Private-equity firm Blackstone Group will be acquiring some prestigious addresses in connection with its recently announced $20 billion deal to take over Equity Office Properties Trust (NYSE: EOP ) , the largest office REIT. While not as glamorous as high-rise office buildings, the industrial properties of fellow REIT ProLogis (NYSE: PLD ) still deserve a look.
ProLogis owns and manages warehouses far from Equity Office's more prestigious buildings, which include Boston's Rowes Wharf building and Chicago's Civic Opera building. But ProLogis' workhorse properties have delivered for investors. ProLogis has generated a 35% total return for shareholders year-to-date, compared with 29% for shareholders of Simon Property Group (NYSE: SPG ) , the largest shopping mall REIT, and 33% for shareholders of Equity Residential (NYSE: EQR ) .
ProLogis' tendency to zig when the broader real estate market zags is what makes the firm's shares especially interesting. Construction lead times for residential and commercial space can stretch between 18 months and three years. During that time frame, rental demand can shift so that new properties may end up coming to market just when oversupply is driving down rents. New warehouses, on the other hand, can be built in just six months. That short lead time provides the managers of industrial REITs with better visibility into the market conditions that would exist when proposed projects would be opening to tenants.
As a provider of logistics, ProLogis can actually do well in sluggish markets because its tenants often need to consolidate warehouse space in order to adjust to the changing business climate. In addition, ProLogis' international scale provides an important competitive advantage in acquiring and retaining global clients that may wish to avoid working with multiple landlords. In the past, these unique features of the industrial REIT business have provided investors with positive returns when investors in residential and commercial REITs were experiencing negative returns.
With a yield of 2.6%, ProLogis shares do not provide the rich income stream that investors may expect from REITs. But ProLogis may offer investors a potentially safer investment opportunity than a traditional REIT.
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