Institutional investors will be faced with rising REIT stock prices and a shrinking REIT universe once Blackstone Group completes its $36 billion deal to buy the $15 billion Equity Office Properties, a Chicago real estate investment trust chaired by Sam Zell.
But investors also will feel the pinch in their private real estate portfolios because the firms that are gobbling up the REITs might have trouble providing the outsize returns they promised investors, consultants said.
"Many investors have both public and private real estate, but the preponderance of their portfolios tend to be on the private side," said Nori Gerardo Lietz, managing director of Pension Consulting Alliance Inc., a Portland, Ore-based consulting firm.
Equity Office ranks second on Pensions & Investments' list of the 10 largest REITs (Simon Property Group is first), and 96% of the shares are in institutional hands.
In the deal with Zell, Blackstone Real Estate Partners V LP is providing $3.2 billion in equity. The rest of the purchase price is in debt, according to the merger agreement filed with the Securities and Exchange Commission on Nov. 21. Providing the debt are Bear Stearns Commercial Mortgage Inc., Goldman Sachs & Co. and BAS Capital Funding Corp.
"What does it mean when an opportunity fund is buying an existing portfolio that had 5.5% yield and leverage of 90%? What kind of return are they ultimately going to achieve that is opportunistic?" Ms. Lietz said.