REIT's Leader Inherits
A Market in Transition

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What do the Chicago Cubs and Equity Office have in common? Dusty Baker's hiring as Cubs' manager has been a foregone conclusion here since the end of the baseball season. Likewise, the elevation of Richard Kincaid to president and chief executive officer of Equity Office Properties Trust was apparent during the dog days of summer. In Mr. Kincaid's case, though, it involved recovering from a brushback pitch from his boss in April, shortly after the job became available with the sudden departure of Timothy H. Callahan. After being told by chairman Sam Zell that he wasn't quite ready for the top job, Mr. Kincaid continued work on revamping the largest U.S. office REIT's property-management and leasing systems as well as mustering the troops during a period that not only saw a change in the company structure, but an economic slowdown to boot. His boss and board of directors, who had been focusing on managers from outside the industry along with those in real estate, took notice. Before Labor Day, Mr. Kincaid was pretty much in charge, though the formal announcement wasn't made until Nov. 18. Mr. Kincaid spoke of his elevation from chief operating officer, as well as the future of his company and office real estate, with me hours after the announcement.

GlobeSt.com: Sam Zell mentioned during a conference call that he called you to his office following Tim Callahan's departure to tell you that while he was impressed with your work, you may not have been quite ready for the president/CEO job. What was your reaction?

Kincaid: At that time I was chief operating officer and I was the chief financial officer, so I had my hands full. I'd only been COO since October and I was in the middle of trying to take an exhaustive look at a re-engineering and process improvement. Also, I had worked for Sam for a long time. I was disappointed, but I had plenty of things to do. Frankly, they did the right thing -- they went out and ran a process. I expressed my interest at that time but focused on getting people through this disruption and execute. The process was very helpful for the board to compare and contrast their alternatives, frankly.

GlobeSt.com: How did you think it would end up?

Kincaid: I thought they would go outside because they had stated that. But Sam was watching the whole team work well together in a difficult economic environment, certainly with a lot of disruption. He saw people come together and do some real good things. I think I convinced him that he had quite a bit of talent here.

GlobeSt.com: During the call, he mentioned your leadership. Can you describe how you rallied senior leadership during these last few months?

Kincaid: One of the things I'm real proud of is the re-engineering process, which we're calling EOPlus, but it was a stressful thing for many people. We were looking at everything that we do and questioning some of the sacred cows. To see how people went from defensiveness to fully embracing change -- while you're dealing with the whole economic situation and the CEO disruption -- was an extraordinary thing to watch. We had to create an environment that started to point in the direction we wanted to go. But we also had to get our management team to accept it. We had 120 people involved on a task force, and we had to let them go down a lot of paths and let them arrive at a destination, so it became their project and not mine. I think that's what happened. I think the change, when we implement it, will be very profound. To get that done on the scale that we'll be doing it, in this environment, without a CEO, has just been real great to see.

GlobeSt.com: How is the reorganization progressing, and how long until you roll it out across the country?

Kincaid: We're going to roll it out in all our markets by June of '03. So we're right on track and making a lot of progress.

GlobeSt.com: In addition to the previously announced move from acquisitions to operations, what changes in corporate strategy can we expect now that you're in charge?

Kincaid: A couple of things. I think the biggest change -- not only in our company, but in the REIT sector as a whole -- is internal operating excellence. That's going to drive external opportunities. Before, external opportunities beget external opportunities. It was very acquisition-driven. The firms that really optimize what they have will have a stock-market multiple advantage, and they will become the consolidators. It is going to be increasingly incumbent on people to make their existing operations drive their growth, because that will give them the access to capital. We will grow again. We'll be a major consolidator of the private-to-public move. We're going to be in a position of balance-sheet strength and asset sales to do that. We're going to continue to provide a high level of service -- very targeted though, perhaps more so. People focus on the cost side of it, but what we're really trying to do is develop a lower-cost model with a high level of service. I think we can do that. We want to be able to compete out there by saying customers in our buildings will have a lower occupancy cost than anybody else with very high service. That's really what we've done in Boston and that's where we're going to get a real competitive advantage.

GlobeSt.com: In what ways will your management style be different from Mr. Zell's? How about Mr. Callahan's?

Kincaid: I am more of the nonhierarchical, nonimperial CEO. That's sort of the modern CEO -- take away the trappings, be non-autocratic. You have to have a very strong team and get them to work together. That's not to say I'm not decisive because I am. I'm just not one for hierarchy or trappings of office. It just didn't fit with me. Sam has a larger-than-life persona. What he really likes to do, and spend his time on, is vision, deals and deal structures. There are few better in the world than Sam at that. I'm highly influenced by Tim. I worked with him for 10 years. Some things I'll probably do differently; he spent an awful lot of time on acquisitions and deals than I will. I'll continue to spend a lot of time on that, but I'll spend more time on operations than we did in the past.

GlobeSt.com: What are your own thoughts on the state of the U.S. office market? Has it turned the corner in terms of vacancy and lower rents?

Kincaid: Vacancies won't peak until the first part of '03. It's at 15.6% and will probably get above 16%. I think we're close to the bottom in most markets. The only sector in which we might have some downside is financial services. Firms seem to be downsizing quite rapidly in the fourth quarter. But for the most part things are starting to bottom. Unlike the last cycle, it's almost the exact opposite. The weakness started in the West with the technology markets and is working its way east. But we've seen signs of bottoming on the West Coast. The recovery now will be all about job growth. We have only 23 million square feet to be delivered in our top 20 markets next year and 6.5 million square feet in '04. That's down from a peak of 110 million square feet in 2000. Right now the development pipeline is shut. If we get some job growth, we'll start to recover.

GlobeSt.com: Going back to acquisitions for a second, are there any on the radar screen in Chicago? There's one prominent one that might become available after the first of the year.

Kincaid: We like Chicago. The suburbs are quite weak, and we think the CBD will catch up a bit because of the amount of supply coming on in the next couple of years. We would look at Chicago, but it would have to be priced and underwritten for a very difficult time. Unfortunately, a lot of these new developments are emptying out some very nice buildings that are institutionally owned. So we think it will be challenging here for the next couple of years. We would not hesitate to look at more opportunities here. We just have to make sure the pricing reflects the risk.

GlobeSt.com: Would Sears Tower be among the opportunities you would look at?

Kincaid: Sears Tower is difficult. It would certainly be very difficult to underwrite right now from many angles -- debt, insurance, market acceptance. It would be a challenge.

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