Although vacancy rates are up in most city and suburban office markets along with a flattening of rental rates, Equity Office reports first-quarter funds from operations of $272.6 million, or or $0.78 per diluted share, up 13% from the first quarter of 2000.

The first-quarter results reaffirm the REIT's strategy of focusing on Class A office buildings in supply-constrained, high-growth markets, President and Chief Executive Officer Tim Callahan included. That strategy was exemplified in the record-breaking $7.3-billion merger with Menlo Park, CA-based Spieker Properties, Inc. announced in February, which Callahan defends against those who have questioned the deal's timing.

"We see every reason to believe this merger comes at the right time," Callahan says. He adds the deal continues to be reviewed by the Security and Exchange Commission, but closing is still anticipated in late June.

Investors apparently agreed, as Equity Office stock jumped 2.3% Thursday to $27.65 per share.

Vacancy rates in the REIT's top 20 markets jumped from 7.3% at the end of 2000 to 8.6% in the first quarter, Callahan reports. Meanwhile, Equity Office's same-store occupancy increased slightly, putting its vacancy rate at 5.8%.

"In other economic downturns, Class A office space has outperformed," Callahan says. "Even with the softening seen in the first quarter, virtually all of our markets are seeing single-digit vacancies…As bad as the headlines have been, we started this downturn with historically low vacancy rates."

Chief financial officer Richard Kincaid adds Equity Office took a conservative approach in its 2001 forecasts, and was aided by research done early in the first quarter for the merger with Spieker Properties.

Although sublease space is becoming an issue in most markets, Callahan says Equity Office's portfolio is less vulnerable to competition from sublease. It also could benefit if tenants choose to sublease, as Equity Office leases give the REIT the right to approve sublessees and a 50% share of any profits from a sublease.

Locally, Callahan says the Chicago Downtown office market remains stable despite an increase in sublease space. The financial service sector have produced players in the leasing market. However, Callahan says the suburban office market bears watching.