The resignations and the drop in earnings and value that prompted them appear to have set off a chain reaction. The day after ProLogis announced Schwartz's resignation along with plans to lower general and administrative expenses by 20% to 25% by cutting jobs and reducing spending, stock in AMB Property Corp., the nation's second largest industrial REIT, plummeted to a new low, falling $5.70, or 30.1%, to $13.25 per share. The San Francisco-based company's shares were off 80% from their 52-week high of $64.66.

The same day shares in the number-four REIT, Denver-based DCT Industrial Trust, also tumbled, falling 20% to $3.71, while shares at number three, EastGroup Properties Inc. of Jackson, MS, fell a more modest 7% to $31.28. The two companies boasted 52-week highs of $10.69 and $51.07 per share, respectively.

Other REITs with significant industrial holdings saw a similar drop in value following the ProLogis news. Indianapolis-based Duke Realty Corp., for example, which has 142 million square feet of space divided among industrial, office, healthcare and retail properties, experienced a 14.75% decrease, with shares falling to $9.71. Its 52-week high was $28.41 a share.

As recently as last December, Forbes magazine was singing the praises of industrial REITs, predicting they would weather the economic turmoil instigated by the crisis in the housing industry without problem. The prediction appears to have seriously underestimated the challenges the sector faced, particularly failing to take into account the eventual drop in consumer spending that has truncated demand for retail distribution and warehouse space both here and abroad.

What the decline in stock value means for the industrial real estate sector is not immediately clear. Most industrial REITs generally have capital to proceed with existing development and undertake near-term launches. ProLogis has halted all new development, and rival REITs have postponed some scheduled projects. AMB's only new starts will entail fully committed or previously negotiated build-to-suit agreements, though the company will spend $338 million to complete its existing $1.6 billion development pipeline.

In the short run, delaying new speculative development could help REITs keep expenses down, but in the long run it could deprive them of profits from the sale or operation of new properties, leading to further declines in stock value. Unfortunately, boosting value through investment faces its own set of stumbling blocks, including a shortage of appropriately priced properties to add to existing portfolios.

Following Brennan's resignation, the California State Teachers' Retirement System issued a statement saying its investment relationship with First Industrial would continue in a "business as usual" manner. But it has extended the expiration date for the two organizations' joint venture funds by several years because of the difficulty finding appropriately priced acquisitions. It pushed the expiration date of the $475 million FirstCal Industrial Europe LLC from 2015 to 2018 after being able to pull off only a single $55 million acquisition since the fund was founded in January.

The European fund launched with $150 million of equity from Calstrs and $17 million from First Industrial. At the time, Gary Neumeier, senior managing director at CB Richard Ellis Investors and Calstrs portfolio manager, said the fund could achieve 10% higher returns than comparable US investments.

The partners expected to spend the bulk of equity in the first three years, but Neumeier acknowledges a continuing gap between seller and buyer price expectations has hobbled acquisition efforts. "It is difficult to locate correctly priced industrial real estate in our targeted markets," he says. "The gap between what buyers and sellers think an asset is worth has become a serious obstacle."

Other REITs are experiencing similar problems, and some analysts worry that a prolonged capital crisis could exacerbate the situation by making even reasonably priced assets too difficult or expensive to finance. In the meantime, ProLogis and First Industrial hope to re-energize their market position through appointment of new CEOs and strategic cutbacks.

Instant Insights /

CEO Departures Underscore Industrial REITs' Problems

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