At the turn of the century, warehouses were like the bonds of the commercial-real-estate world: safe, predictable, and a little boring. But since the end of the Great Recession, they’ve become one of the hottest sectors in real estate — and two major investors are duking it out to become the dominant warehouse player.

In one corner: Prologis, a public real-estate investment trust with a market cap of $100 billion, a long history of investing in warehouses, 460 million square feet of warehouse space under management in the US, and over 1 billion square feet globally.

In the other: Blackstone, a giant alternative-investment firm with a market cap of $131 billion, which used its capital-deployment skills over the past 12 years to bet big on warehouses, and now owns 480 million square feet of warehouse space in the US and a total of over a billion square feet across the world.

Together, the two firms have partnered on deals, competed over them, and, in less than 10 years, become the leading landlords of one of the hottest real-estate assets.

As warehousing spreads across the US landscape — and warehouse work becomes the one of the dominant forms of blue-collar employment — these two companies increasingly control how America gets its stuff.

Warehouses on top

Logistics properties and residential real estate “are probably two of the best sectors in the entire economy around the world,” Blackstone’s president and chief operating officer, Jon Gray, said on a July earnings call.

Last year, nearly $172 billion was spent on warehouse acquisitions, according to the global real-estate-services firm Savills — more than a fourfold increase from a decade ago.

The sector has come a long way from the aftermath of the Great Recession: Average US warehouse rents have climbed almost 75% since the beginning of 2010, according to data provided by CBRE, to $8.18 a square foot from $4.72 a square foot.

As a result of the boom, warehouse ownership has shifted from a mishmash of small businesses and manufacturing companies to a shortlist of blue-chip money managers and companies that spotted the rising demand for the properties.

Over each of the past 12 years, institutional investors have purchased more warehouse space than they’ve sold, while private owners and owner-operators have sold more than they’ve purchased, according to CBRE’s data.

In other words, big money is buying up warehouse space as fast as smaller owners can sell.

The coronavirus pandemic accelerated this change, with warehouse investment outpacing office investment in 2020 and 2021, according to CBRE.

The big bang of the warehouse boom

The warehouse boom traces back to the dark days of 2008, when market distress created an opportunity for some of the industry’s largest players to regroup and grow.

Prologis almost didn’t survive the Great Recession: In 2010, The Wall Street Journal said the company “had been on life support” during the financial crisis, when warehouse rents and demand dropped. But once back on its feet, it made big moves.

A Prologis sign on the side of a green warehouse.

A Prologis warehouse in Ichikawa City, Japan. Prologis now has about 1 billion square feet of space globally.

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By 2011, Prologis was predicting rip-roaring rent growth in the logistics sector. It became the world’s largest industrial-real-estate company through an $8.7 billion merger with AMB Property Corp. AMB was early to jump on e-commerce, investing in an early e-commerce company called Webvan in 2000.

“The idea was that we were going to capitalize on this e-commerce revolution,” said Dan Letter, Prologis’ global head of capital deployment who had worked in deployment at AMB pre-merger. “We were maybe a bit early, but it was definitely visionary.”

After trading at as low as $9 in 2008, Prologis now has about 1 billion square feet of space around the globe and a share price hovering at about $130. That has gone as high as $170 this year.

Prologis wasn’t the only one that saw the ways that e-commerce could transform the world.

In 2010, Blackstone began aggressively buying cheap warehouse assets, including a $1 billion purchase of 180 properties from Prologis.

“We identified early on that the e-commerce growth we were starting to see was significant,” said David Levine, the cohead of Americas acquisitions at Blackstone.

The long-term vision, combined with the short-term distress of operators who couldn’t pay off their debts, led to a buying spree that built a portfolio rivaling that of Prologis.

In about 2015, Blackstone paused warehouse acquisitions for a year, Levine said.

“We were trying to do what we did in 2010 again and to get a feel for how we wanted to invest, how the world had changed, and how the market had changed,” he added.

A large stone Blackstone sign on a city street.

In 2010, Blackstone began aggressively buying cheap warehouse assets, including a $1 billion purchase of 180 properties from Prologis.

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Blackstone’s new strategy, dubbed “Warehouse 2.0” by Levine, was born out of consumers’ increasing demand for faster shipping. It saw the firm pivot from investing in warehouses that served metro areas from dozens of miles away to those in urban areas focused on so-called last-mile logistics.

