NEW YORK CITY-After previously rating global industrials “overweight” and US industrials “underweight,” Banc of America Securities LLC has revised its advice to rate all industrials as “marketweight.” But it simultaneously revised its recommendation for Denver-based ProLogis, the world’s largest industrial REIT, from buy to neutral.

In a June 19 report prepared by BofA analysts Mitchell Germain and Christy McElroy, the company worries the 35% increase in fuel costs since January could put downward pressure on long-term air and container cargo trends. With transportation expenditures comprising roughly 70% of supply chain costs, the two researchers say they see potential for a moderate shift in the global supply chain that would decrease demand for distribution space overseas, push rents down and reduce the need for new construction.

The picture is not entirely gloomy. Despite the depredations of the credit crisis, Germain and McElroy point out that reduced access to financing could favorably impact the supply picture by limiting speculative development and increasing the focus on build-to-suits. They also note the IMF projects global trade volumes will increase 5.5% this year. Though the percentage is down from the 8% recorded in 2007, it is three percentage points ahead of global GDP growth. Regarding the US market, the report authors say trade volumes are ahead of prior year levels as the weak dollar and burgeoning middle class in emerging regions continue to bolster exports. They add that import volumes are holding steady with ’07 levels, a favorable sign considering the slowdown in housing and consumer spending.

The downgrade of ProLogis may come as a surprise to some observers, particularly since Germain and McElroy reiterated a buy recommendation for rival AMB Property Corp. as recently as April. But the researchers say they are increasingly concerned about the long-term growth outlook for ProLogis due to the impact of increased transportation costs. Though they acknowledge rising transportation expenses also impact San Francisco-based AMB, they believe its fundamentals are more protected because only 10% of its rents and 55% of its development pipeline are in Europe and Asia, where logistics costs are highest. They further note that AMB has a greater portfolio concentration in high-barrier-to-entry port and airport markets.

The world’s largest owner, manager and developer of distribution facilities, ProLogis has a portfolio of 526.3 million sf of space in 121 markets across North America, Asia and Europe. But unlike AMB, the company has no assets in South America, the region least affected by the current capital markets crunch. The company, which has about $20 billion of investment capacity, expects to start over $4.4 billion in developments in 2008. The figure represents 7% growth over ’07. About 85% of new development is expected to be outside the US and over 25% is expected to be build-to-suit.

Despite the downgrade, the authors emphasize the Denver REIT’s unmatched global platform and solid tenant relationships mean they continue to view the stock as a core industrial holding. In June alone, ProLogis announced some 2.14 million sf of leases transactions. These included build-to-suit agreements with LaCrosse Footwear Inc., Bay Valley Foods and Skechers EDC for, respectively, a 380,000-sf distribution facility at Park 267 in Whitestown, IN, a 600,000-sf distribution center at ProLogis Park Rochelle in Rochelle, IL and a 247,000-sf distribution building in Liege, Belgium. It also signed logistics firm Kuehne + Nagel to 540,000 sf at ProLogis Park Wellingborough in Wellingborough, UK and 370,000 sf at ProLogis Park Isle d’Abeau in Lyon, France.

Nonetheless, Germain and McElroy say they no longer see a positive catalyst to push ProLogis shares higher in the near future. In its previous report on the REIT, BoA projected shares would reach a target price of $70 this year. The current report revises the figure downward to $62. ProLogis shares closed at $57.45 on June 20, down from $63.53 a month earlier and on par with the $57.96 the same time last year. Its highest closing in the last 12 months was $72.13 on Oct. 10. Germain and McElroy say they believe the current value is fair based on its being in line with shares at peer companies.

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