Bloomberg News

Blackstone to Buy Suburban U.S. Offices for $1.08 Billion

October 21, 2011

(Updates with closing share price in final paragraph.)

Oct. 21 (Bloomberg) -- Blackstone Group LP, the world’s largest private-equity firm, agreed to pay $1.08 billion to buy Duke Realty Corp.’s suburban office holdings in U.S. cities including Chicago, Dallas and Atlanta.

Blackstone Real Estate Partners VII will buy the 82 buildings with a combined 10.1 million square feet (938,000 square meters) of space, Indianapolis-based Duke Realty said in a statement. They include “substantially” all of Duke’s wholly owned suburban office properties in the Midwest and South.

Blackstone has invested more than $7 billion in real estate this year, and has raised $4 billion for its latest property fund that the New York-based firm expects to exceed $10 billion, Chairman Stephen Schwarzman said yesterday. Managers such as Fortress Investment Group LLC, Colony Capital LLC and Starwood Capital Group LLC also are pitching new property funds.

“Blackstone has a lot of capital to deploy so they need to deploy it in large chunks,” Ben Thypin, director of market analysis for New York-based Real Capital Analytics Inc., said in a telephone interview. “It seems like they got a good discount to what comparable properties have been trading for in those regions, especially considering how well-leased and relatively new the properties are.”

Below Average Price

The planned purchase price is $107 per square foot, below the $121 average this year for suburban office buildings in the Midwest and Southeast, according to Thypin. For properties built after 1980 in those regions, the price was $133 a square foot.

Almost 85 percent of the office space is leased and the buildings have an average age of 15 years. Blackstone will take over the leasing and management of the properties.

Nationally, the vacancy rate for U.S. suburban office properties was 18 percent in the third quarter, down from 18.5 percent a year earlier, according to CBRE Econometric Advisors. Offices in downtown areas have performed better, with a vacancy rate of 13 percent in the third quarter.

Quarterly Loss

Blackstone yesterday reported an unexpected third-quarter loss on a drop in the value of its buyout holdings. In April, Blackstone said a fourfold increase in profit from its real estate funds helped the company post its best quarterly results since going public in 2007.

In September, the company agreed to buy 36 U.S. shopping centers from Equity One Inc. for $473.1 million. It also paid $9 billion for the U.S. malls of Melbourne-based Centro Properties Group in June in its largest transaction since the leveraged buyout boom collapsed in 2007.

Duke Realty’s Chief Executive Officer Denny Oklak said the sale is “a continuation of our strategic plan to reduce our investment in suburban office properties.”

Money generated from the transaction will be used for the acquisition and development of industrial and medical properties, and to reduce debt, he said in the statement.

The purchase price includes $30 million of assumed debt, according to Duke’s statement.

Duke Realty rose 5.6 percent to $11.28 at the close in New York. The shares have lost 9.5 percent this year compared with a 1.4 percent drop in the Bloomberg REIT index.

--With assistance from Kathleen Chu in Tokyo. Editors: Christine Maurus, Kara Wetzel

To contact the reporters on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net; Brian Louis in Chicago at blouis1@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net


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