Despite the fact that "everyone" wants to claim we're at the top of the market, mega mergers as well as major asset sales are going to be with us for a while, Zell stated. GE Real Estate president and CEO Michael Pralle agreed, noting that bucking the general wisdom that the market is about to turn has caused "stomach-turning" deal decisions in his shop. "The most quoted phrase in our office is that every deal we make is a mistake," he commented.
Further countering that general wisdom, "The biggest surprise is coming," said Roth, "and that is that rents will continue to rise and make the current prices seem right on the money."
But fundamentals can't justify all deals, and "assets with different quality considerations are trading at the same prices," as higher-valued properties, said Zell. "The most vulnerable area is where assets are priced indiscriminately to value." He cited suburban offices moving for CBD price tags. "Every time the market commoditizes like that, not long after, we start having problems."
Turning to the red-hot privatization trend, Zell admitted that if he owned EOP lock, stock and barrel, "I wouldn't have sold. But my fiduciary responsibility to shareholders," dictated that he not turn his back on the $39-billion Blackstone offer.
That gave Roth the opportunity to reflect on the difference in strategies between Blackstone and Vornado, and he admitted that the Manhattan REIT's presence at the bargaining table may have indirectly fostered the post merger sell-off. "Our strategy was simple," he recounted. "We would buy EOP with a 50% stock transaction, sell off some assets and hold assets on both coasts. We would combine the remaining assets to create a pure-play office portfolio."
"When I pushed Blackstone on price, they came under intense pressure to justify their price." One self-evident way to do that was to shed hunks of the portfolio, Roth indicated.
Given market conditions, he continued, it is conceivable that Blackstone and Vornado could find themselves at opposite ends of yet another merger tug-of-war. "But I don't think they want to go another round. And neither do we."
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John Salustri
John Salustri has covered the commercial real estate industry for nearly 25 years. He was the founding editor of GlobeSt.com, and is a four-time recipient of the Excellence in Journalism award from the National Association of Real Estate Editors.
