Both shoes dropped -- and dropped hard -- on the logistics property industry at the end of 2008 as the economy worsened, financial markets went haywire and the real estate market's woes spread.
What started with the subprime crisis in 2007 affecting mainly residential real estate and some commercial properties ballooned into a full-scale financial and economic disaster for the industrial property market in 2008.
A successful operating model for that sector fractured suddenly. That model is based on developing industrial properties and then selling them, operating them outright or managing them along with institutional investor partners in financial vehicles known as real estate investment trusts.
That works fine in a growing economy with strong trade, steady demand for new warehousing and distribution space, stable financial markets and access to low-cost credit.
As the latter months of 2008 demonstrated for high-flying warehousing and distribution center developers such as ProLogis, AMB Property and First Industrial Realty Trust, when those factors dissolve, profits, stock prices and investors fly south. So does their cash.
The stock market crash that began in late September punished the stock values of all three companies, perhaps more than they deserved, as investors fled from the REIT market. But their wretched third-quarter results didn't help and underscored what could no longer be glossed over: With trade down and financial markets in turmoil, a period of retrenchment, restructuring and downsizing was necessary.
That began in late October and again in November, when, within a matter of weeks, Michael W. Brennan, president and chief executive of First Industrial, and Jeffrey H. Schwartz, chairman and chief executive of ProLogis, resigned hastily. Both were the architects of a remarkable period of growth -- ProLogis became the world's largest industrial developer under Schwartz's watch -- but their fall was swift and harsh.
A recovery this year is difficult to visualize, especially for real estate and REIT funds. Many say the U.S. economy won't begin to rebound until 2010.
In the interim, cost-cutting and cash preservation are the imperatives. Expect staffing cuts to continue throughout the supply-chain and logistics property industries as part of efforts to reduce general and administrative costs.
New warehouse and distribution development, even in the build-to-suit area, is on the back burner with the heat turned off well into 2009, at least. Whatever development does occur likely will be in emerging markets. Asset and property sales to raise liquidity will accelerate. In some regions, shorter lease terms will be offered -- perhaps three years or less -- with a range of innovations on lengths, break clauses and incentives designed to make leases more attractive and competitive in the down economic environment.
For companies with heavy debt and a lack of good refinancing options currently and for the foreseeable future, bankruptcies, especially Chapter 11 restructuring, could dot the landscape.
Warehouse management computer applications, including on-demand warehouse management system portals, are increasingly sophisticated and affordable. They will play an important role as lower-cost options to manage inventory, distribution and network operations while reducing staff.
The shift to leaner, greener warehouse operations, including green retrofits, might get a boost from the incoming administration, which has spoken about stimulating the economy through a combination of renewable energy, environmental and infrastructure strategies.