Prologis Inc., the world's largest developer and manager of industrial property, will spend $5.9 billion to acquire the U.S. asset portfolio and operating platform of KTR Capital Partners, a megadeal that coincides with one of the most robust cycles in the history of the U.S. industrial market.
The deal, announced late Sunday night, adds KTR's 60 million square feet of U.S. space and 322 properties to the 590 million square feet that are owned, managed or under development in Prologis' global network, San Francisco-based Prologis said in a statement. KTR's strengths are in southern California, New Jersey, Chicago, Dallas, Seattle, and south Florida, markets where Prologis is already strong. The companies' respective U.S. portfolios have a 95-percent overlap, Prologis said.
"It is rare to have the opportunity to acquire a portfolio of such high asset quality, customer profile, and market composition that is so consistent with our own," Prologis chairman and CEO Hamid Moghadam said in the statement. KTR was unavailable to comment.
Prologis U.S. Logistics Venture, a joint venture with Norges Bank Investment Management, which runs the massive Norwegian sovereign wealth fund, will acquire KTR's assets, ProLogis said in the statement. Moghadam said the value of investments jointly held by Prologis and the management firm now exceeds $11 billion. The fund, officially known as the Norwegian Government Pension Fund Global, is believed to be the world's largest fund of its kind, with about $900 billion under management.
The transaction is believed to be the second largest on record in the industrial property space, surpassed only by the Singapore sovereign wealth fund's $8.1 billion purchase late last year of IndCor Properties Inc. from investment giant The Blackstone Group LP. IndCor had about 100 million square feet under management. Yesterday's acquisition affirms the appetite of overseas sovereign wealth firms for U.S. industrial companies that control large-scale properties in prime markets occupied by established, well-financed tenants.
Craig Meyer, president of the U.S. real estate business for JLL Inc., (formerly Jones Lang LaSalle) a large Chicago-based real estate and logistics firm, said this might not be the last transaction involving a sovereign wealth fund buying or taking a large ownership stake in a U.S.-based industrial developer. (ProLogis is a client of JLL's, though JLL was not involved in the transaction.)
Jack Rosenberg, national director-logistics and transportation for Colliers International Inc., a Chicago-based real estate advisory firm, called the Prologis-KTR transaction a "huge deal" that reflects a continued seller's market for industrial real estate as vacancies hit 10-year lows, and in dozens of markets approach all-time lows. The U.S. industrial market has experienced 20 consecutive quarters of positive net absorption, meaning more space is occupied than is vacated. According to JLL data, the average industrial vacancy rate is at 6.8 percent, a 10-year low; in 15 of the top 50 markets JLL canvasses, rates have fallen below 6 percent, which would represent all-time lows in those markets.*
The industrial market did not suffer nearly as badly as the residential and commercial sectors during the financial crisis and the ensuing recession. The industrial sector did not enter the crisis in an overbuilt condition, nor was it financially overextended. When the economy began to recover and e-commerce became a staple of everyday life, demand began to surge for large, high-quality industrial properties in densely populated markets to serve as fulfillment centers. Speculative development, which froze up before, during and after the recession, has still not returned to prerecession levels, an indication that industry players remain cautious despite the current boom cycle.
"It's an historic time for the industrial real estate business. The demand by corporate occupiers has never been stronger. In addition, there has never been more capital chasing industrial real estate investments. And the capper is that there is real rent growth in industrial markets across the U.S.," said Rosenberg.
The transaction is unlikely to lead to higher rents, because the U.S. industrial market is so large and fragmented that no one company exerts pricing control, Meyer said. Any continued rise in rents will be due to basic tenets of supply and demand, and will not be triggered by market consolidation due to one player, albeit large, exiting the market, Meyer added.
Tenants could benefit from the integration should they need the flexibility to quickly expand in one market and contract in another, or if they need to expand in a particular city or region, Meyer said.
Established in 2004 and based in New York City, KTR is led by the same management team that ran Keystone Property Trust, a publicly traded entity that also focused on industrial real estate when it was sold in 2004 for $1.6 billion.
*Editor's note: An earlier version of this article incorrectly stated that rates had fallen below 6 percent in 30 markets canvassed by JLL.
Gartner, Inc.