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A SITE SELECTION CORPORATE PROFILE: PROLOGIS
From Site Selection magazine, January 2011
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Strength in Numbers

FrontCoverSilh

Building on a legacy of sustainable growth, ProLogis sets visionary strategy to expand global reach.

by RON STARNER
W

hen your company has spent the past two decades establishing global dominance by rolling out the largest inventory of state-of-the-art industrial distribution facilities in the world, what do you do for an encore?

If you are Walter C. Rakowich, CEO of ProLogis, you build some more.

"We are poised to go on the offense," Rakowich says of the firm that has 475 million square feet of real estate under roof and has total assets owned, managed and under development approaching $35 billion. "We are incredibly well positioned and we have a great brand. We have the best portfolio in the market, and our capital structure has strengthened substantially in the last few years."

How large is ProLogis' global platform? To put the Denver-based company's portfolio into perspective, it would take 9,000 American football fields to cover the same amount of space as the firm's industrial property under roof.

That portfolio counts more than 2,500 facilities in 700-plus locations across Asia, Europe and North America. The buildings can be found in 105 markets in 19 countries. Another 10,000 acres are controlled by ProLogis in a global land bank to support future development.

But none of those numbers are as important to Rakowich as this one: more than 4,400 satisfied customers.

The CEO is one of 1,100 ProLogis associates who serve this clientele, which includes DHL, The Home Depot, BMW, Hitachi, LG Electronics and many other Fortune 500 companies.

"We do business with companies in multiple locations throughout the world. It makes sense to have a footprint that's global," he says. "We do business in a consistent way. The whole notion of being a global company works well in the industrial real estate business because the customers are global."

Being global also means being responsive to the needs of rapidly growing global companies. "All of our new facilities will be certified environmentally throughout the world," Rakowich says. "We made that decision four years ago. We believe that sustainability is advancing in one direction — forward."

One way ProLogis is addressing this issue of climate change is by installing solar panels on the roofs of its buildings. "We probably own more roof area than perhaps anyone outside of the U.S. government," the CEO says. "We woke up five years ago and saw that this could be a real asset for us. If you put solar on the roof, nobody sees it. It faces the sun. We have done this with about three percent of our roof space. As the cost of solar panels comes down, this could go up."

Inventory Gap Expected to Close

Also increasing is the tightening of the supply of industrial space in key markets across the U.S. and around the world — a fact that plays into the hands of ProLogis' strategy to develop more build-to-suit space for expanding firms.

"We are coming out of this recession, and inventories are likely to increase because companies had to be convinced that increased sales were sustainable," says Rakowich. "For every one-point increase in GDP, there is a need for an additional 50 million square feet of warehouse space in the U.S. That does not count obsolescence of the existing stock, which goes obsolete at a rate of one to two percent a year. There is a total demand for 100 to 200 million square feet of new space every year, but if you look at this year and last year, there was delivery of less than 15 million square feet of new space each year."

That spells opportunity for ProLogis. "There is pent-up demand out there, and we plan to capitalize on it," the CEO says. "We think that there will be an inventory rebuilding where inventories will catch up with sales over the next 12 months."

Flush with cash and the ability to develop new product quickly, ProLogis is leveraging its considerable assets to meet the needs of expanding companies in key logistics corridors around the world.

"Capital has been sitting on the sidelines, and that is not a bad thing. Right now, there is very little new supply of product being built," he adds. "That is one dynamic. The other is that demand is beginning to grow again. The new facilities that went up in the market in the last few years are almost entirely absorbed now, and the customer — all things being equal — will prefer a new building almost anytime over an existing building."

Rakowich's prediction is that "the development business will be very good over the next couple of years. There is not a lot of capital out in the market to build those facilities. We have the capital, and that makes it very good for us relative to our competition, because we do think that demand levels will grow."

ProLogis believes its new development starts will grow next year to $800 million and perhaps to as much as $1 billion. In 2010, Costco moved into ProLogis Parc Ichikawa I, a five-story, 1.6-million-square-foot facility close to the Tokyo metro area and Costco's retail outlets. TOMY, one of the oldest and largest toy companies in the world, secured and customized space at ProLogis Parc Ichikawa II, a five-story, 802,000-square-foot facility near Tokyo in the Chiba Prefecture.

ProLogis has also recently developed facilities for BMW in Chicago and eastern Pennsylvania, Marks & Spencer in Yorkshire in northern England, Geodis near Budapest in Hungary, and The Home Depot in Ontario, Calif.

ProLogis, an S&P 500 company traded on the New York Stock Exchange under PLD, owns and manages its largest portfolio on its home continent — nearly 340 million square feet in North America.

ProLogis Seeks High GDP Per Capita

Rakowich says ProLogis targets markets that possess two primary characteristics: a population of at least 5 million people and a very high GDP per capita. "Strong population creates sales and the need for warehousing," he notes. "We also look for higher spending and production per capita, as well as very strong import and export markets. The GDP per capita is 40 percent higher in our markets than it is in the non-logistics corridors. We look for import-export hubs with large, growing ports."

