In March 1999, distribution facilities giant ProLogis, an Aurora, Colo.-based real
estate investment trust (REIT), acquired Meridian Industrial Trust, another leading
manager and developer of distribution facilities, resulting in a global powerhouse with a
market capitalization in excess of US$6.7 billion. ProLogis, with more than 168 million
square feet (15.6 million sq. m.) under development or operation, intends to do more than
simply be the biggest player in the distribution business, according to John W.
Seiple, managing director and chief operations officer, North America.
ProLogis already is capitalizing on the emergence in recent years of e-commerce,
or electronic/online purchasing of products and services. In one recent 90-day period,
ProLogis signed new leases representing 1.4 million sq. ft. (130,000 sq. m.) of space
geared to e-commerce companies. At press time, another 500,000 sq. ft. (46,500 sq. m.)
was in negotiation. Companies joining the e-commerce bandwagon — and companies
formed just to ride the e-commerce wave — require faster and more flexible distribution
channels, says Seiple. Meeting such client requirements means taking a very hands on
approach to customer service. That, hints Seiple, will help distinguish ProLogis from the pack.
Site Selection: ProLogis?s acquisition of Meridian Industrial Trust creates a
major player — the major player — in the distribution facility marketplace in the United
States. In your view, what synergies does the merger create?
John W. Seiple (right): Before proceeding with the merger, we studied where we were
positioned relative to our competitors. The merger makes us more than twice the size of
our next closest competitor, so it gives us great market coverage. One of the key reasons
for the merger is increased market share in key logistics markets. It significantly
increased our presence in Dallas, for example, as well as Chicago and Los Angeles, such
that today, we are first or second in market share in every key logistics market except
New Jersey, and we are working hard to build our presence there.
Secondarily, it expanded our customer relationships. Not only did it bring us new
customers, but it increased the number of multi-market customers, such as Kraft, for
whom we had done some business. We now work with them in four locations instead of
just one. The multi-market customer is very important to us. Thirdly, the merger provided
some operational efficiencies, because in acquiring Meridian, we added more than 30
million square feet [2.8 million sq. m.] of property, but relatively few people, to our
operations.
SS: Is there a downside to being the biggest player in a market?
JWS: The biggest concern in a merger is integration, and that was my first job in
my new role. We put together a team that did a superb job; integration was completed
seamlessly. Now that that is accomplished, we haven?t experienced any disadvantages
related to the merger. We added very few people, and we didn?t have to open any new
offices. The overlap between Meridian?s operations and ours was perfect. Meridian had
outsourced all their customer service elements, leasing and property management, which
we never do, so there was not a people overlap. It was beneficial from all perspectives,
particularly in having a bigger platform from which to serve our customers
SS: You mentioned New Jersey as a market with room for growth in the
ProLogis network. What other areas will the organization focus on going forward?
JWS: Our North American network is pretty complete. We will build up a bit
more in New Jersey, and we have a strong presence in south Florida, but not as strong as
we?d like, so we?ll continue to develop our presence there.
On the international side, we are in four markets in Mexico, and we?ll continue to
build our presence there. In Europe, we have 15 targeted markets. Our team in Europe is
working very hard to build our presence there and put in place there the same type of
platform we have in the United States. There?s a tremendous opportunity in Europe as
companies are reconfiguring and taking a pan-European approach to distribution. We?ve
done some large acquisitions there, too, including the largest development company in
the United Kingdom [Kingspark Group Holdings] and the largest property company in
France [Garonor S.A.]. At the same time, we?re active in Amsterdam and Rotterdam,
Barcelona and Warsaw. So, we?re building our European platform very rapidly.
SS: I understand ProLogis recently signed an important new client in the United
Kingdom, Amazon.co.uk. What is the significance of this contract?
JWS: That was a key transaction for us. We?ll build two facilities for Amazon,
one 500,000 sq. ft. [46,500 sq. m.] and one 228,000 sq. ft. [21,000 sq. m.]. We have a
strong focus on the e-commerce industry — a vertical focus, if you will, with dedicated
resources devoted to it. That increased focus is starting to pay off. In addition to the
Amazon transaction, we recently completed a half-million square foot [46,500 sq. m.]
build-to-suit facility for Hamilton Beach in Memphis, Tenn.; they are delivering their
products to e-commerce type companies. There is a lot of activity in that arena at this
time, and we?re focusing on markets we think are key markets that could benefit from e-
commerce activity in the United States.
SS: What makes distribution and logistics issues different in the context of e-
commerce?
JWS: There are two areas to discuss. First, there are start-up companies that
never had a distribution network, so they need to roll one out. The most important thing
there is timing to get products to market. Companies want to get their facilities up and
operating very quickly. With our national and international presence, we?ll provide those
companies a single point of contact and a dedicated team to roll out those facilities.
