Capital is not as readily available today at the huge loan-to-value ratios as it was in 2007 (loan underwriting is more thoughtfully done today),” he says. “In addition, investors are concerned about whether we are at the top of a cycle, and so are being more restrained about the prices they pay for assets. In the 2007 cycle, many of the private equity buyers were paying huge prices for very low cap rate assets. Today, the private equity buyers are trying to find assets that produce higher yields and offer additional upside [like Brookfield’s purchase of AEC], which seems much more prudent to me.”
In a recent report, New York–based research firm Real Capital Analytics (RCA) added research to the anecdotes. Across commercial real estate, the firm said portfolio- and entity-level transactions represented 48.3% of all transaction volume in 2007, and, in some quarters, they crested to as much as 53% of volume. That percentage of large deals jumped to 38% in the first quarter of 2015, but the trend over the past few quarters this cycle has been around 30%.
There’s another major difference, as well—people are buying private companies this time. “The entity-level transactions which happened into 2007 represented a generally one-way flow of capital,” RCA said in the report. “Just under 72% of all transactions involved taking public companies private in an arbitrage play on asset values in the public and private markets. In the last two quarters, the entity-level deals involve a wider array of capital flows.”
Taken altogether, there are major reasons why the large capital aimed at entity and portfolio deals is behaving differently. Even RCA acknowledges some risk.
“Anytime somebody says, ‘This time, it is different,’ investors  may  want  to  reach  for  their wallets,” it said in the report. “This said, we are confident in saying that if there is some sort of shock to prices, it will not be driven by the same conditions that led to the fall in prices into the global financial crisis.”
And returns have generally been good for the buyers of the other large deals in this cycle, EQR, AVB, Essex, and MAA, though the integrations went differently. 
“BRE was done in ’13, and that turned out to be an attractive acquisition for Essex,” Litt says. “I think we’re probably at a point in the cycle where there’s probably a good return for the private guys and probably a good premium for existing shareholders, as well. I don’t think we’re at the precipice at a decline.”
While the amount of capital pouring into apartments might be similar to that of the last cycle, the circumstances facing CEOs aren’t the same as 10 years ago. Traditionally, a REIT would receive an offer and management and the board would make a decision. The process is voluntary, even for public companies. Laws in Maryland, where many REITs are incorporated, even have anti-takeover provisions that make it harder for a party to come in and run a public real estate company. With those laws, REIT executives could feel fairly comfortable in their ability to dictate their own fate. Usually, it’s a retirement, lack of succession plan, or other issue that  prompts a company to  sell. 
“Something is usually going on socially with the management team [when it sells],” says Ric Campo, CEO of Camden.
Things changed, however, on July 31, 2013. Hours before BRE’s earnings call, Litt blindsided the REIT’s board with a scathing, open letter detailing the firm’s underperformance and castigating it for rejecting his offer to buy it for $60 a share. In December 2013, the company was sold to Essex. 
While there’s debate over how much influence Litt had over the BRE sale, there’s little doubt his half-year campaign to install a new board at AEC, fronted by Sellers, led to its eventual sale to Brookfield.
Instead of just sitting and holding on, as AEC CEO Jeffrey Friedman was accused of doing for decades, REIT execs now may face challenges if they’re perpetual laggards and they ignore shareholders.
“I think that the environment over the past several years has made it really important for boards to be aware that, if they’re not executing their fiduciary duties to maximize value for shareholders, activist investors might come in to agitate and unlock value,” Litt says. “I would think that would be true as it relates to offers that come in.”
Another result might be that if a company sees trouble on the horizon, it might spare itself the fight and preemptively sell. “If I’m perpetually lagging and trading below NAV for a long time, I could become a target for an activist investor,” Wagner says. “So how do I want to write this exit? That’s what happened with AEC. They were forced to vote and got into the fight. You can get into a fight and potentially get punched out, or I can write my exit and do things.”
Ultimately, it may be better for these companies to be private anyway. “If you have a company [of] perpetual laggards who are trapped in a box and the public market isn’t giving them the signal to grow and they’re perpetually being stuck at a size and trading at a discount at NAV, maybe a private buyer would value them more highly and it makes sense for them to go private,” Wagner says. “The greatest value some firms may ever achieve is going to be through a private transaction [right now].”
Sellers thinks some of the REITs need to go away. “I believe there are still far too many publicly traded real estate companies, and the long-term trend will be toward substantial consolidation in the apartment sector, as well as in other asset types,” he says. “Obviously, the major impediment is the so-called ‘social’ element.  By this I mean the tendency for management teams to see the company as ‘theirs’ instead of the shareholders’ company.”
And if they don’t go over the next couple years, they could face cap-rate risks. “You could get a great valuation and could say that you sold out at the top and did the right thing for shareholders,” Wagner says. “For a lot of these companies, they’ve been in the business for a while and these are some of the lowest cap rates in recent memory.”

While low cap rates can certainly motivate executives who have considered selling, the question remains—will they ultimately dissuade buyers, especially after what happened in 2008? 
While Sellers acknowledges some buyers (of portfolios and single properties, as well as entity-level deals) are exhibiting “later-in-the-cycle” behavior, he thinks the industry has more growth ahead.
“The 10-year Treasury is much lower today than it was in May 2007, yet cap rates are similar,” he says. “Therefore, you could argue that current cap rates are much more justifiable than they were in May 2007.  In addition, I think we still have a bit more upside to this economic cycle than we did in May 2007. So, there should be another two years of solid NOI growth ahead of us today.”
With the promise of more NOI growth and money to spend, it’s a good bet consolidation will be a trend in the foreseeable future. In April, REIT Newshound reported that Rochester, N.Y.–based Home Properties, which is led by CEO Ed Pettinella, was in “advanced discussions” to be acquired by a private equity fund, Dallas-based Lone Star Funds.
Edward J. Pettinella, Home Properties 
Stephen Voss / WpN Edward J. Pettinella, Home Properties 
And, on the private side, a June report from Real Estate Alert indicated that Wood Partners, one of the nation’s largest and most active apartment developers, has reportedly hired a broker to shop the firm to potential buyers. The company, which has been controlled since 2008 by CBRE Global Investors, has hired Eastdil Secured to find a buyer. It wouldn’t be a surprise to see other private companies that got an injection of the equity in the downturn also test the market.
“The portfolio- and entity-level activity has been on the rise and I think that will continue,” says Jim Costello, a senior vice president with RCA.
Though Alexander D. Goldfarb, managing director at investment banking firm Sandler O’Neill + Partners in New York, doesn’t see any of the apartment REITs he covers as great candidates for takeover, he thinks the climate is ripe for more privatization across the REIT space.
“As long as you have this disconnect between public and private values, yeah, you’ll see more privatizations,” he says.

And that probably could extend to private companies, especially on the development side, looking for an exit as well. If that happens, a lot more CEOs will know what Sellers felt like in 2007.