ProLogis and AMB Property Corp. today confirmed their "merger of equals," a move that could have a profound impact on the U.S. and global industrial property markets. But it may take some time before the balance of power begins to shift in what has been an entrenched buyer's market for U.S.-based warehousing and distribution center space.
By any measure, the merger is a big deal. The combined portfolio includes about 600 million square feet spanning 22 countries on four continents. The combined assets have a value of $46 billion, the companies say. ProLogis and AMB both have a large presence in North America, Western Europe, and Japan. ProLogis is stronger in Central and Eastern Europe as well as the United Kingdom. AMB has a sizable presence in China and Brazil. ProLogis, which owns and operates 435 million square feet of industrial property, has the bigger footprint, but AMB is considered an equal, if not stronger, presence outside the United States, analysts say.
Under the transaction, each ProLogis common share will be converted into 0.4464 of a newly issued AMB common share. The combined company will retain the ProLogis name. The deal is expected to close by the end of the second quarter.
The merged entity's corporate headquarters will be in San Francisco, AMB's current base. Operations headquarters will be housed in Denver, ProLogis's current corporate base. AMB CEO Hamid R. Moghadam and ProLogis CEO Walter C. Rakowich will serve as co-CEOs through the end of 2012. At that time, Rakowich will retire and Moghadam will become the sole CEO, the companies say.
The merger is the first major salvo in what may become a multiyear consolidation phase of industrial real estate investment trusts, or REITs. A source familiar with the transaction says even senior ProLogis executives were stunned by the announcement and the deal's scope. "Shock and awe" is how the source described the consensus reaction at ProLogis's headquarters.
Because both companies lease and manage their own industrial capacity, a concentration of this type could, in theory, tighten up the market and end the leverage that buyers and lessees have been exerting since the financial meltdown and subsequent recession caused a massive drop in property values and asking rents. While many property markets have stabilized in recent months, rents remain relatively low, and developers report still having to grant concessions to attract and retain tenants.
Market conditions are not expected to change any time soon, according to Stephen F. Blau, senior director at Newmark Knight Frank Smith Mack, a Wayne, Pa.-based real estate consultancy. Rents won't firm, he says, until demand picks up, and that won't happen until more favorable employment trends take hold.
Blau called the merger a "defensive" move by both companies. "It represents an opportunity to scale operating costs across a larger portfolio—so the first result will be some economies [of scale] that will allow the merged entity to operate profitably Ã¢ï¿½Â¦ until the portfolio is stabilized and rent growth returns," he says.
The companies are mum on what assets, if any, they may sell in markets considered non-strategic to their future operations. Richard H. Thompson, executive vice president, Americas, for Jones Lang LaSalle, the Chicago-based real estate services and consulting giant, says AMB's and ProLogis's common model of leasing and managing their respective facilities might create significant market dominance and enable lease rates to be raised over time.
Thompson says much will depend on what path AMB, considered the financially stronger of the two, will take and whether its strategy will prevail. "AMB has historically liked some markets and would potentially exit other markets," he says.
Blau says that if history is any guide, the REITs will be the big winners, just as they were after the nation's economy dug out from the savings and loan crisis of the early 1990s and opportunistic developers snapped up properties at bargain prices.
This time, Blau says, there are fewer REITs around to pick up the pieces from the Great Recession. When the dust settles, those who've survived "will control significantly more real estate than they do today," he adds.