Equity Office sale sets off real-estate investor frenzy

CHICAGO — The commercial real-estate market erupted in heavy speculative buying Monday after a $19 billion deal to take famed investor Sam Zell's Equity Office Properties Trust private, signaling to investors that other real-estate companies also could be snatched up.

The Blackstone Group's blockbuster agreement to buy the nation's largest office landlord — whose trophy properties include WorldWide Plaza in Manhattan, the Civic Opera building in Chicago and Columbia Center, Seattle's tallest tower — demonstrates the U.S. commercial market hasn't lost its zing.

It also will further reduce a shrinking public real-estate market for investors.

Analysts, though, said the deal may be more a reflection of the hunger among capital-flush private-equity firms for leveraged buyouts (LBOs) in general than a barometer of the commercial real-estate sector.

"It's probably not as much industry-specific as it is that people want to get in on LBOs," said Linda Varoli, vice president of research at Wall Street Access, an institutional brokerage firm.

"Sam Zell built this company, so it's kind of surprising he would want to sell it. But when you get offered a really good price like that, you have a responsibility to shareholders."

New York-based Blackstone agreed to pay an 8.5 percent premium to Friday's closing price of Equity Office and is taking on nearly $17 billion in debt.

That gives the deal announced Sunday night a total value of $36 billion, which it said will be the largest private-equity transaction ever.

It's the private equity firm's third purchase this year of a real-estate investment trust (REIT) and its 10th in two years, including 2006 deals for CarrAmerica Realty and, with partner Brookfield Properties, for Trizec Properties.

Real-estate investment trusts are public companies that own and operate real estate and don't pay corporate income taxes so long as they distribute almost all their income to shareholders as dividends.

They are particularly popular among well-off investors because of their tax benefits, with many of the dividends either non-taxable or qualifying for reduced taxes.

Shares of Chicago-based Equity Office rose $3.42, or 7.7 percent, to close Monday at $48.14 after reaching an all-time high of $48.52.

Shares of numerous other REITs also jumped on the possibility of other deals, with Boston Properties, Brookfield Properties, Vornado Realty Trust, Mack-Cali Realty, Maguire Properties and SL Green Realty all hitting 52-week highs.

"The fact that Equity Office could be taken private means no REIT is safe," said Morningstar analyst Arthur Oduma. "That obviously excites investors who own REITs."

Equity Office owns 580 U.S. buildings totaling more than 108 million square feet in 16 states and the District of Columbia. It was founded in 1976 by Zell, the Chicago investor who earned the nickname "Grave Dancer" for his talent for spotting undervalued properties.

Zell, 65, remains chairman of the company, which went public in 1997 but is not part of the buyout group.

Equity Board's board has approved the offer by Blackstone's real-estate arm of $48.50 a share, an impressive figure for a stock that traded below $30 in February.