Few companies have been more successful in turning globalization to their advantage than ProLogis. In 1994 it was a small US industrial property company with $300 million of warehouses. Today it is the world’s largest developer, owner and manager of distribution facilities, with $40.8 billion of assets and a commanding share of most of the big markets around the world.
Jeff Schwartz led the company’s rapid expansion to a position of global dominance, spearheading its successful forays into Europe and east Asia before becoming chief executive in 2005. Under Schwartz, ProLogis was a seemingly unstoppable force, hoovering up land and churning out speculative development, leaving rivals trailing as its empire spread across the globe.
When the downturn came, ProLogis was not alone among developers in failing to predict its severity. However, the company’s former acquisitiveness left it particularly exposed to the effects of the crisis. The health of the logistics sector is closely tied to that of retailers and manufacturers, and investors swiftly fell out of love with the company as the global economy began to contract.
The US-based real estate investment trust’s share price fell more than 90% from its peak of $71.79 at the end of 2007 to less than $5 in November 2008, and Schwartz shocked the industrial property world by resigning. New chief executive Walt Rakowich moved to allay fears about the company’s future by calling an investor meeting and revealing a radical change of direction. ProLogis was to halt all new development and land acquisitions, halve its dividend for 2009 to $1 a share and cut operating costs by 20% in an attempt to reduce its debt burden and the consequent risk to investors.
At the packed two-hour meeting, Rakowich admitted: "In hindsight the company took on a tremendous amount of development, in the last two years in particular. Unfortunately, that strategy, combined with the economic downturn we have today, created a need to reduce the level of risk in our business and de-lever our balance sheet. And we will do that. Period. End of story."
Stock market analysts welcomed ProLogis’ new strategy but remained unsure about the company’s future. In a research note, JPMorgan analyst Mike Mueller responded: "The company’s focus has changed 180 degrees from global expansion to surviving the capital crunch after overextending itself in a deteriorating market. Our take is that there are still a lot of unknowns with respect to how exactly the company gets from point A to point B, and the path will likely include meaningful short-term pain."
Analysts and investors are still anxious over the issue of ProLogis’s debt repayments. The company has $3.9 billion of consolidated debt maturities over the next two years, including the expiration of its $3 billion global credit facilities in 2010. They are hoping that the company has not responded too late to the danger, and that retrenchment will allow it to stabilize and survive until the market begins to improve. Many remain unconvinced, however, and since the investor meeting, the company’s share price has continued to slide, reaching a new low of $3.42.
The strategy that made ProLogis an investors’ darling is now one of its greatest weaknesses. The company’s business model included three principal sources of revenue: owning and operating warehouses, selling developments, and fees earned through managing funds into which many of its properties were placed.
These partnerships with institutional investors generated large returns, with nearly half of ProLogis’s income this year coming from 18 funds managing $22 billion of property in diverse locations such as Europe, the US, Japan and Mexico. Institutional investors are now retreating from industrial real estate as demand diminishes and they try to reduce exposure to property in the face of the shrinking value of equities in their portfolios.
Such has been the dominance of ProLogis over recent years that few in the distribution property market are even willing to contemplate the possibility that it might not survive the downturn: "ProLogis has too many talented people, the business is too big and they have too many customers to fail. You have to think they will come out strong when things improve," says Guy Frampton, European head of industrial and logistics at CB Richard Ellis.
There have been some positive signs for ProLogis this year. By mid-November the company had let about 95 million square feet across its portfolio, better than the figure for 2007, and Rakowich argues that markets are not oversupplied with industrial space.
However, Steven Watt, head of European industrial and logistics at Cushman & Wakefield, argues that even before the downturn there were signs that ProLogis’s position was being eroded. He says the developer was losing market share in central and eastern Europe to such rivals as Panattoni, Goodman, Segro and First Industrial.
"The cake was getting bigger, but the ProLogis share was diminishing," he claims. "They were regarded as a bit aloof and less flexible when dealing with occupiers. Like a big oil tanker it was difficult for ProLogis to slow down and turn compared with nimbler players who were biting market share from them."
