Behind the Rise of Prologis
The world’s largest industrial REIT didn't get so large by accident. How does the company’s size impact smaller industrial investors?
The country’s largest private industrial landlord earlier this week announced it was about to get a whole lot bigger. Prologis’ $26 billion all-stock acquisition of another industrial heavyweight, Duke Realty, will bring the REIT’s holdings to more than 1.1 billion square feet around the world.
Prologis has been among the largest players in the industrial sector for many years. But how did it get to where it did today as the largest industrial REIT in the world?
Going All-In on Industrial
Founded as AMB Property Corp. in 1984, the private investment firm initially focused on more than just industrial. It also targeted office and retail assets. The firm shed most of its office properties after the savings and loan crisis, later divesting from retail in 1999. Since that time, the company has kept industrial real estate as its primary focus.
Though the firm has had its ups and downs — even selling off some of its foreign holdings in Singapore, China, and Japan to cover outstanding debt — the last decade has seen Prologis soar, largely due to its focus on what it terms “high-barrier, high-growth markets.” Its target tenant base, too, continues to drive its growth. The investor focuses on tenants involved in business-to-business and retail and online fulfillment. They include Amazon, The Home Depot, FedEx, and many others. This has held true even as the REIT continues to buy industrial properties in smaller, secondary markets.
Image by Arno Senoner from Unsplash.
Buying Up the Competition
While Prologis is one of the largest industrial developers and has invested in significant modern distribution centers in major markets, its most notable recent acquisitions have been companies. While Duke Realty is the latest — and largest — to date, Prologis has had its hand in multiple mergers and acquisitions in recent years.
In 2020, for example, Prologis made two major acquisitions: Industrial Property Trust and Liberty Property Trust. The Liberty acquisition, pegged at a value of about $12.6 billion, was an all-stock deal similar to the Duke deal. Liberty’s holdings included 108 million square feet of industrial space with another 5 million square feet under construction.
The acquisition of IPT, however, was all cash. Prologis paid roughly $4 billion for the company’s 37.5 million square feet across 236 properties, according to Real Estate Weekly, largely expanding Prologis’ footprint within the REIT’s focus markets.
Significant Cash Flows
Even with commitments of capital toward acquisition and development activity, Prologis has consistently performed well, owing to soaring demand in the industrial space and its position as the main landlord to some of the largest e-retailers. A January podcast from The Motley Fool highlighted that Prologis’ revenue at the end of 2021 represented a 15% gain from the previous quarter.
At the same time, the company’s real estate is occupied — with a portfolio occupancy of 97.4% at year-end. This steady stream of income, especially as industrial rents skyrocket across the globe, has enabled them to keep around $5 billion of cash on hand, combined with their credit facilities.
How Can Smaller Industrial Investors Compete?
Prologis’ ongoing success may leave industrial developers and investors wondering how they can compete for credit tenants. However, a deeper look shows there isn’t much cause for concern. While Prologis’ portfolio grows bigger and bigger, industrial demand is outpacing it. Not only that, it's outpacing all other companies’ existing and upcoming inventory in spades.
With so little vacancy in nearly every major industrial market, simply having and maintaining modern distribution space is enough to secure tenants. Until the supply-demand dynamic reaches equilibrium — which may be some years off — it’s enough. That said, streamlining the operations of your industrial assets is key to long-term growth and even survival in the sector. It will also offer a significant upside in the near term through higher rents and increased profitability.
Related Questions
What is Prologis and how has it grown in the commercial real estate industry?
Prologis is a global leader in logistics real estate, providing a comprehensive range of services to customers across the world. Founded in 1991, Prologis has grown to become one of the largest owners, operators and developers of industrial real estate in the world, with a portfolio of more than 830 million square feet in 19 countries. Prologis has been a leader in the commercial real estate industry, with a focus on logistics and industrial real estate. The company has been involved in some of the largest and most complex transactions in the industry, including the acquisition of Duke Realty for $26 billion in 2021. Prologis has also been a leader in the development of modern logistics and industrial real estate, with a focus on sustainability and innovation. Source
What are the benefits of investing in Prologis properties?
Investing in Prologis properties can provide a variety of benefits. According to Prologis, some of the benefits of investing in Prologis properties include:
- Long-term leases: Prologis properties typically have long-term leases, which can provide investors with a steady stream of income.
- Diversification: Prologis properties are located in a variety of markets, which can help investors diversify their portfolios.
- Strong tenant base: Prologis has a strong tenant base, which can provide investors with a reliable source of income.
- Flexible financing: Prologis offers flexible financing options, which can help investors secure the best loan terms for their investments.
What are the risks associated with investing in Prologis properties?
Investing in Prologis properties carries the same risks associated with any commercial real estate investment. These risks include the potential for decreased property value, increased competition, and the need to pay both principal and interest at the end of the interest-only period. Additionally, Prologis properties may be subject to additional risks due to their location and the nature of the property. For example, Prologis properties located in areas prone to natural disasters may be at risk of damage or destruction.
Before investing in Prologis properties, it is important to speak with a qualified commercial real estate broker to discuss all of the risks and benefits associated with this type of investment. Additionally, investors should research the area and visit the municipal planning department to learn about any potential developments or projects that may affect the property's value.
What are the different types of financing available for Prologis properties?
For Prologis properties, the financing options available depend on the type of property. Industrial properties, such as manufacturing properties, warehouses, and flex properties (office-industrial hybrids) can be financed with loan options from Commercial Real Estate Loans starting at $1,000,000 and up. To learn more, you can speak with a commercial mortgage banker or contact [email protected].
What are the advantages of using a commercial real estate loan for Prologis properties?
Commercial real estate loans for Prologis properties offer a variety of advantages, including fast funding, flexible terms, and access to capital. Bridge loans are among the fastest-closing financing packages available to commercial real estate borrowers, with a loan closing in a matter of days. This enables investors to execute their real estate strategies quickly and effectively. Additionally, commercial real estate loans offer flexible terms, allowing borrowers to customize their loan to meet their specific needs. Finally, commercial real estate loans provide access to capital, allowing borrowers to purchase or refinance a property without having to use their own funds.
What are the best strategies for obtaining a loan for a Prologis property?
The best strategies for obtaining a loan for a Prologis property depend on your specific needs and financial situation. It is important to research all of the available options. Some may be a great fit, while others may not pencil out. It is also important to have a clear investment strategy in place before taking out a loan. This includes understanding what your goals are for the property, how you will achieve those goals, and if the building needs to be renovated or if capital improvements are needed.
Commercial real estate loans can come in many forms, including traditional bank loans, bridge loans, and SBA loans. Each of these loan types have different terms and conditions, so it is important to understand the differences between them. For example, traditional bank loans typically have longer terms and lower interest rates, while bridge loans are short-term loans with higher interest rates.
It is also important to consider the loan-to-value ratio (LTV) when obtaining a loan for a Prologis property. The LTV is the ratio of the loan amount to the value of the property. Generally, lenders prefer a lower LTV, as it reduces their risk.
For more information on obtaining a loan for a Prologis property, please visit Commercial Real Estate Loans and 5 Considerations for Taking an Office Loan.