Those qualities make Houston, Los Angeles, New York, Amsterdam, Barcelona, Hamburg and the Port of Marseilles very attractive to ProLogis.

Leonard Sahling, head of research for ProLogis, says that his firm remains committed to the top logistics corridors in the U.S., including the Los Angeles Basin and Inland Empire of California, Chicago, northern New Jersey, eastern Pennsylvania, Atlanta, and Dallas-Fort Worth.

"These are still the tier one markets in the country," he says. "The amount of distribution space in these markets is often ten times what they are in other markets. The coastal industrial markets have rebounded the most so far. Chicago is experiencing some growth in demand. So are New Jersey and eastern Pennsylvania. Atlanta and Dallas-Fort Worth are remaining somewhat flat. Tier two and three markets in the U.S. are still seeing weak demand."

Sahling says that several emerging trends are impacting the development of distribution centers. Chief among them are rising freight transportation costs. "Spot rates for 40-foot containers were below $1,000, but now they are up to $2,500 to $3,000," he notes. "Freight costs have risen 20 percent over the last year, and they are being driven upward by the run-up in fuel costs. Oil prices fell to below $60 a barrel during the recession, but they have risen sharply recently. Oil prices have only one way to go and that is up."

Rising transportation costs mean that companies must make optimum location decisions for their distribution facilities. "Companies have been more focused on cost reduction than ever," Sahling says. "Supply chain costs can be well over 70 percent of the total product costs. That is the context for the current development of logistics centers. Companies are beginning to reconfigure their distribution networks."

In the past, the accepted wisdom was to consolidate and shrink the network of distribution facilities. "The net outcome always seemed to be fewer facilities," says Sahling. "Cost savings came from fewer inventories. But with fuel costs having risen so dramatically, companies are re-examining that optimization procedure. Now, some companies are adding distribution facilities to their networks. The goal is to reduce the distance of the final leg between the warehouse and the final destination of the product."

Rail, Port Upgrades Fuel Expansion

This sudden demand for more logistics facilities, rather than fewer, is part of what's feeding the ProLogis development wave. Also feeding the wave are vast upgrades in transportation infrastructure.

Among these improvements are the widening of the Panama Canal and the work to increase the ceiling heights of rail tunnels along the U.S. East Coast.

"The widening of the canal, scheduled for completion in 2014, will challenge the quasi-monopoly that the West Coast ports had enjoyed on the movement of goods from Asia into the U.S.," says Sahling. "Insofar as the East Coast ports succeed in winning market share from the West Coast ports, there will be a corresponding increase in the derived demand for nearby transloading facilities. But the incremental demand for them is likely to be fairly modest because the vast majority of inbound containers are transshipped directly to their inland destinations, without first being diverted to port-side transloading facilities."

And with CSX and Norfolk Southern railroads spending more than $1 billion to improve their intermodal capacity on the East Coast, Sahling says the upgrades to rail infrastructure will create opportunities for new logistics facilities from Norfolk, Va., to Columbus, Ohio.

"The containers can be moved from the ships directly onto trains," he says. "We will see the East Coast ports grab marketshare away from the West Coast ports. We will see an increased demand for distribution space around the New York-New Jersey ports. That promises to be a major development for logistics and distribution networks. It will be interesting to see the competition between the ports, because the rates the West Coast markets have charged in recent years had risen dramatically."

As ProLogis works to capitalize on this trend, it is doing so by developing the most technologically advanced and greenest warehouse facilities on the planet.

"Our facilities have very high clear height, and they are all sprinklered to at least an ESFR standard," says Rakowich. "They all have an ample truck radius and room to store trucks. And we are seeking LEED certification. Sustainability is increasingly becoming the most important criterion for our customers."

It is all part of ProLogis' strategy to develop "new, high-quality facilities," says Rakowich. "The majority of our investment has been our own developments. The portfolio that we own is one of extremely high quality."

Another factor trending in ProLogis' favor is the relative age of industrial product in the U.S. and around the world. Total warehouse supply in the U.S. today is about 10 billion square feet. Europe has a total of some 4 billion square feet. Of the combined total, more than 150 million square feet of industrial space becomes obsolete every year.

"In many cases, companies are looking to move out of their older space and into newer, more modern facilities that are both sustainable and cost competitive," Rakowich points out. "Companies merge and consolidate and buy other companies and become different. That causes reconfigurations. There is a constant need for new facilities."

ProLogis is poised to meet that need for a long time.


ProLogisLogoThis Corporate Profile was prepared under the auspices of ProLogis. For more information, visit www.prologis.com.


Story in Pictures

ProLogis completed a 667,000-square-foot, cross-dock facility for The Home Depot on a 55-acre parcel of ProLogis-owned land at Crossroads Business Park in Ontario, Calif. The building was designed to achieve LEED Silver certification.
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Charts & Maps

Growth in Occupied Warehouse Space vs. Growth in Real GDP


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