He also argues that ProLogis’s recent troubles will damage occupiers’ confidence in the company’s ability to deliver developments: "If I was advising a [distribution] user, the pendulum has swung towards Segro and Gazeley. Because of their stronger funding situation, you have to think they would manage the crisis better," he says.
Despite its problems ProLogis’s chief selling point remains intact. While the development pipeline has been turned off, it still has plenty of space available and it is still better able than any other developer to provide modern distribution buildings for its clients in all of the biggest markets – and many emerging locations too.
The company’s empire-building is on indefinite hold. ProLogis has hitherto been characterized by its aggressive expansionism, providing opportunities for some of the most highly skilled and ambitious people in the sector. In a period of retrenchment it might prove difficult for ProLogis to hold on to its best personnel. If the company survives the current crisis it is likely to emerge reduced, chastened and with a far more cautious approach than the ProLogis of old.
Gazeley positioned to power ahead
ProLogis executives were always inclined to snort when the word rival was used to describe Gazeley. The UK-based industrial developer was a keen competitor in western Europe but its global operation was embryonic in comparison to that of the US firm. That could be set to change, however, as oil money begins to flow into Gazeley’s coffers from its new Dubai-based owners.
In June, Economic Zones World (EZW), part of the Dubai World sovereign wealth fund, paid £300 million ($462 million) for the developer. The move surprised the market, which had doubted that a buyer could be found in the face of the economic downturn. However, Dubai World had strategic reasons for acquiring a warehouse developer.
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| Gazeley’s carbon neutral distribution centre at Chatterley Valley |
DP World, another Dubai World company, is one of the world’s biggest ports operators. Gazeley’s development expertise will help it exploit the capacity for industrial development around its facilities, as well as providing a more comprehensive service for its existing logistics customers. Formerly the development subsidiary of retailer Asda Wal-Mart, Gazeley was never considered to be a core asset by its parent company. It had nonetheless developed more than 60 million square feet of warehousing worldwide, built up a strong position in western Europe and had begun to establish operations in China, India, Mexico and Poland. Following the takeover by EZW, its global expansion has accelerated, and efforts are under way to enter the US and Russian markets.
Gazeley’s long-standing chief operating officer, Pat McGillycuddy, has relocated to Dubai as the new COO of EZW, and the relationship between the two companies will provide Gazeley with a powerful position in the Middle East, an important emerging market for distribution property. EZW’s flagship scheme, the Jebel Ali Free Zone (Jafza) business park in Dubai, alone provides 49 square kilometres of development land.
At a time when funding for development has largely dried up and many competitors are paralysed, access to a sovereign wealth fund’s billions will be a huge advantage for Gazeley: "It is a very smart move and it puts them in a very strong position for the next two to three years," says Watt. "The money seems to be there, the management is exceedingly strong and they have not spread themselves too far and wide."
Gazeley is also known in the market as a pioneer of green warehousing. Global head of sustainability Jonathan Fenton-Jones is an acknowledged authority on low-carbon development and the company plans to create the first warehouse building to be carbon neutral without the need for offsetting at Chatterley Valley in the UK.
Frampton predicts that thanks to the difficulties afflicting ProLogis, which has also emphasized sustainability, Gazeley is well placed to take centre stage on environmental issues. "They will probably step that up – there is an opportunity for them to really put their stamp on the green agenda next year," he says.
However, it is still not known how aggressive an approach Gazeley and its new backers intend to adopt. There is little competition in the market for land acquisition or speculative development, but even with EZW’s substantial financial resources negative sentiment may mean that Gazeley holds fire until the market begins to improve. It is rumoured that EZW recently refused to approve the acquisition of two substantial sites in the UK from distressed developer Wilson Bowden.
Gazeley has historically been less inclined towards speculative development than ProLogis, usually proceeding only where an institutional funding partner has been secured. This has helped to prevent the company from becoming over-extended and such cautious habits might be difficult to shake off.
Despite the limitations placed on it by Asda Wal-Mart’s ownership, Gazeley gradually earned the right to be mentioned alongside ProLogis and Australian-based Goodman as a leading global provider of distribution warehousing. With EZW’s backing it might at last have the cash to rival or even surpass them as the economic recovery begins and a new world order emerges.