It was a well-timed bet. The price per square foot for urban logistics transactions increased 17.2% from the second quarter of 2017 to the second quarter of 2022, according to Avison Young.

One of the biggest challenges for last-mile logistics is that the sprawling single-story warehouses are expensive to build in dense urban areas. That’s why Prologis has been building multistory warehouses in Tokyo for decades.

As American cities become denser and more expensive, it’s doing the same here. Four years ago in Seattle, it opened the US’s first multistory warehouse.

Prologis, Blackstone, and the rest of big money duke it out

Other big-money investors have increasingly invested in warehouses. The private-equity giant KKR, the insurer Prudential, and the real-estate firm Rexford have each poured money into the sector for its promises of high rents and property values.

Bridge Industrial, a Chicago real-estate investment firm, has had a surge of interest from pension funds eager to invest in warehouses.

“Almost every large financial institution has capital in real estate,” Tony Pricco, Bridge’s chief investment officer, said. “Do they really want to be in office or retail? Probably not.”

The real-estate investment arm of the $95 billion Ontario Municipal Employees Retirement System, one of Canada’s largest pensions, now invests 35% of its $63 billion real-estate portfolio in warehouses, its president, Michael Turner, told Insider in May. Four years ago, that number was 9%.

Institutional investors are enjoying double-digit returns in the sector. In the first quarter of 2022, total returns for the US industrial sector were 52.8% year over year, according to the National Council of Real Estate Investment Fiduciaries, which tracks commercial-real-estate performance data.

But Prologis and Blackstone remain the biggest investors by far.

A blue cherry pocker with workers on it against a large white warehouse wall.

Prologis has gone beyond buying warehouses: It’s building its own in areas where there’s not enough. Its development arm oversees a $5 billion land bank.

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In 2019, a year with a record of more than $40 billion in warehouse mergers and acquisitions, Blackstone completed the largest private financial transaction ever at the time, doubling its warehouse space by beating out Prologis to purchase the US assets of GLP for $18.7 billion.

The industry may set another record for warehouse M&A in 2022. Prologis acquired Duke Realty for $23 billion this year, the largest commercial-real-estate sale of the pandemic. Blackstone has recapitalized Mileway, its European last-mile warehouse company, for $24 billion after Bloomberg reported that Prologis had bid $23 billion to acquire Mileway.

Prologis has gone beyond buying warehouses: It’s building its own in areas where there’s not enough. Its development arm oversees a $5 billion land bank, a collection of land that Prologis could develop properties on, and started almost $3 billion worth of development during 2020 alone.

It’s also helping its tenants get around a national labor shortage by investing millions in logistics- and transportation-worker training programs.

In 2018, Prologis launched its Community Workforce Initiative in a Miami-Dade County high school and a program placing interns from Los Angeles and Long Beach high-school students.

So far, Prologis’ CWI program has trained more than 13,000 people and is on track to train 25,000 for jobs in transportation, distribution, and logistics by the end of 2025, according to Steven Hussain, the vice president of workforce programs and community relations at Prologis.

New competitors waiting in the wings

Even with the threat of a recession hanging over the warehouse sector and players like Amazon slowing their plans for warehouse growth, Prologis and Blackstone expect retailers to grab even more space to prevent supply-chain disruptions when crises inevitably emerge.

Other firms are grabbing warehouse space themselves.

Rexford Industrial Realty is aggressively buying up warehousing space in California’s Inland Empire. Clarion Partners has netted 27 million square feet of warehousing space since 2010, according to Savills. The UK’s Segro once sold warehouse space to Blackstone — now it’s acquiring its own warehouses for last-mile delivery that Blackstone might have otherwise picked up for itself.

But Prologis and Blackstone are unlikely to be unseated in the near future, a senior real-estate analyst who spoke on the condition of anonymity to talk candidly said. They compared Blackstone and Prologis’ dominance to Amazon’s hold on e-commerce.

Prospective competitors face an uphill climb “because Prologis and Blackstone are so big,” the analyst said.

“There’s groups like Brookfield, Starwood, KKR — all of those private-equity firms that are trying to compete with Blackstone,” the analyst said.

The person added that the market was big enough to accommodate more large acquirers but noted the challenges.

“It’s tough,” the analyst said, “because they’re so far ahead.”

Correction: October 21, 2022 — An earlier version of this story misstated the amount of warehouse space that Blackstone owns in the US. It is 480 million square feet, not 370 million.

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