The list goes on and on. In fact, even commercial real estate brokerages are merging. Although the deals are smaller—Newmark Grubb Knight Frank acquired Cornish & Carey Commercial for $135 million, London-based Savills completed a $260-million merger with Studley earlier this month and Avison Young continues grabbing smaller firms as it expands across US markets—it's nevertheless a signal of a changing industry.

Where do we go from here? Industry watchers say M&A activity is not likely to stop. Any attempt at predicting the volume of M&A activity in the second half of 2014 and beyond demands understanding the market factors driving the uptick, the positive and negative impacts of M&A on the industry and how those drivers may change in a consolidated landscape.

Why So Much M&A?

The commercial real estate industry has seen waves of consolidation in the past, but 2013 and 2014 will go down in history books as a flurry of activity. So what's driving all the consolidation?

“REITs were rocked on share prices last year, and M&A might be the salve,” says Joseph Pasquarella, a senior managing director at Integra Realty Resources. “While the S&P 500 grew 32.4% in 2013, the average REIT return was just 2.7%. The jump in interest rates last May triggered the cold snap and since then REITs have had to pursue alternative strategies to demonstrate their worth to investors.”

Stuart Eisenberg, partner and real estate practice leader at professional services firm BDO, has a similar take. He says the lack of quality assets and competition for these assets is a major factor driving M&A activity in the commercial real estate industry.

“In fact, according to the 2014 BDO RiskFactor Report for REITs, 94% of REITs cite strong competition for lessees and prime real estate as a top concern, ranking it the third risk overall for a second consecutive year,” Eisenberg says. “Many real estate companies may see merging with and acquiring other firms as a way to navigate around the competition.”

Commercial real estate prices and values that follow economic activity are key drivers, according to Jerry Hansen, a forensic accountant at consulting firm Berkeley Research Group. As the US economy has recovered, real estate prices are recovering and even exceeding pre-financial crisis levels in some areas. And that may be influencing some of the mega moves REITs are making to merge for buying scale.

“The market is not overheated yet, but investors are looking to take advantage of the low interest rates, higher occupancy rates and a rise in values to potentially realize significant returns in the short term,” Hansen says. “In addition, buyers such as private equity and hedge funds, as well as international sovereign wealth funds, have been sitting on huge sums of cash waiting for an opportunity to invest. The available cash, improving bank lending, low interest rates, high occupancy and potential returns are driving this increased M&A activity.”

Big Deal Makers Speak Out

What is the positive impact of the flood of M&A on the commercial real estate industry? From the REIT perspective, it's the economy of scale operations.

“Bigger is better, and REITs held to high standards for growth can get a boost through M&A,” says Pasquarella. “Through roll-ups and acquisitions, REITs are growing their silhouettes in bursts rather than property by property. By acquiring more properties, REITs can reduce operating expenses and better pool human resources.”

That's the view from the outside, but is there a running theme among those participating in the M&A deals? Consider statements from some of the CEOs involved in megadeals and you'll see various reasons for big buys:

“With the scale and advantages that come with being a $21.5-billion investment grade credit rated company, we expect to enjoy a significant cost of capital advantage,” says Nicholas Schorsch, chairman and CEO of ARCP about the $6.85-billion Cole acquisition. The combined company is now the world's largest net lease REIT.

Brookdale CEO Andy Smith on the $2.8-billion Emeritus acquisition: “This combination will improve our ability to deliver the best high-quality solutions for the growing demographic of aging seniors and their families. With still only 10% market share post-merger, we are confident of our prospects for driving further long-term revenue growth.” Brookdale's portfolio grows to 112,694 units across 46 states to create what the company says is “the only nationwide network of senior living communities” providing end-to-end care.

Trevor Bond, WPC's president and CEO, says this about the $2.4-billion CPA:16 acquisition: “We believe that the positive balance sheet, earnings and AFFO impact of the merger with CPA:16—Global, along with the additional liquidity provided by the increased size of our credit facility, will continue to support WPC's position as the leading global net lease REIT.” The merger brings WPC's portfolio to over 85 million square feet of corporate real estate leased to over 230 companies around the world.

Michael Schall, president and CEO of Essex, says of his firm's $4.34-billion merger with BRE Properties: “The integration effort is proceeding as planned, which we believe will result in a stronger platform for sustainable growth, superior service for our residents, and expanded career opportunities for our employees,” says. The combined company has an equity market capitalization of about $11.1 billion and a total market capitalization of approximately $16.2 billion.

