Giant Office Space Trust to Be Sold

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ROBERT SIEGEL, host:

Equity Offices Property Trust is not a name that rolls off the tongue, but it happens to be the largest owner of office space in the United States after the federal government. Well, today came news that Equity Office is being sold to the large private equity firm, the Blackstone Group. It's just one of a flurry of corporate mergers and acquisitions announced today.

NPR's Jim Zarroli joins us now. And Jim, how much is Blackstone paying for Equity Office and what is it actually getting?

JIM ZARROLI: Well, Blackstone is paying about $20 billion, although it's assuming a lot of debt as well, so it's really - this is going to set it back about $35 billion.

Now what it is getting is a real estate investment trust, what is commonly called a REIT. REITs basically are investment vehicles that put money into real estate. You can buy and sell shares in them like stock, so if you want to invest in real estate but you don't want all the hassle that entails and you want to keep your money pretty liquid, REITs are the way to do it.

Equity Office Properties Trust is a really, really big REIT. It owns 590 buildings, including properties in just about every major American city. Some of them well known buildings - World Wide Plaza here in New York City, 1 Post Office Square in Boston, 161 North Clark in Chicago. So it's a big trust and so you might kind of say this is the biggest real estate deal ever.

SIEGEL: Well, there are a lot of properties then that are being sold and it's an enormous price, so what does that say about the real estate market? Does it mean that Blackstone is getting lots of property on the cheap or that the real estate market isn't so soft?

ZARROLI: Well, the housing market is soft. The residential market is soft. The commercial real estate market is actually doing very well. Office vacancy rates are low. Companies have a lot of money to spend, so that's driving up the value of the kinds of properties that Equity Office owns, which is no doubt the major reason why Blackstone wanted to acquire it.

SIEGEL: Now Blackstone is a private equity fund. And such funds have been in the news a lot, so I want you to explain to us what is a private equity fund.

ZARROLI: Just as their name suggests, they are private entities. They can invest in lots of different kinds of assets. Blackstone is one. Bain Capital, the Carlyle Group.

Now investors have been putting a lot of money into these funds, so these funds have a lot of cash to spend. They're looking for things to buy. They've been snatching up some really well known companies - Eddie Bauer, Burger King. Sometimes they hold onto these for a while. They make changes. Maybe they'll put new management in place. Maybe they'll close some factories and lay some people off. Then when the company is more profitable, they'll take it public again and make a lot of money.

Sometimes critics say they just take a lot of money out of the company in the forms of fees and dividends and then try to unload it on other investors if they're able to do that.

SIEGEL: So why have funds like that been particularly active lately?

ZARROLI: The economy's been doing well. They have a lot of money. Business confidence is pretty high. One thing about these funds is that because they're private, they have a certain kind of flexibility that they wouldn't have if they were in the public markets. For instance, the stock markets don't like it when companies take on a lot of debt, but you see private equity funds that acquire companies and borrow 90 percent of the money to do so.

One of the questions you hear asked a lot today is, you know, are these firms going too far? Are they spending too much money and taking on too much debt? Obviously, private equity firms don't want to see companies they acquire go under. The question is, you know, are they taking the kinds of risks that will put otherwise healthy companies in jeopardy. We have seen these kinds of periods of excess before, after all.

SIEGEL: Well, there have been quite a few other mergers. Some announced today. What were some of the more important ones?

ZARROLI: Well, the research firm Dealogic says that there were another $88 billion worth of deals today. The copper miner Phelps Dodge was acquired by a big mining conglomerate for $25 billion. Bank of America said it was buying US Trust for $3.3 billion. There were also a lot of deals announced in Australia, Canada, Europe. Euroficina. Just a huge rush of mergers this year.

SIEGEL: Okay, Jim. Thank you.

ZARROLI: You're welcome.

SIEGEL: NPR's Jim Zarroli speaking to us from New York.

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