Already an industrial giant, ProLogis is expected to grow its total portfolio to 350 million sq. ft. by year's end — nearly three times the size of its closest competitor. The Aurora, Colo.-based owner and developer announced in June that it will purchase San Francisco-based Catellus Development Corp. for about $4.9 billion. ProLogis ranks No. 1 in this year's Top 25 Industrial Owners survey with a U.S. portfolio of 224.5 million sq. ft.
In addition to adding 36.4 million sq. ft. of assets, the deal combines the resources of two of the country's top developers. ProLogis ranks No. 2 on NREI's Top 25 Industrial Developers survey with 11 million sq. ft. either completed or under construction at the end of 2004, while Catellus shares the No. 9 spot with 4.4 million sq. ft.
“We think that while the pricing is rich, ProLogis' acquisition of Catellus results in a stronger combined company, particularly in the U.S.,” according to a report written by Banc of America Securities Analyst Russ Nussbaum. With 79% of the Catellus portfolio located in California, New Jersey, Chicago and Dallas, the properties are a good strategic fit for ProLogis. In addition, Catellus' sizeable land bank and development team should enhance growth of the firm over the next few years, Nussbaum notes.
One of the most significant parts of the deal is that Catellus has a large land bank of 1,500 acres that can accommodate almost 30 million sq. ft. of new development in top distribution markets. The ready access to land will help ProLogis fuel its already aggressive development pipeline.
“We have been extremely focused on development,” says John W. Seiple Jr., ProLogis' president and CEO of North America. “We are having a record development year without this acquisition.” ProLogis expects construction starts in 2005 will total nearly 12 million sq. ft. Major projects under way include a new 882,000 sq. ft. building for Solo Cup in Rialto, Calif.
As a result of the merger, Banc of America forecasts that ProLogis will spend $2 billion on development in 2006. ProLogis plans to continue significant Catellus land development projects already under way, including the redevelopment of the Robert Mueller Airport in Austin, Texas; Pacific Commons in Fremont, Calif.; Los Angeles Air Force Base; and Enterprise Landing in Alameda, Calif.
Industry impact
The Catellus acquisition will help fortify ProLogis' development focus, especially considering Catellus' inventory of large tracts of land, says Craig Guers, senior vice president and general manager at Opus East in Philadelphia. “It is going to make them by far the largest player in the industry. They will have the ability to be both a developer and an acquirer,” Guers says.
In fact, it is ProLogis' ability to acquire industrial property that most interests Opus. Both ProLogis and Catellus have bought properties from Opus in the past, and in theory the merger will give ProLogis more capital resources for acquisitions. “The merger could actually be a good thing for us,” Guers says.
The ProLogis-Catellus merger also could signal a rise in industry consolidation. “I think the world is moving in that direction in all facets. You see it happening among the accounting firms, banks, retailers, and now it is happening on the industrial side,” Guers says. Mergers have the potential to create greater efficiency and greater resources to expand both nationally and internationally, he adds.
“The industry has been consolidating for some time, and I think this consolidation will continue to occur,” adds Seiple of ProLogis. “If you put real estate in perspective to other industries, it remains a fragmented industry.”
Competitive threat
ProLogis will continue to face stiff development competition from major players such as Opus. The merchant builder held on to its No. 1 ranking on NREI's Top Developers survey with 14.3 million sq. ft. completed or under development at the end of 2004.
Opus currently has 25 buildings under construction nationwide totaling about 7 million sq. ft. Projects such as a new 471,000 sq. ft. warehouse/distribution facility in Trenton, N.J. have helped to push the firm's construction activity about 10% ahead of last year's pace.
Yet, the Catellus acquisition certainly gives ProLogis the opportunity to become a much more dominating force in the development field. And the timing couldn't be better as construction activity nationwide begins to pick up.
New construction completed during the first quarter totaled 19.5 million sq. ft., which is nearly 5 million sq. ft. less than the fourth quarter of 2004, according to Grubb & Ellis, but still substantial. At the same time, the industrial construction pipeline swelled to 88 million sq. ft., a gain of about 4 million sq. ft.