The top line story on Blackstone Group’s $5.6 billion take-out of CarrAmerica (NYSE: CRE) last week is simple: It’s fresh proof of the private equity capital glut that’s stalking public REITs. In 2005, reports SNL Financial, there were $20.4 billion in REIT privatizations, up from $2.64 billion in 2004, and roughly $9 billion in such deals have been struck during the past 10 weeks alone.

But the deal also represents a steep bet on Silicon Valley’s beleaguered office market, where CRE owns roughly 5 million sq. ft. of office space, which represents nearly one-quarter of its wholly owned office portfolio. Last May, Blackstone was rumored to have been among the bidders for the 5.3 million sq. ft. Silicon Valley office/R & D portfolio owned by private investors Richard Peery and John Arrillaga. Those properties are still on the market, and Blackstone is apparently no longer in the running. Like CRE, Blackstone declined to comment for this story.

Washington-based CRE owns 4.8 million sq. ft. of downtown office space in the nation’s capital, but it has been expanding in Silicon Valley in recent years. In 2004, for example, CRE bought the Mission Towers I in Santa Clara for roughly $130 million, adding 282,000 sq. ft. to its portfolio. CRE also owns significant office assets in Sunnyvale, Palo Alto's Stanford Research Park, and properties in Mountain View, home of search engine juggernaut Google.

Six years after the tech wreck, Blackstone’s move can still be viewed as a value play. After peaking at 24% in 2003, office vacancies registered 17.12% at the end of 2005, reports Colliers ABR. Net absorption more than doubled last year, to 1.75 million sq. ft from 764,626 sq. ft. in 2004. Despite that progress, Silicon Valley office vacancy was still well above the national average of 14% at year-end 2005. Average starting rents for office space were running $1.93 per sq. ft. at year end 2005, which represented a 5% increase during the previous 12 months. Blackstone, whose nascent office holdings included a 350,000 sq. ft. pair of properties in Rockville, Md., also gains a lead role in the nation’s healthiest office market. According to Cushman & Wakefield data, office vacancy in Washington D.C. stands at just 7.2%, making it the tightest U.S. office market. How will Blackstone, better known for snapping up hotel REITs in recent months, play in the office sector? In a March 6 note, Bear Stearns analyst Ross Smotrich projected that Blackstone will likely keep CRE’s operating platform intact rather than just flipping the assets.

Under that scenario, Blackstone will assume an 18.4 million sq. ft. portfolio, ownership interests in joint ventures that control another 7.9 million sq. ft. and 202 acres of land zoned for 3.1 million sq. ft. of additional development. A full 47% of the remaining portfolio (based on 2005 operating revenues) is scattered across the San Francisco and southern California regions.