The Blackstone Group has agreed to acquire a 10.1 million-square-foot office portfolio from Duke Realty for $1.08 billion, in what currently is on track to be the first investment for the firm’s latest fund, Blackstone Real Estate Partners (BREP) VII. The deal, which is expected to close on or around 1 December, includes the assumption of $30 million in debt.
From a pricing perspective, the acquisition was attractive for Blackstone because the purchase price of $107 per square foot represents a 40 percent discount to replacement costs, according to a source familiar with the deal. In addition, the high cash yield offered by the portfolio, which is due to trade at a 9 percent capitalisation rate, created “a compelling basis to invest in an asset class [Blackstone] historically has not invested in,” the source said. While the firm has invested heavily in office properties, it has not focused on suburban office assets.
The 82-building portfolio encompasses the bulk of Duke Realty’s wholly-owned suburban office properties in Atlanta, Chicago, Columbus, Dallas, Minneapolis, Orlando and Tampa. The properties have an average occupancy rate of 84.6 percent and an average age of 15 years.
As for Duke Realty, the sale is part of a repositioning of the Indianapolis-based company’s holdings. “The portfolio sale is simply a continuation of our strategic plan to reduce our investment in suburban office properties, primarily in Midwest markets,” said Denny Oklak, chairman and chief executive of Duke Realty, in a statement.
The acquisition will be one of the first deals on behalf of BREP VII, which has not yet funded a transaction. In September, Blackstone agreed to buy 36 shopping centres, located primarily in the Southeastern US, for $473.1 million from Equity One. That acquisition also is expected to close in December.
BREP VII held a first close on $4 billion in commitments in August and is expected to equal or exceed Blackstone’s previous real estate opportunity fund, BREP VI, which closed on $10.9 billion in February 2007, Blackstone chairman Stephen Schwarzman said in an earnings call last week. Sources have said an additional amount is expected to be committed and closed upon by the end of the month, with a final close projected for the first half of 2012.