These are the days for cherry-picking assets

Prologis’s planned acquisition of a 14-million-square-foot industrial portfolio from Blackstone for $3.1 billion, announced late last month, is not exactly a blockbuster deal. The San Francisco-based logistics real estate giant and New York-based mega-manager have executed far larger transactions in the sector, including two massive trades just last year – Prologis with its $23 billion takeover of Duke Realty Corporation, Blackstone with its €21 billion recapitalization of Mileway.

But in an investment market where billion-dollar sales in industrial have become a rarity, the Prologis-Blackstone tie-up is notable for being the largest asset-level real estate transaction of H1 2023, according to investment research firm MSCI’s Q2 2023 US Big Picture report. The deal also stands out for another reason: the buyer was able to cherry-pick the assets that went into the 56-property portfolio.

As Prologis president Dan Letter said in the firm’s Q2 2023 earnings call on Wednesday: “The quality of the portfolio was quite high, I would say very close to our own portfolio. The percentage that we would dispose of is zero. So it was hand-selected to meet our requirements.”

Of course, managers sell portfolios from their funds all the time because of the limited life of closed-end vehicles. Indeed, Prologis is buying the properties from Blackstone’s opportunistic real estate funds. But for a firm to have zero dispositions from a large portfolio acquisition is unusual. In contrast, Prologis had offloaded properties from the Duke Realty deal as well as its prior $13 billion acquisition of Liberty Property Trust in 2020, chief executive Hamid Moghadam said on the call.

The earnings call comments chimed with remarks we heard during a breakfast meeting with the global co-heads of real estate at a PERE 100 manager this week. One of the co-heads noted that about a year ago, real estate owners generally only wanted to sell their troubled or marginal properties, not their best assets.

However, with much of the private real estate industry now facing some level of liquidity constraints, would-be sellers are more open to considering the potential dispositions of even their most prized assets. In other words, everything is on the table for discussion. The executive also added that as a seller, their firm was receiving more inbound queries about the assets in their own property portfolio.

That is not to say buyers are necessarily picking up top-quality properties for a song. As Letter remarked on the Blackstone deal’s pricing: “I wouldn’t call it a steal. We didn’t steal anything.” He explained the assets were acquired at “market rate” and, with expected upside in rents, are projected to generate an 8 percent internal rate of return in a sub-3 percent inflation rate environment.

Even so, sellers – industry heavyweights included – are not always parting with their properties willingly. “We’re starting to see funds picking and choosing which assets they save and which assets they let go of,” the head of global real estate structured debt at an Asian bank told us earlier this month. “Even the biggest guys in the market, they’re going to have to make those tough choices. They’re not going to be able to save everything.”

During a time of market upheaval, the ownership of many sought-after real estate properties is potentially in play. For some buyers, the current market environment is presenting once-in-a-generation opportunities to acquire assets that may not be available to them again.