The biggest ever merger of real estate investment trusts — the combination of Equity Residential and AvalonBay, announced Thursday — has investors and analysts alike left with dropped jaws. 

The all-stock merger will have a market capitalization of about $52 billion and a total enterprise value of approximately $69 billion, according to a release. It will create one of the largest real estate companies in the U.S., with more than 180,000 rental apartments. 

“This combination creates a new and fundamentally stronger company with differentiated capabilities that will drive structurally superior cash flow generation, earnings and dividend growth, and value for shareholders,” said Benjamin Schall, CEO of AvalonBay. 

Schall will become CEO of the newly formed company, and Equity Residential CEO Mark Parrell will retire when the transaction closes.

Allan Swaringen, president and CEO of JLL Income Property Trust, called the tie-up “unbelievable.”

“That they would merge is really incredible,” he said. 

JLL Income Property Trust is part of LaSalle Investment Management, which manages about $90 billion of real estate investments globally for institutional clients and high-net-worth individuals.

Swaringen noted that the stocks of both companies are trading at below their net asset values, a situation that makes them both ripe to be bought and privatized. 

“I think this might be a defense against privatization. By putting themselves together, they’re almost too big to get bought,” Swaringen said. 

He also noted the high cost of building technology, which residential tenants now demand – from online leasing to credit checking to delivering bandwidth and Wi-Fi. Consolidating could reduce those costs.

“Strategically, the rationale is straightforward: scale, liquidity, balance sheet efficiency and overhead synergies,” said David Auerbach, chief investment officer at Hoya Capital Real Estate. 

Auerbach said he thinks this could be the first of more megadeals in the space. 

“We have WAY too many Apartment REITs out there, and it’s a sector ripe for consolidation,” he wrote in emailed comments to CNBC. 

Auerbach noted that the deal comes after a challenging stretch for apartment landlords, who have been dealing with sluggish rent growth due to the post-Covid construction boom that delivered a massive wave of new supply.

Neither Auerbach nor Swaringen said they expect to see any effect on rents. While the combined company’s market share might be growing in certain markets, they are still going to have to compete with the rest of the field. The apartment market is highly diversified, building to building,…

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A slew of new supply is still making its way through the multifamily housing market. That, coupled with weakening demand, especially from the youngest workers, is pushing vacancies up and rents down. 

The national median rent for apartments fell 1% in November from October, and now stands at $1,367, according to Apartment List. It was the fourth consecutive month-over-month decline. Apartment rents are down 1.1% from November 2024 and have fallen 5.2% from their 2022 peak. 

“Earlier this year, it appeared that annual growth was on track to flip positive for the first time since mid-2023; however, that rebound stalled out and reversed course during a particularly slow summer,” according to Apartment List researchers.

After hitting a record high for this index, which dates back to 2017, in October, the national multifamily vacancy rate remained at 7.2% in November. 

The historic surge in multifamily construction over the past few years is now pulling back, but a good supply of new units is still coming online at a time of much weaker demand. 

The fall historically sees the biggest slowdown in multifamily rents, but this year it’s even more pronounced. CoStar reported the biggest monthly drops in median rent it had seen in 15 years of tracking. The primary reason is that more young people are struggling to form new households.  

“That 18- to 34-year-old group … I think it’s up to 32.5% of those now are living with family, and that’s the highest it’s been in a while,” said Grant Montgomery, CoStar’s national director of multifamily analytics. “I think it reflects high rental costs that have risen over the years, as well as the tougher job market for young folks just coming out of college.” 

“That is where a lot of demand traditionally comes from, the core renter demand is from that sort of younger base,” he said.

The weakness is showing up in stocks of the major public apartment REITs. Names like AvalonBay, Equity Residential and Camden Property Trust are all down year to date. 

Some markets are seeing rents drop faster than others, due to local economic factors. Las Vegas, for example, is experiencing slower tourism, which in turn hits jobs there. Boston has seen a decline in federal funding for biotech as well as a drop in…

Renting has its benefits. It’s usually cheaper than buying a home, and it offers the freedom of moving without much hassle. That’s why about half of apartment renters in large urban markets usually move when their leases expire. But that is not happening now.

The low turnover is “striking,” according to real estate analyst Alex Goldfarb at Piper Sandler. He said some of the largest landlords are seeing turnover at just 30% compared with the industry norm of 50%.

He cited reasons including an unaffordable for-sale market, lack of rental supply on the coasts, nervousness about the economy and tariffs, the cost of moving and a shift to suburban apartments, which tend to be larger and more comfortable.

“The consequence is landlords are getting better pricing from renewals, as people don’t want to leave,” said Goldfarb. “It also improves [their] cash flow, because of lower turnover costs.”

Those costs would include repairs, painting and cleaning.

As a result, in the multifamily REIT sector, Goldfarb likes Essex Property Trust, with its large West Coast footprint. Equity Residential also benefits from that regional presence.

He noted the rebounds of San Francisco and Seattle, driven by artificial intelligence and tech companies like Amazon issuing return to office mandates, have helped real estate.

He’s neutral on the Sunbelt, which had been a hot pandemic play. Names like Camden Property Trust and Mid-America Apartment Communities had strong performances in the first quarter of this year, but could be hit hardest if there is a recession that leads to job losses.

As for the overall multifamily market, after declines last year due to record levels of new supply, rents are now coming back, up 0.9% year over year in the first quarter, according to CBRE. That is thanks to the strongest positive net absorption, or the change in the number of occupied units, since 2000 and more than triple the pre-pandemic first quarter average.

It marks the fourth consecutive quarter in which demand surpassed new construction completions, and that pushed the multifamily vacancy rate down to 4.8%, below its long term average of 5%. 

“The first drop in vacant units in more than two years signals a crucial turning point in the multifamily sector,” said Kelli Carhart, leader of multifamily capital markets for CBRE. “This boost will lead to increased investment activity in 2025 as improving fundamentals continue to drive investor confidence capital deployment.”