The village is waiting to see which way the giant will fall. Rumors are rampant that Boston Properties is about to take its nearly 42 million sf of real estate private. If it does, it will join a roster of REITs that have made similar moves over the past three years, names that include CarrAmerica, Arden and AMLI Residential. The difference here is that, with assets valued at nearly $9.2 billion, if this giant falls on private ground, everyone will hear the noise.

Much has been made about the privatization of REITs, and most experts agree that it is indeed a trend. Market forces from relative valuations to the cost and burden of Sarbanes-Oxley have been credited as the driving forces behind it. But privatization is only part of a larger trend, one that speaks to the health and value of the REIT market. Trusts are being snapped up by private and public players alike, and while the private side is clearly hungrier, plays such as Plymouth Meeting, PA-based Brandywine Realty’s $3.3-billion purchase of Prentiss Properties and the Trizec portion of the $5-billion GE/Arden deal cannot be overlooked. Taken as a whole, the message here may not be one so much of the joys of privatization as much as the wisdom of owning REITs in the current market environment.

We should also keep in mind that nothing is final or fatal, and the privatization trend in no way signals the end of REITs as we know them. Rather, it’s an expedient, a navigation for the current market waters.

Privatization is “definitely a trend,” according to Gregory Pressman, a partner in the real estate department of Manhattan-based law firm Schulte, Roth & Zabel LLP. “The market is simply undervaluing the stock compared to what management believes is the real value of their assets. It’s a classic buyback situation.”

How much of a trend is it? According to Real Estate Forum, which based its statistics on Real Capital Analytics figures, of the $260.5 billion of core properties that traded last year, $130.8 billion went to private buyers.

And how much is Sarbanes-Oxley, with its costs and documentation, greasing the skids of the trend? It’s certainly been credited with much of the momentum. In fact, during the recent Mipim convention, European REIT gurus, struggling as they are now to establish continental standards of accountability, laid the blame for US privatization squarely on the shoulders of SOX. Despite the buzz, US insiders pass the notion off as foolish.

“I don’t buy that,” says Michael G. Frankel, Ernst & Young’s Dallas-based director of real estate tax services and the REIT sector. “I don’t think it has anything to do with it.”

If you need a catalyst, better look to Wall Street. “Sometimes the market focuses on short-term earnings and penalizes the real estate decisions that are often the right decisions,” says Pressman, who offers up as illustration a REIT with a tenant holding an under-market lease. Buying back that lease and upgrading the space is a capital-intensive affair with a “short-term depressive effect on earnings.” Analysts, he says, don’t always see the long-term value.

S&P didn’t see it when it recently warned investors of a 5% to 15% pullback in shares, declaring that, “The sector’s sustained out-performance over the past few years has been based on improving fundamentals, however, we think valuations look stretched on a near-term basis.”

The implication that REITs are overvalued is too much of a broad-brush statement for Scott Crowe, who heads US REITs for UBS. “You could argue that they’re stretched because relative to equities and bonds they’re not looking cheap,” he tells “But relative to direct property they are. There isn’t a huge amount of risk on the horizon, and we’re expecting REITs to provide a 10% return in 2006. Balance sheets are very healthy.”

Clearly, REITs are a solid buy, one in which the private market is interested. “There’s clearly a pattern,” says Frankel. “The public companies are there and everyone knows who they are and what they own.”

And shareholders are listening. If stocks have maxed out and an outside buyer waves the right number before the board, “you’ve got to think long and hard what makes sense for you and your shareholders,” says Frankel. “They may be selling to management or to a third party, but they’re selling.”

The rumors surrounding Boston Properties are all the more intriguing because of its size and scope, given that, to date, the dozen or so REITs that have gone private have been mostly regionally oriented. If the rumors are true, it proves, as the E&Y executive observes, that “everything is for sale.”

But beyond that, the sale would only prove that privatization is a right move in the current climate. “I don’t think the size of Boston Properties has anything to do with it,” Frankel offers. “The question is how to make money off of what you’re buying.”

The E&Y executive confesses that his first thought on hearing the rumor was that chairman Mort Zuckerman and president and CEO Edward H. Linde would raise some cash and take the operation themselves. “But more sensible is the notion that someone else would come in and buy the whole kit and caboodle,” he adds. Zuckerman and Linde “are extremely savvy, so they can’t be selling things on the cheap. But it takes two to Tango, and there’s got to be some view on the other side that whatever they pay they will be able to leverage in a way that Boston Properties couldn’t as a public company.”

Defender of the Faith Steven A. Wechsler, president and CEO of the Washington, DC-based National Association of Real Estate Investment Trusts is having none of this privatization talk. “Much of what you’re hinting at exists in other sectors of the economy as well,” he counters. “Linens ‘n Things is being taken private, but no one is calling up the retail industry and asking if it’s the end of public capital markets for retailers.”

The ebb and flow of public companies occurs all the time, he states, and in fact one has only to look at the history of such non-REITs as CB Richard Ellis–which has played the private/public switcheroo to its best advantage in all cycles–to realize that Wechsler is essentially right. He also references the Trizec portion of the Arden deal as well as the Brandywine/Prentiss deal. Privatization is a swinging pendulum, he argues, and the eventual return of the public sector’s favor is as sure as the economic tide.

“We’re seeing a moment in the capital markets where there is some degree of arbitrage between how elements of the private market are valuing real estate and how the public market is valuing it,” he says about those trusts that have switched uniforms. “The only thing certain about that is that it will change over time. There’s more heat than light in a story” about REITs going private, he concludes.

Frankel agrees, predicting that the market will see more REITs go private, even as more IPOs are filed. “You buy a company and do what you have to do, and then you take it or part of it or some permutation of it back to the public markets and that’s your exit,” he reasons. “GE’s going to have an exit. They’re not going to hold those properties forever.”

And remember, as Frankel stated earlier, everything is for sale.

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