The merger of Prologis and DCT Industrial Trust could spark additional consolidation in one of the best-performing real estate sectors of the past year.
“There aren’t that many people on the dance floor,” John Guinee, managing director of equity REIT research at Stifel Nicolaus, told IPE Real Assets. “I would be astounded if at least one of the other six industrial REITs was not involved in a merger or other transaction before the end of the year.”
In addition to Prologis’ $8.4bn acquisition of DCT, Guinee said he expected large private equity fund managers such as Blackstone, Starwood, and Apollo to explore potential industrial deals. “Their favourite asset class is industrial, and we expect they will sharpen their pencils,” Guinee said.
Guinee’s projection is already materialising as Blackstone has earlier this week agreed to buy Gramercy Property Trust for $7.6bn.
Both transactions illustrate how e-commerce continues to influence the size, location and capabilities of US industrial property. Amazon, for example, will remain the largest single tenant of the Prologis-DCT merged entity, leasing about 3% of the space Prologis owns.
Large scale is required to succeed in the US industrial market, as the increasing adoption of e-commerce business standards affects the location of logistics assets, building capabilities and competition among industrial property managers.
While it may be some time before an industrial property owner attains the size of Amazon, there is no doubt that the Prologis-DCT merger creates a logistics colossus.
It is also becoming clear that Prologis has mastered the post-merger integration skills required to create long-term value by acquiring entire portfolios as well as focusing on organic growth.
Peter Siciliano, a director at Fitch Ratings, told IPE Real Assets that, according to consensus earnings forecasts tracked by SNL, shares of listed industrial property companies have been trading at a premium to the value of their assets over the past several months.
Prologis and Blackstone both offered premiums of around 15% to the last closing price for their target company’s shares.
The bottom line for US industrial property “bigger is better”, said Tim Wang, managing director and head of research at Clarion Partners, which owns and manages around 140m sqft of US industrial space, including 19 facilities leased to Amazon.
Having more buildings in key distribution markets allows asset owners to leverage economies of scale and reduce the operating costs of developing, leasing and managing assets, helping improve returns.
Second, broad geographic coverage enables industrial property investment managers to offer more complete solutions to major warehouse space users, such as homebuilding and furnishings retailers that trade in bulky goods, as well as logistics services providers that manage the nuts and bolts of US industrial and manufacturing companies.
While Amazon is the biggest factor in the e-commerce universe, accounting for about 45% of overall e-commerce growth, Wang highlighted that e-commerce comprises just 25% of total US industrial space demand, with the rest stemming from ordinary retailers, manufacturers and international trade.
The low cap rate on the Prologis and DCT transaction, he noted, “suggests the industrial sector is red hot, and the secular shift from the retail real estate to industrial warehousing is continuing”.
Guinee believes Prologis has a leg up as the sector consolidates. “A 15% premium is hard for a board of directors to reject,” Guinee said.
“Prologis could do that to any other REIT, and roll that into their portfolio instantaneously.”