Prologis to buy Duke Realty, countering fears of slowing industrial demand

Industrial real estate investment trust Prologis Inc. will buy rival Duke Realty Corp. for $26 billion in an all-stock transaction, ending months of negotiations and countering some industry concerns that demand for industrial real estate is slowing.

The acquisition will include Duke Realty's operating portfolio of 153 million square feet, distributed across 19 U.S. markets, as well as another 11 million square feet under development and 1,228 acres of land that are owned and under option. The transaction is slated to close in the fourth quarter.

As a combined company, Prologis will be better positioned to weather the uncertain macroeconomic environment, including inflation, rising interest rates and the potential prospect of a global recession, analysts said.

"We see the stock deal … as a reflection of a tough patch of headwinds in the immediate timeframe, allowing the combined company a new/large sandbox to create value that couldn't be achieved separately," SMBC Nikko Securities America Inc. Research Division analysts Rich Anderson and Jay Kornreich wrote in a June 13 research note.

However, Prologis CEO Hamid Moghadam dismissed suggestions that the macroeconomic environment impacted the deal. Moghadam said that despite some market volatility affecting other companies, Prologis' value had not changed significantly in recent months.

"In whatever macroenvironment, good or bad, that we have, the new company will perform even better than the old company," Moghadam said during a call June 13.

Duke Realty rejected a nearly $24 billion buyout offer from Prologis in May, where stockholders would have received 0.466 shares of Prologis common stock for each share of Duke Realty common stock. In a May 11 statement, the company called the offer insufficient.

Under the new agreement, Duke Realty shareholders will receive 0.475 shares of Prologis common stock for each Duke Realty share they own. The respective boards of Prologis and Duke Realty unanimously approved the transaction, according to a Prologis press release.

Industrial real estate has performed extremely well over the past two years, as the pandemic created a surge in online shopping, which increased retailer and third-party logistics provider demand for warehouses. However, consumer e-commerce spending has begun to slow. Consumers spent $77.8 billion online in April — an increase of 4.5% year over year but significantly lower than the double-digit growth reported earlier in the year, according to the Adobe Digital Price Index.

Amazon.com Inc.'s online sales fell by 3% in the first quarter, while sales in physical stores rose by 17%. On an earnings call, executives said the e-commerce giant had excess capacity in its fulfillment and transportation network, and will spend fewer fulfillment dollars on capital projects in 2022 than in 2021.

Moghadam said he was not concerned about Amazon pulling back on industrial real estate, as industrial users have diversified beyond e-commerce.

Duke Realty's portfolio has greater exposure to Amazon industrial leases than Prologis. In the long run, the combined company will have exposure of about 5% to Amazon, up from Prologis' current exposure of just over 4%, executives said.