Top trends of 2007: the golden age of REIT buyouts

The Blackstone Group’s $39 billion (€27 billion) acquisition of Sam Zell’s Equity Office Properties Trust in February made headlines not only for its record price tag, but as the ultimate example of an ongoing trend – it was yet another private-equity backed takeover of a public real estate investment trust.

Sam Zell

Blackstone’s real estate team, co-led by Jon Gray and Chad Pike, emerged with Equity Office Properties— an office empire Zell built over two decades—after a fierce bidding war with Vornado Realty. The Equity Office deal furnished the buyout giant with a portfolio of 580 office buildings across the US from New York to Los Angeles, comprising approximately 109 million square feet.

The market was caught off guard by the size of Equity Office and ferocity of the battle to acquire it, but not by the specter of a REIT going private. This trend had been unfolding for months.

In 2006, a joint venture between Blackstone and Brookfield Properties closed on the $7.2 billion acquisition of Trizec Properties— one of North America’s largest commercial landlords.
The private equity firm also took office REIT CarrAmerica private in March 2006 in a deal valued at $5.6 billion.

Not to be outdone, Morgan Stanley Real Estate acquired resort-and-office REIT Crescent Real Estate Equities this past summer for $6.5 billion, transferring control of 63 office buildings across the US to the firm. The portfolio also included investments in resort properties in Arizona, California and Massachusetts, totaling approximately 700 rooms, along with resort residential developments across the US.

The Equity Office and Morgan Stanley deals were echoed later this past October when Tishman Speyer Properties and financial partner Lehman Brothers shelled out $22.2 billion for Colorado-based apartment REIT Archstone-Smith Trust. With 359 properties in its cache, Archstone presides over a collection of 87,667 apartment units, including units under construction.

The Gershwin: Archstone asset

The portfolio includes garden-style apartment communities operating under the Archstone Communities brand and high-rise apartment properties under the Charles E. Smith name. It also includes Manhattan’s landmark Gershwin apartment tower.

Since early 2006, the majority of high-profile REIT privatizations have been in the office sector but the multifamily sector has also been generating interest among investors: Last year, Morgan Stanley acquired Baltimore, Maryland-based REIT Town & Country for $1.3 billion as well as Chicagobased AMLI Residential Properties Trust which went for $2.1 billion.

It remains to be seen whether the transfer of public REIT assets to private hands can continue at the same pace now that debt is more expensive and less available. But with commitments still flowing into the funds of very large private equity real estate firms, REIT buyouts present an attractive way to put big dollars to work.

For the complete Top Trends list, check out the 2007 PERE Yearbook, out now.