“Through mergers and acquisitions, REITs aim not only to pad their property portfolios, but also to expand the geographical diversity of their holdings,” says Pasquarella. “Many REITs typically focus on a single area, and by diversifying by location, REITs stand a better chance of maintaining value despite regional issues, such as Detroit's bankruptcy last summer.”

The Pros and Cons of Consolidation

The dealmakers are bullish on their mergers and acquisitions, but how is all this M&A impacting the commercial real estate? Is it good, bad or ugly? Maybe a little bit of all three.

According to Eisenberg, M&A activity has a number of positive effects in today's market. First, he says, it can be relatively less expensive to obtain new assets by means of an acquisition as opposed to doing multiple transactions. “Also, mergers and acquisitions can add fresh talent in addition to properties,” he says. “Finally, this activity can establish the enterprise value for good operators that may be separable from the underlying real estate.”

But it's not all pretty: “The potential downsides to increased M&A activity include reduced competition in the real estate industry, which may result in lower pricing,” he says. “It could also make it difficult for smaller players with fewer resources to compete with their larger counterparts.”

At this point, it's unclear as to what impact the flood of M&A activity could have on the overall competitive environment long-term. Although joining of companies may alter the pricing landscape and make it harder for smaller firms to compete, Eisenberg says it's too early to tell what the lasting affects will be. That said, there has been no outcry from industry watchers that there is too much consolidation among commercial real estate firms.

That may be, in part, because REIT prices have dipped a bit on Wall Street. With stock prices failing to reflect a REIT's true net asset value the time seems right for larger, well-capitalized REITs to swoop in and make a deal before stock prices rise again. Kite Realty Group's $2.1-billion acquisition of Inland Diversified Real Estate Trust is a good example.

The merger brings together two shopping center retail portfolios with a combined asset base of 131 properties totaling 20.3 million owned square feet across 26 states. Essentially, Kite doubled its shopping center holdings—and did so by leveraging favorable cap rates while picking up shopping centers in strategic locations.

“Inland Diversified has assembled a very well located, high quality portfolio,” says John Kite, Kite Realty's chairman and CEO. “The asset and tenant quality and strong demographic profile will be a great complement to our portfolio. With this transaction, we will be able to substantially increase the size and scale of our portfolio in our core markets and enter into attractive new markets. This transaction will further strengthen our balance sheet and enhance our cash flow, positioning us favorably for future growth and shareholder value creation.”

Will This Pace Continue?

With blockbuster deals happening almost left and right, how much more consolidation will the industry see? How much more can it take? Will this pace of M&A deals continue? Industry watchers do expect consolidation but there are factors that could slow the deal flow, perhaps in some sectors before others.

“Retail and apartment REITs stand to gain the most from this phenomenon,” says Pasquarella. “Last year apartments hit a 12-year high for occupancy, with rents riding high. Yet Bloomberg's Apartment REIT index slipped 7% in 2013. The result is acquisitions like Essex Property Trust's recent purchase of BRE Properties, which was trading at 13% below net asset value, amounting to a hefty discount on high-quality assets.”

Even beyond retail and apartment REITs, most believe M&A activity will remain active. However, Eisenberg says a change in interest rates as well as risk tolerance on the part of buyers may impact this current trend. When looking at REITs in particular, BDO's report reveals that 85% of those surveyed consider mergers and acquisitions, joint ventures and partnerships to be a risk to their business, which underscores that, while there are many advantages to such activity, it can be a risky business move.

As 2014 continues, Pasquarella also expects to see more M&A as REITs take advantage of discounts in net asset value to add heft to their footprints. As he sees it, it's nearly impossible to meet many shareholders' expectations by acquiring properties one by one. “Wall Street is looking for strong growth with a healthy trajectory, not to mention that larger acquisitions are more efficient in terms of transaction and human resources costs,” he says. “So watch for more billion-dollar deals as REITs show the bulls who's boss.”

Of course, eventually the M&A run has to end, or at least slow way down. John Hekman, a principal at Berkeley Research Group, says the strength of M&A in the commercial real estate sector has to do with the Federal Reserve policy, namely low interest rates and aggressive purchasing of mortgage backed securities, which has injected a great deal of money into the sector.

Hekman thinks we're in a slowdown this year, “because the quantitative easing is going away and the Fed is deciding when to raise interest rates. The markets will anticipate the Fed's policy change, and a slowdown will occur.”

Hekman's colleague Hansen has a slightly different view. He is betting M&A activity will continue its strong pace until the best opportunities are snatched up or interest rates and prices increase to negatively impact some of the potential upside. “Real estate is typically a longer-term play and for it to pay off, the price and financing have to be right,” he says. “Companies and investors have learned some lessons from the financial crisis and will be more cautious as the price levels heat up.”