$19b Equity Office sale part of growing trend.

The Blackstone Group announced on Sunday that it has acquired Equity Office Properties, the largest real estate investment trust in the country, for $19 billion.

The deal is the biggest in a series of mergers and acquisitions that have swept the REIT industry in recent years and highlights the growing preference among real estate companies to operate within a private ownership structure.

Private ownership is thought to provide a real estate company with a greater level of leeway to choose certain investment strategies versus being beholden to the public market, which some REIT executives have bemoaned as being arbitrary, impatient for immediate returns, and risk averse. Private real estate companies are also more efficient to operate because they aren't forced to comply with the rigid and costly accounting guidelines that public companies must follow under the Sarbanes Oxley Act. But perhaps more than anything else, private investors have been willing to pay much more for real estate portfolios than the public market. "I don't think that Blackstone overpaid in this deal ... this just shows that the public markets are still having a difficult time accurately valuing public REITs," said Dan Fasulo, a REIT analyst at the real estate research firm Real Capital Analytics. "It has a lot to do with the short term mentality of Wall Street. Sometimes it's necessary to take a longer view when looking at real estate as an asset."

On a per share basis, Blackstone agreed to pay $48.50, an 8.5% premium over EOP's stock price on Friday and 20.5% more than the company's average share price for the last three months. As part of the deal, Blackstone will also take on roughly $17 billion of Equity Office Properties' outstanding debt, valuing the total transaction at $36 billion.

Blackstone will take EOP's place as the owner of more commercial real estate assets than any other landlord in the nation. This year, the private investment firm partnered with Brookfield Properties to acquire two other REITs--Trizec for $4.8 billion and CarrAmerica, for $5.6 billion.

Although Equity's holdings are located nationally, the company had shed much of its holdings in smaller markets in favor of bulking up on assets in the country's leading office markets, especially New York City. The REIT purchased the commercial office portion of 1540 Broadway earlier this year, which has a significant block of vacancy. Last year, it purchased 1095 Avenue of the Americas, a trophy building that is in the process of being renovated.

Both are management intensive projects whose deft handling will test quickness and effectiveness of Blackstone's transition into owner.

"It will be interesting to see how Blackstone handles the day-to-day activities not only of the Equity Office properties, but also Trizec and CarrAmerica," said David Arena, president of Grubb & Ellis in New York City. "They are now going to be in the service business." However, Michael Grupe, executive vice president for research and information at the National Association of Real Estate Investment Trusts (NAREIT) said that, historically, private equity investment isn't a particularly long-term hold. "I don't see a lot of this capital as acquiring these companies to be in that form of business for a long period of time--whether in real estate, commodities or health care. They see it as an opportunity to arbitrage, to realize that value in short order. I think a lot of these private equity deals will look at some of the real estate assets they have bought and will sift through those portfolios reselling those [non core assets] and keeping those they want to focus on.

"Their exit strategy has to be to take those assets public again in some form in order to make the kind of profits that they are indicating to the pension world that they are worth."