Alan George can recall the rush of relief he felt as the ink dried, sealing the deal on Equity Residential’s purchase of former Archstone properties.
After all, Equity’s chief investment officer had been waiting for the deal to go down as his company haggled with AvalonBay over properties that composed one of the most powerful, high-quality portfolios in the industry.
Given the acquisition’s size and scope, it would be impossible for any other transaction to overshadow the carving up of the Archstone portfolio between Sam Zell’s Equity Residential and AvalonBay (AVB) this year.
The Chicago-based firm’s purchase of 78 former Archstone properties was locked in at a whopping $8.961 billion, according to data from Real Capital Analytics, a market-research firm based in New York City. The deal brought about 23,100 units into Equity’s portfolio, doubling the size of its multifamily empire and pushing it to become the industry’s largest REIT, holding about $36 billion in assets, according to Newport Beach, Calif.-based market-research firm Green Street Advisors.
George says the largest point of appeal for the transaction was the sheer size of the portfolio.
“We saw volume that rarely comes around like this and would have taken us a long time to accumulate otherwise,” he says.
AvalonBay fell in line right behind Equity and bought the other portion of the Archstone portfolio, putting them on the list with the No. 2 largest deal of the year.
That transaction added more than 22,000 former Archstone units at 66 properties into Arlington, Va.–based AvalonBay’s portfolio, enabling AVB to become the second-largest REIT in the nation, with $24.6 billion in assets.
The two transactions combined for a pricetag of more than $16 billion and went down in the history books as the second-largest deal in the past 10 years. In fact, the only deal larger also involved Archstone—the $20.8 billion sale of Archstone-Smith to Tishman Speyer and Lehman Bros. (the latter of which eventually folded) at the height of the market in 2007.
Between Equity and AvalonBay, the Archstone properties were “drafted” by creating two separate transactions that satisfied both companies, George says.
One of the highlights for Equity was being able to gain ground in the competitive, high-barrier San Francisco market.
“We ended up with four development sites in San Francisco, and that is fabulous and unprecedented,” George says.
Southern California was also a clear point of interest for AvalonBay, Matthew Birenbaum says.
Birenbaum, AVB’s executive vice president of corporate strategy, says the deal was also about bringing in high-quality assets, both in properties and people. In addition to increasing the company’s portfolio size by about 35 percent through its largest transaction ever, AVB was also able to take over a stellar team of employees.
“We wound up getting a lot of great people through the process as well,” Birenbaum says. “It was easier to underwrite the real estate instead of the people.”
And in the midst of it all, one of the largest risk factors in taking on such a huge acquisition had nothing to do with the acquisition itself. The biggest risk was in being able to manage the existing business plans AvalonBay already had in motion prior to engaging in the transaction.
By the end of this year, the company will have more new development under way than it has ever had before, Birenbaum says.
“Sometimes the risk [in a huge transaction] is the distraction risk,” he says. “Does it take the eye off the ball of your core business?”
Top 10 Deals of 2013
1. Archstone Portfolio, Equity Residential from Lehman Bros.
2. AvalonBay Archstone Portfolio, AvalonBay Communities from Lehman Bros.
3. GE Capital U.S. Apartments Portfolio, Blackstone from GE Capital
4. Equity Residential Portfolio, Goldman Sachs, Greystar, and Ivanhoe Cambridge
from Equity Residential
5. Lone Star Funds Apartment Portfolio, Lone Star Funds from ORIX Capital Markets
6. Aldyn & Ashley Portfolio, GID OBO CalPERS from Carlyle Group
7. UDR Portfolio, MetLife from UDR
8. La Mirage (San Diego), Irvine Co. from Equity Residential
9. Archstone Crystal Towers (Arlington, Va.) Dweck Properties from Equity Residential $322.3 million
10. Bravern Signature Residences (Bellevue, Wash.), Invesco RE from Schnitzer West
List provided by Real Capital Analytics.
Lindsay Machak is an Associate Editor for Multifamily Executive. Connect with her on Twitter @LMachak.