Dive Brief:

• Chicago-based Equity Residential announced it is acquiring 11 properties, totaling 3,572 units, from Blackstone Real Estate strategies in separate transactions, including Blackstone Real Estate Income Trust, Blackstone Real Estate Partners and Blackstone Property Partners, for approximately $964 million. The transactions are expected to close in the third quarter.
• The properties, with an average age of eight years, are located in EQR’s Atlanta, Dallas/Ft. Worth and Denver expansion markets. EQR said they will be attractive to its “higher-end renter demographic,” while also accelerating the firm’s growth in the Sun Belt, in a release announcing the sale. 
• Alec Brackenridge, EQR’s executive vice president and chief investment office, said in the release that the pricing on the assets was attractive compared to replacement costs. “This transaction is a significant step in our goal of generating a higher percentage of our annual net operating income from these strong growth expansion markets,” he said.

Dive Insight:

Like its peer Arlington, Virginia-based AvalonBay Communities, EQR has sought to strengthen its presence in Sun Belt markets. 

EQR currently generates 6% of its NOI from Atlanta, Dallas/Ft. Worth, Denver and Austin, Texas, according to CEO Mark Parrell on the firm’s Q2 earnings call last week.

“These are three markets that represent the ‘new core’ for multifamily investors — large, diversified, highly liquid growth markets across the Sun Belt and Mountain regions that are still in growth mode,” Jay Parsons, head of investment strategy at Lubbock, Texas-based Madera Residential, which owns properties in the region, told Multifamily Dive.

Parrell indicated that the new apartment supply being delivered in these markets gave EQR the opportunity to buy recently built properties “at a basis that compares well to replacement cost.” EQR is underwriting a 5% forward cap rate in its pro forma and assuming further degradation of rents. 

However, the Blackstone assets are older than the properties Parrell referenced on the call, leaving unanswered questions about their cap rate. However, the deal does show market momentum picking up.

“With this announcement of another large transaction here in 2024, it's another indicator that the era of price discovery is coming to an end — at least for well-located class A and B-plus apartments,” Parsons said.

Asim Hamid, senior managing director at New York City-based Blackstone Real Estate, said in the release that the “transaction represents an excellent outcome” for the firm’s investors and “demonstrates the strong institutional demand for high-quality assets.”

“Rental housing remains one of our highest-conviction themes, and we continue to see strong fundamentals in attractive markets,” Hamid said.

Operational upside

EQR expects to harvest additional value from new acquisitions in the Sun Belt through its centralized operational platform, which utilizes technology and groups properties in pods to share resources. It also expects to gain benefits from its delinquency and vacancy management processes, Parrell said on the call.

“Clearly, you see [the benefits of pods] show up in our payroll growth numbers, and that is what we would expect going forward in those expansion markets,” Michael Manelis, chief operating officer for EQR, said on the earnings call. “But there’s also opportunities in the service side of the business, as we think about leveraging resources differently, that take our dependency off of third-party contractors that kind of keeps that [repair and maintenance] number down.”

But before EQR can fully capture the benefit from the Blackstone acquisitions, it needs to withstand the current deluge of new apartments being delivered in its expansion markets.

“We continue to see demand, but it's a challenging operating environment for both new leases and retention given the amount of new supply,” Manelis said. “Right now, the pressure on new leases makes renewing residents the No. 1 priority in these markets.”

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