In what would be a $4.48 billion deal that is a reminder of the strength of the Bay Area economy, Essex Property Trust said Monday it has made a formal offer to buy a rival apartment realty investment firm, BRE Properties.
Palo Alto-based Essex Property and San Francisco-based BRE would coalesce into an apartment property giant with its apartments concentrated in the gateway markets of the West Coast, primarily the Bay Area, at a time when rental rates are rising strongly in the nine-county region amid a job surge.
"Essex Property Trust has made a nonbinding proposal to acquire BRE Properties in a negotiated strategic business combination," Essex said Monday. BRE said it was continuing an ongoing process to explore strategic alternatives, and confirmed it had received a "nonbinding proposal" for a sale to Essex. On Monday, shares of Essex rose 0.2 percent to finish at $154.26, while BRE fell 2.3 percent to finish at $57.99.
According to a public filing in November, Essex owned more than 34,000 apartments and had about 46 percent of those in Southern California markets, including Los Angeles, Riverside and San Diego.
At the end of September, BRE owned or had stakes in more than 21,000 apartments, and about 28 percent of the company's operating income was derived from apartments in the Bay Area.
The deal would give Essex a much bigger footprint in the Bay Area than it now has. Industry experts said this is a clear indication of investor desire for investment property in this region. The area's economy underpins all of this.
"There is a lot of job growth, you have a lot of hiring in tech, biotech, software and social media," said Mark Feldman, a senior vice president with Colliers International, a commercial realty firm. "Then you have the apartment market. The Bay Area is supply constrained, there is a high cost of housing, apartment rents are rising."
The relative newness of the BRE apartment portfolio could be an attraction for Essex, said Ryan Wagner, a vice president with Colliers.
"Essex would be able to own a lot of BRE properties for a lot less risk and less money than it would cost to build brand-new units in those markets," Wagner said. "Essex has been aggressive in buying apartments and they still hunger for more to buy."
The pace of rental rate increases has slowed but remains sturdy. In 2010 and 2011, rates for apartments were rising by about 10 percent to 12 percent a year in the Bay Area. The rate of increase is expected to be 3.5 percent to 5 percent in 2013, Feldman estimated.
Average rents are now around $3,000 for a one- or two-bedroom unit in San Francisco, according to Colliers, while they are around $2,700 for one- or two-bedroom units in San Jose.
"Essex and BRE are going to be in the markets where jobs are being created," Feldman said. "The Bay Area is one of the economic epicenters in the United States."
Contact George Avalos at 408-859-5167. Follow him at Twitter.com/georgeavalos.