You also have companies that had distribution capabilities, but their business
activity is increasing due to e-commerce. Those companies may need to reconfigure or
expand their distribution network; we?ve been calling on those companies all along, but
we?ll increase our call effort. Much of the distribution by e-commerce companies is being
done by third-party logistics companies. We have had a vertical industry focus on those
players for more than four years. So we?re working with the same companies in some
cases, but we?re expanding those relationships, because of the new contracts they are
picking up with e-commerce.
SS: What other market forces are driving companies? distribution facility
location decisions at this time?
JWS: Speed is of the essence to all corporations that are reconfiguring their
distribution network or bringing a new product to market. They want to streamline the
time it takes to roll out a new distribution network and their other processes, which helps
streamline the time it takes to get the product to market. A continuing process is
rationalizing networks to take cost out of the overall supply chain. Our structure lends
itself to assisting those companies.
SS: Many companies are in the process of integrating business functions,
including corporate real estate, into a corporate services unit. In what way does this
change how ProLogis personnel interact with clients?
JWS: That change makes working with clients easier. If it?s done properly by the
customer, there is more coordination between the different groups within a company.
Historically, the vice president of logistics or operations did not have a lot of interaction
with the vice president of facilities or real estate. Having a coordinated effort there falls
right in line with our strategy of having multiple contacts in the organization, to have
contacts in the logistics arena, in the real estate department and in the financial area of the
company. The more streamlined and consolidated their decision-making process is, the
more that appeals to our single point of contact and dedicated team working with them
nationally and globally. If a company is very decentralized, we?ll still call on it, but it
makes your [sales] effort much more difficult because you must call on multiple people
in multiple locations.
SS: What are corporate clients? biggest challenges today in siting a new
distribution facility?
JWS: For any company, one of the biggest costs is transportation. They need to
be in a location where they can minimize the transportation cost, but they really need to
look at all costs, and come up with an optimal network design. We have an interest in a
company called InSite, which markets software tools that help a company look at their
overall supply-chain costs and allows them to optimize their distribution network. It will
tell them cost trade-offs, for example, between locating a facility in Memphis and
locating one in Atlanta. You can include all types of variables — warehousing costs,
transportation costs, labor rates and others — and it optimizes around those variables
instead of just one.
You also have to look within the areas and focus on labor. You may have labor
cost rates, but that doesn?t tell you about labor availability. So you have to overlay your
network study with a labor availability study as well. Labor shortages are probably the
biggest problem any of our customers face today; it?s mentioned in almost every
conversation we have with them. And that doesn?t necessarily give one area an advantage
over another. Frankly, with the way the economy is now, almost every market, certainly
every major market, is experiencing labor shortages. That causes more turnover.
SS: Could you define the ProLogis Operating System?
JWS: The Operating System is the heart and soul of our company. It is our three-
part customer service element — it?s the way we serve our customers. The Market
Services Group is a team of professionals out every day working with our customers.
That group works with customers locally. The Global Services Group calls on the
customer at the corporate level, offering a single point of contact to facilitate meeting
their facility requirements in the U.S. and throughout the world. The Global Development
Group executes strategies from the technical perspective. When we are going to build a
new facility for, say, Amazon.com, all three groups are involved. It brings resources to
the customer base in three different ways, but in a synchronized fashion, such that it is
seamless to the customer.
SS: What will be different about doing business in the new millennium?
JWS: Well, just because the calendar changes, it doesn?t mean business
dramatically changes. But a number of things are changing. The main issue has to do
with time frames, which are continuing to shorten. Time to get to market and time to roll
out a new product are getting shorter and shorter. And processes to achieve that have to
be streamlined. The successful companies going forward will be those that can streamline
their processes and shorten the time frame to get their product to market or roll out a new
distribution network, and the companies that can service those companies by helping
them do that. Our focus is on helping our customers improve their business efficiency as
it relates to their distribution network, streamlining the process.
SS: How is institutional investors? risk tolerance evolving where investing in
REITs is concerned?
JWS: REITs today are pretty conservatively structured. If you look at the
leverage position of most REITs compared to 15 years ago, it?s very conservative. There
are certain requirements they must follow, which are helping them become more
acceptable as an equity investment.
In my view, there are two types of REITs. Asset accumulator REITs should be
viewed as an alternative investment. They buy up a large group of assets, it?s a pure real
estate play, and those companies will ride with the market cycles. Other REITs have an
operating strategy and a customer service focus. Those are the companies in which equity
investors will increasingly want to invest.
SS: What do you see ahead for the REIT industry?
JWS: I believe we?ll see continued consolidation; it?s going on today. The other
trend that is not happening today but in my view will start occurring very shortly is
differentiation. That?s differentiation between REITs that are asset accumulators and
those that have an operating strategy and differentiation based on the earnings multiples
the market assigns to those companies. You?ll see a wide divergence in how REITs are
valued.
SS
