Beyond the Rent is Multifamily Dive’s analysis of the trends driving supply, demand and operations in the apartment industry. Click here to read the first column. 

Tadd Miller was a busy man on June 14. 

While Miller mingled with other multifamily leaders at the Walker & Dunlop Summer Conference in Sun Valley, Utah, a news release announced that his firm, Milhaus, had aspirations beyond its Midwestern roots, prompting the CEO to sneak away for media calls.

The Indianapolis-based multifamily player was buying SRG Residential, a subsidiary of California-based Sares Regis, and acquiring Broadshore Capital Partners to expand its investment and lending capabilities. In one fell swoop, Milhaus went from a strong regional player to a budding powerhouse with a national footprint and aspirations.

For Miller, the announcement was both the end of one process and the beginning of another. 

Now that the twin transactions have been announced, Milhaus can begin integrating two multifamily firms into a platform that could start 3,500 apartments a year and manage 100,000 units in two years.

“We just opened an entire half of the country for a third-party management company to go probably double in size for the next three years,” Miller told me. “We just opened up California and Vegas to a development company that has capital.”

Milhaus is only the most recent multifamily firm to see M&A as a vehicle to growth, but also to scale its property management business. In their “merger of equals,” AvalonBay Communities and Equity Residential also see the opportunity to achieve efficiencies across their operational platform.

Growth mode

Miller clearly sees his acquisitions as an avenue for growth. Scale is also a big part of the story with the multifamily merger that has dominated the news this summer:  Equity Residential and AvalonBay. 

Growth is there in that merger, too. With 180,000 rental apartments, the combined AvalonBay and Equity Residential would have ranked No. 1 on the National Multifamily Housing Council's most recent Top 50 owners list, per the release.

The “merger of equals” will also create a construction behemoth with $4.4 billion in projects, totaling 10,800 apartments under construction, and a $4.2 billion development rights pipeline.

“From a development perspective, the baseline is to double the level of activity that both the companies have going on today,” AvalonBay President and CEO Ben Schall said on a May 21 call announcing the merger.

But cost control is also part of the story. In the May press release announcing the merger, the second and third bullets talked about savings and efficiencies.

The merger helps the REITs expand margins by scaling proven operational innovations across a larger portfolio. The merger is expected to generate $175 million of gross synergies and $125 million of net efficiencies after real estate tax reassessments, according to the release.

The advantages of scale

Morgan Properties Chief Operating Officer Greg Curci told me that he doesn’t think the deal is “a purely defensive play from a cost efficiency standpoint” and that it will be “unlocking” opportunities in operations.

“Investing in technology and the people to deploy that technology is expensive, and it's probably more efficient to do them as a team,” Curci said.

Miller essentially made the same point about his management portfolio. “In today's world, it's almost impossible until you get to 50,000 units to really run third-party management,” Miller said. 

But now, with SRG Residential, Milhaus can provide property management services to many of its clients, whereas in the past it was saying no, according to Miller.

Indeed, in the years of cheap debt in the 2010s and early 2020s, when valuations skyrocketed, it seemed anyone could buy an apartment, hold it for a few years, and flip it for a healthy profit. But as Curci notes, those days have passed.

Now the winners won’t be the ones who pulled the most creative financial levers. They’ll be the ones who can efficiently operate apartments that provide great customer service. Doing that takes scale, which is why the M&A trend won’t end with AVB, EQR, Milhaus and SRG Residential.

“To me, this is about the ascendance of the operating platform,” Curci said. 

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