Imagine, for a minute, that you're a small apartment REIT. You own and operate about 13,000 apartments in 38 communities, primarily in the Mid-Atlantic. For the nine months ended in September 2005 (the most recent figures available), you generated nearly $98 million in total rental revenues and $7.6 million in net income.

Are you worth upwards of $40 per share or more than $1.5 billion in cash?

Essex Property Trust thinks so. Since early February, the Palo Alto, Calif.-based apartment REIT, working with UBS Wealth Management and AEW Capital Management, has sweetened its offer again and again in its pursuit of Baltimore-based Town and Country Trust, a small public apartment REIT that in December announced the sale of the company. According to public documents, the buyer was a joint venture of Morgan Stanley Real Estate and Onex Real Estate, which had agreed to pay $33.90 per share, or $1.3 billion, for the company.

But the wheeling and dealing had only just begun. Before the Morgan Stanley deal could be finalized, Essex made its own play for Town and Country, repeatedly upping its per-share offer from $36 to $38.50 and then $40.15. Berkshire Property Advisors, a private multifamily firm based in Boston, also got involved in February, offering $37 per share. (The situation remained unresolved at press time.)

Alison Rice
Katherine Lambert Alison Rice

To some, those are mighty sweet offers. "I'll be curious to see whether, a few years from now, this will mark a high-water mark in pricing," says analyst Craig Leupold of Green Street Advisors. He doesn't doubt the geographic appeal of Town and Country's holdings, which are concentrated in Washington, D.C., and Baltimore–two metro areas with strong rental markets and high barriers-to-entry. "It's really a portfolio play," says Leupold, who nonetheless worries about the average age of the company's portfolio (26 years) and the level of capital expenditures required for such properties. "At these prices, it's hard to imagine this as a good deal for Essex," he says.

Of course, that may just be a matter of perspective. "Over the last couple of years, the public REIT market has not ascribed the same value to apartment assets as the private market," says Leupold. That suggests that public firms (i.e., Essex) may simply be following the lead of their private counterparts by getting more aggressive on price.

But pricing is a finicky and unpredictable thing in real estate. "You'll never stay in this business very long by calling high-water marks and low-water marks," says Tom Toomey, CEO of United Dominion Realty Trust, who sees other forces at work in the Town and Country situation and other recent public-to-private multifamily deals such as Gables Residential Trust and AMLI Residential Trust.

Investment banks, tired of simply advising companies for a fee on such big transactions, want a piece of these deals for themselves. Pension funds and banks are getting involved as well. And, Toomey notes, they are calling on capital from all over the world, with predictably successful results in the American multifamily market. "They are asset accumulators because they are able to match global funds to the opportunity."

With so many players (and so many dollars) entering the multifamily investment arena, the seemingly rich price for Town and Country's assets could soon become standard.