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Prologis to buy Duke Realty in $26 billion deal, including debt

Prologies a company ,

PLD -7.51%

The world’s largest warehouse operator, buying a competitor

Duke Realty corp.

DRE 0.98%

The $26 billion deal highlights the widening chasm between those who believe e-commerce growth still has a long way to go, and those who think it’s running out.

The deal marks the largest sale of commercial real estate since the start of the pandemic, according to real estate analytics firm Green Street, and is the latest in a series of massive acquisitions in the sector. Warehouses and distribution centers It was one of the most popular types of real estate– especially during the pandemic – because consumers’ online shopping habits have changed.

But in recent months, some investors have begun to worry that the industrial real estate market Shows signs of exaggeration. Investors began dumping shares of Prologis and other warehouse owners in April amid reports

Amazon.com a company

They overestimated future demand and were underestimating warehouse space growth.

The two real estate companies unveiled the deal on Monday, after months of stalking by Prologis and Duke Realty’s Initial rejection of a $24 billion bid Last month. The all-stock deal, which includes debt, is expected to expire later this year, adding another 160 million square feet of space in 19 major US logistics markets to the Prologis empire.

Prologis operates a billion-square-foot network of industrial facilities around the world that help store, process, and ship online orders for businesses including Amazon,

FedEx corp.

and others. In a call with analysts on Monday, Prologis CEO Hamid Moghadam helped that the all-share deal had nothing to do with the company’s view of the state of the real estate market.

“In whatever macro environment – good or bad – we have, the new company will do better than the old companies,” he said.

The provider also dismissed concerns about Amazon’s withdrawal and said the rental demand remains strong. “Yes, Amazon may have a smaller share than that, but the market as a whole is certainly broader than it would have been,” he said.

But many investors are starting to feel nauseous about the future demand for industrial space. said Michael Knott, president of US real estate investment trust research firm Green Street.

Shares of Prologis fell $8.81, or 7.5%, Monday, to $108.43, a larger drop than the broader market. Duke Realty shares rose 49 cents, or 1%, to $50.27.

Industrial property prices have skyrocketed in recent years in part because e-commerce requires more different types of warehouses to store goods and load delivery trucks than brick and mortar stores. Real estate prices have risen much faster than rents in many cities, in part because investors have been betting on growth.

But now some investors and analysts say the boom is coming to an end Concerns about a possible recession are growing. Higher interest rates hurt warehouse owners because they make mortgages more expensive and tend to lower property prices.

Amazon in April It announced its first quarterly loss In seven years. E-commerce giant Looking to sublet At least 10 million square feet of warehouse space is exploring options to terminate or renegotiate leases with outside owners.

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Some industrial aerospace developers have also become more cautious. Ward Fitzgerald, CEO of real estate investment manager EQT Exeter, said his company has put many of its industrial projects on hold due to what he sees in the market.

“You will see the demand for space decrease and rent rates will stop rising at the pace that they are increasing, and there is no way around that,” Mr. Fitzgerald said.

This has not deterred Prologis from pursuing Duke Realty, whose acquisition will add high-quality real estate to the Prologis portfolio in key regions, including Southern California, New Jersey, South Florida, Chicago, Dallas and Atlanta.

Prologis and Duke Realty’s boards of directors have now unanimously approved a transaction in which Duke Realty shareholders will receive 0.475 Prologis shares for every Duke Realty share they own, an improvement over Prologis’ previous exchange offer of 0.466 times.

Prologies Initially offered to buy Duke Realty for $61.68 per share, which is a 29% premium to Duke Realty’s share price at the time.

Prologis plans to acquire 94% of Duke Realty’s assets and exit one market.

Prologis said the deal is expected to generate an immediate backlog of between $310 million and $370 million in corporate savings, general and administrative costs and operating leverage as well as market adjustments to leases and debt. In the first year, the transaction is expected to increase annual base money from operations by 20 to 25 cents per share.

Despite Wall Street’s concerns about industrial property, the sector still has reasons for optimism. Investment funds targeting real estate have huge capital reserves and industrial property still looks attractive compared to sectors such as office buildings.

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Industrial space vacancy rates are still at historic lows. “The current supply and demand picture still looks rather positive,” said Mr. Knott of Green Street. “But the outlook certainly looks more murky than it did two months ago.”

write to Konrad Putzier at [email protected]

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