Two companies lead in battle for warehouse space

by Bloomberg29 Oct 2019

It’s the year of the warehouse mega-deal, and the two largest players are running away from the pack.

Blackstone Group Inc. and real estate investment trust Prologis Inc. are locked in an Amazon-fueled acquisition battle, gobbling up U.S. warehouse space in a bid to profit from rising consumer demand for fast shipping.

Together, the two companies have inked warehouse acquisitions worth more than $38 billion in 2019. More than 40% of that total comes from a pair of deals announced in the last month.

“There’s a huge amount of demand coming from e-commerce,” said Lindsay Dutch, a Bloomberg Intelligence analyst. “The growth of online shopping and the desire for quick delivery times has really driven a need for more warehouses, especially in the last mile.”

When the most recent transactions close, Blackstone and Prologis will own nearly 1.1 billion square feet of warehouse space in the U.S., more than the next 14 largest owners combined, according to data compiled by CBRE Group Inc.

Their combined footprint could decrease as the companies dispose of newly acquired assets. Blackstone sold about $3 billion worth of logistics real estate to Nuveen Real Estate in October, and Prologis has said it will sell some assets.

On Sunday, Prologis agreed to buy Liberty Property Trust for $9.7 billion, adding 107 million square feet of space in markets including Chicago and Houston. It was the third time in the last 18 months that Prologis has swallowed up a competitor, following deals for DCT Industrial Trust Inc. and Industrial Property Trust Inc.

Blackstone, too, has been adding to its warehouse portfolio. In June, the private equity giant agreed to pay $18.7 billion for U.S. logistics owned by Singapore’s GLP Pte., and followed that with a $5.9 billion deal for more logistics space in September. Globally, Blackstone has spent roughly $70 billion on logistics space in recent years.

There’s a simple reason the two warehouse giants are winning an outsized share of available deals, said Eric Frankel, an analyst at Green Street Advisors: They have capital available. In the case of Prologis, its scale allows it to pay a premium for property, Frankel said.

While online shopping has grown rapidly in recent years, there’s reason to think the e-commerce boom has plenty of room to run. About 20% of sales in consumer electronics and apparel now come online, but only 4% of food and beverage sales happen there, according to eMarketer.

Amazon and Walmart are investing billions to automate warehouses and accelerate delivery times, in part to help deliver on pledges they’ve both made this year to get millions of orders to customers’ homes in just one day.

Amazon’s shift to next-day delivery “will raise consumers’ expectations,” Morgan Stanley analyst Simeon Gutman said in a note Tuesday. “To avoid losing relevance, retailers might also need to move to one-day delivery.”

That could spur more warehouse deals, which accounted for 35% of large real estate transactions over the 12 months ending in September, according to Real Capital Analytics data on sales of portfolios and whole companies. That’s up from 20% in September 2015, as investors shift focus from retail and office deals to industrial real estate.

For its part, Prologis is stepping up where competitors are backing off. In August, the chief executive officer for industrial REIT Duke Realty Corp. said that the company preferred investing in its development pipeline rather than paying up for a warehouse portfolio at current prices.

Still, the recent run of large warehouse deals can’t go on indefinitely, if only because there aren’t many large portfolios left to buy.

“The availability of high-quality portfolios is dwindling,” Prologis CEO Hamid Moghadam said in July.

When those assets do hit the market, the company plans to compete for them, Moghadam said, because “we can really squeeze a lot more juice out of those oranges.”

 

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