Jan. 11 (Bloomberg) -- Equity Office Properties Trust, the U.S. office landlord that agreed last year to be acquired by Blackstone Group LP in the biggest real estate buyout ever, may become the object of a bidding contest.

Cerberus Capital Management LP, the private equity firm whose chairman is former Treasury Secretary John Snow, is weighing a bid for Chicago-based Equity Office that may top Blackstone's offer, people familiar with the situation said. Equity Office agreed Nov. 19 to Blackstone's $20 billion bid. With debt, it would be worth $36 billion, making it the largest leveraged buyout in history.

Equity Office, whose chairman is billionaire Sam Zell, owned or had a stake in 543 buildings from New York to Los Angeles as of Dec. 31. The company has been selling office buildings in weaker markets such as Atlanta and buying in markets such as New York where rents are rising and vacancy rates are dropping.

``There's still a good amount of room for Blackstone to go higher,'' said John Cheigh, a portfolio manager at Cohen & Steers, Equity Office's largest shareholder with about 29 million shares as of Sept. 30.

New York-based buyout firm Cerberus is considering making an offer with other investors, the New York Times reported today. They include Starwood Capital Group LLC, a firm run by Barry Sternlicht, and Walton Street Capital LLC, according to the newspaper. Walton Street is led by Neil Bluhm, a real estate investor.

Equity Office's shares closed above Blackstone's offer price for a second straight day. The shares rose 51 cents to $49.26 in New York Stock Exchange composite trading, up 1.1 percent today, and 1.6 percent above Blackstone's $48.50 a share offer. Colin Higgins, the president of San Mateo, California-based Golub Group LLC, which owns 176,000 shares of Equity Office, said ``a competing bid that would be in the 50-plus dollar range would be more appropriate.''

Tightening Market

U.S. office vacancy rates fell to 13.6 percent at the end of 2006, from 14.6 percent a year earlier, according to commercial real estate brokerage Grubb & Ellis Co. Asking rents for so-called Class A urban offices averaged $40.90 a square foot, up 9.6 percent from the end of 2005, the company said.

``The market is tightening,'' said Robert Bach, Grubb & Ellis's national director of market analysis. Companies like New York-based Blackstone and Cerberus are ``especially anxious to acquire properties in markets that are supply-constrained, areas like Manhattan, Southern California, and San Francisco, places where it's hard to build and rents are likely to rise,'' he said.

Starwood Fund

Equity Office spokeswoman Terry Holt declined to comment, as did Cerberus spokeswoman J.J. Rissi and Blackstone spokesman John Ford. A message left for Zell at Equity Office wasn't immediately returned. Sternlicht's Starwood office said he was not available for comment. Walton Street principal Eric Mogentale, declined to comment in a telephone interview today.

Greenwich, Connecticut-based Starwood, which specializes in property investments, raised a $1.5 billion investment fund in December 2005. The firm has made investments worth about $14 billion since it was founded in 1991, according to its Web site.

Chicago-based Walton Street has raised $3.4 billion in equity capital and made more than $30 billion in real estate investments, according to its Web site.

Investment firms such as Cerberus, Blackstone, Starwood and Walton Street use a combination of equity and debt to make acquisitions, usually borrowing about two-thirds of the purchase price. They seek to sell their investment after three to five years after seeking operational improvements, additional investments and cost cutting.

`More Likely'

Citigroup analyst Jonathan Litt said in a note to investors on Tuesday that the strong business environment for office building owners, including their ability to charge higher rents, ``makes a topping bid more likely.''

Litt wrote in the report that a buyout offer of $50 to $52 a share would be most likely if a rival bid emerged.

In the week the Blackstone transaction was announced, Equity Office shares closed above the offer price three times on speculation another buyer would attempt to top the Blackstone bid. Before yesterday, the shares had not closed above the $48.50 offer price since Nov. 24.

``Blackstone's not the only player out there,'' said Dean Frankel, a portfolio manager at Urdang Securities in Plymouth Meeting, Pennsylvania, which owned 2.4 million Equity Office shares at the end of September.

Equity Office would owe Blackstone $200 million, or 1 percent of the cash portion of the bid, should it accept a competing offer, according to the terms of their agreement. That so-called breakup fee is less than half the standard 2 percent to 3 percent. A vote on the Blackstone acquisition by Equity Office shareholders is scheduled for Feb. 5 in Chicago.

Flush With Cash

Flush with $401 billion in new funds raised last year, private equity funds and management announced a record of more than $700 billion of takeovers, according to data compiled by Bloomberg. The acquisitions announced by the buyout firms were among the largest ever, including Equity Office, the $33 billion offer for hospital company HCA Inc. and the $27.8 billion takeover of the world's largest casino company, Harrah's Inc.

Cerberus in November led a group that bought 51 percent of General Motors Corp.'s finance unit for $7.4 billion. It also was part of a group that last year acquired U.S. supermarket chain Albertson's Inc. for about $9.8 billion.

The firm, founded in 1992 by Stephen Feinberg and William Richter, manages about $22 billion in capital and employs more than 275 people worldwide. Former U.S. Vice President Dan Quayle is chairman of Cerberus's international unit. The company is named for the three-headed dog that guards the gates to the underworld in Greek mythology.

To contact the reporters on this story: Brian Louis in Chicago at blouis1@bloomberg.net; Brett Cole in New York at coleb@bloomberg.net.

Last Updated: January 11, 2007 16:21 EST