CHICAGO — The bidding war over Equity Office Properties Trust might result in a premium for the real estate investment trust's shareholders but a discount in investors' long-term returns.
Equity Office shareholders are expected to vote this week on The Blackstone Group's $38.3 billion all-cash offer to buy the Chicago-based REIT. Blackstone, New York, is offering $54 per share.
Last week, Blackstone's rival in the bidding — a consortium of real estate investors led by Vornado Realty Trust, Paramus, N.J. — upped the ante again, making an offer of $56 per share — $31 in cash and $25 in Vornado stock. Bids had been increasing steadily since the Vornado-led consortium first challenged Blackstone on Jan. 17 with an offer of $52 per share of cash and stock. Equity Office's board on Feb. 2 affirmed its support for the Blackstone bid, because the transaction would close sooner than one would with Vornado.
All of the action on the Equity Office sale could leave institutional investors wondering what the rising prices will do to their real estate portfolio returns. Investors won't know for several years whether the EOP purchase was worth the investment.
Money managers and consultants fear this sale signals the top of the real estate market. The concern is if Sam Zell — the legendary real estate investor and EOP chairman — is selling his U.S. commercial real estate holdings. then perhaps real estate values are at their peak, just ahead of a downward slide. Mr. Zell remains chairman of three REITs: Capital Trust, which invests in real estate debt; Equity Residential, an apartment owner; and Equity Lifestyle Properties Inc., which owns manufactured housing.
Also, consultants and real estate money managers say long-term returns might get hit because private equity, real estate and hedge funds are all after the same deals.
Ultimately, how well investors do depends on the state of the market five or six years from now, when current private equity funds' lifespans come to a close and the private equity money managers sell the properties or take the former REIT public again. And it will take a decade before institutional investors know whether the high price paid for trophy REITs like Equity Office Properties was worth it.