Bidders Hold Future of Equity Office Buildings Here

By Dana Hedgpeth
Washington Post Staff Writer
Monday, January 22, 2007

The bidding war that started last week for Chicago-based Equity Office Properties Trust, one of the largest real estate companies in the country, has set off talk among executives here about what will happen to the roughly 20 buildings, with 5 million square feet of space, that it owns in Northern Virginia and the District.

An investment group led by Vornado Realty Trust bid $38 billion for Equity Office. Blackstone Group of New York offered $36 billion in November.

Blackstone's bid has some parallels to its acquisition last year ofCarrAmerica Realty, said Randall M. Griffin, president and chief executive of Corporate Office Properties Trust. In that case, it turned around and sold its Washington portfolio to Tishman Speyer.

"Blackstone will do what they did with Carr," Griffin said. "They'll break it into smaller pieces and sell, while Vornado intends to hold. It's a very different strategy. One is buy and sell quickly and reap the differential. The other is looking at a longer play value."

Sara L. Grootwassink, chief financial officer at Washington Real Estate Investment Trust, said she thinks that Vornado, if it wins, would keep the Washington properties because "they already have some investment here."

"It gives them an opportunity to acquire a portfolio in a city they like," she said. "What's interesting is you have very smart people on both sides of the transaction who are intelligent buyers and sellers in the market. They have different objectives of whether to hold assets and take advantage of possible higher rental rates or they're looking to sell."

The deal would give Vornado an entry into markets like Boston and Los Angeles where it does not have a major presence, experts said.

Among the attractive assets of Equity Office in the Washington area are the Army and Navy Club two blocks from the White House, 1620 L St. NW, Liberty Place on Seventh Street NW and Market Square on Pennsylvania Avenue. In Northern Virginia, it owns Centerpointe I and II near Dulles International Airport, and the Polk and Taylor buildings and Jefferson Plaza I and II in Crystal City.

Mitchell N. Schear, the president of Vornado's Charles E. Smith unit, declined to describe his company's plans. "We're excited about the opportunity," he said. "We realize we may be the underdog, but nonetheless we're excited about the opportunity."

John Germano, senior managing director at CB Richard Ellis, said the two offers for Equity Office are likely to create a frenzy of real estate sales in Washington.

"No matter who buys it they're going to dissect the portfolio," he said. "Some [of the properties] will fit with the existing strategy, some of it will not. They may put smaller portfolios together and try to flip those or flip individual buildings. Whoever buys it, you'll see more buildings churn."

That could come as some have predicted that the rapid sales market would slow down because it couldn't keep going at such levels. But Germano said this is going to create some "velocity" in sales.

The question remains: What happens to tenants if the local buildings are flipped to new owners? Many real estate executives say they expect the caliber of management and services to remain high -- but if building prices rise, tenants' chief fear is a potential hike in rental rates.

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