May 21 (Reuters) - Equity Residential ( EQR ) and AvalonBay Communities ( AVB ) have agreed to an all-stock merger to form a housing rental company with an enterprise value of $69 billion, the firms said on Thursday, strengthening their presence in key U.S. markets.

The deal, which would create the largest publicly traded U.S. apartment real estate investment trust by market value, will also strengthen the capacity to invest in AI technology.

The companies said they have a 95% overlap in markets where they own rental properties, a concentration expected to improve margins by enabling neighborhood-based operations, centralized services and lower cost-to-serve.

The transaction is expected to generate $175 million in gross synergies by the end of 18 months after completion, driven by reduced corporate overhead costs and property management expenses, the companies said.

This could help add about 15 cents per share to the bottom line after adjusting synergies for the drag from real estate tax reassessments, said BTIG analyst Michael Gorman.

"The combined company's investors will benefit from accelerated growth from increased investment in operational innovation; a larger, self-funded development platform," said Equity Residential ( EQR ) CEO Mark Parrell.

Under the deal, AvalonBay shareholders will receive 2.793 shares of Equity Residential ( EQR ) common stock for each share they own.

On closing, expected in the second half of 2026, AvalonBay shareholders will own about 51.2% of the newly formed company and Equity Residential ( EQR ) shareholders the rest.

A combination will also pave the way for a larger proprietary data set, enabling AI-powered demand forecasting that can help reduce operating expenses, they added.

The companies were Series-A investors in Elise AI in 2020, which offers specialized technology for property management such as AI-guided tours and request resolution.

AvalonBay CEO Benjamin Schall will lead the combined company while Parrell will retire after the transaction closes.

Shares of AvalonBay and Equity were down about 1.5% in morning trading in New York.

(Reporting by Aishwarya Jain in Bengaluru; Editing by Joyjeet Das and Sriraj Kalluvila)