Last week's headline in BusinessWeek, "Get Yer Red-Hot Office Towers" (July 7, 2003) caught my attention with its lead: "Sellers are putting their trophy properties on the market for big bucks. Did somebody say 'bubble'?" It turns out that, in May, Equity Office sold the U.S. Bancorp Center in Minneapolis to Wells Real Estate Investment Trust for $174 million. This article reminded me of Zell's comment, "If I can sell at a 6.5% cap rate and buy at a 7.5% cap rate, why wouldn't I do that?" Equity Office stock yields about 7.5%. (Full Disclosure: I do not know the cap rate of the U.S. Bancorp Center.)

Meanwhile, the cover story of the June Real Estate Forum featured Wells, which was "ranked as the number one purchaser of class A office buildings last year, securing 35 buildings with a total of 7.5 million sf for nearly $1.5 billion, according to Real Capital Analytics." And, according to the article, Wells, which sells its funds privately through financial planners, charges fees of 14% to 16%.

So if Wells were to buy at a 6.5% cap rate and their fees totaled 15%, the yield to investors would be about 5.7%. Conversely, to pay a yield of 7% to investors, Wells would have to buy at a cap rate of roughly 8%. ... What do you think? Would you be a buyer or a seller of trophy buildings? A year from today, will cap rates be higher or lower?

--Peter Pike