However, the company has found its own common stock a much better deal than potential office building acquisitions, having bought back 22.1 million shares for $550 million this year. In addition, Equity Office Properties Trust has redeemed $250 million of preferred stock and $109 million in operating partnership units, saving $72 million a year in dividends in the process.

Chairman Samuel Zell says the stock buyback translates into a 9.3% to 9.6% implied capitalization rate across the REIT's portfolio, a better return than can be had in the current frothy office sales market. By comparison, the company's $367 million in sales volume was at an 8.5% capitalization rate, Kincaid says.

"As long as the market continues to be as liquid and attractive as it is now, we'll continue to take advantage of that, even if it means we might have a loss of income in the near term because of the disposition of these assets," Zell says.

Meanwhile, vacancy across the REIT's 125.7-million-sf office portfolio remained flat in the second quarter, the first time in three years it did not rise, Kincaid notes. Locally, vacancy across Equity Office Properties' city and suburban portfolio ended the second quarter at 11% compared to 14.8% for the overall market rate. Occupancy ranged from 97.7% at the 909,000-sf 30 N. LaSalle St. in the Central Loop to 70.7% at the 546,000-sf Tri-State International and 81.1% at the 656,000-sf at the Corporate 500 Centre complexes in the north suburbs. In Westchester, occupancy at the 1.1-million-sf Westbrook Corporate Centre stands at 80.8%.

The company views a 3.8% increase in temporary employee hiring across the US as an indicator of future job growth that, so far, has been absent from the economic recovery.

"We predicted this would be a jobless recovery in the early stages similar to 1992 to '93," Zell says, adding the risk of war and continued corporate downsizing has weakened office markets. "I think they're history rather than the future."

However, the company has collected $25.2 million in early lease termination fees from companies, most of them going out of business, says CFO Marsha Williams. Although early lease terminations are down from the same period in 2002, when they totaled approximately $150 million, they still are running higher than expected, she adds, and are expected to approach $60 million this year.

Instant Insights /

Equity Sees Vacancy Flattening in Sellers' Market

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