By Steve Schnur
Senior Vice President of Duke Realty’s Chicago portfolio
Duke Realty, like most commercial real estate companies, was impacted by the great recession. So after a detailed examination of where the company wanted to be five to 10 years down the road and an analysis of how to make it less susceptible in the event of another economic downturn, Duke Realty, a diversified, publicly held REIT with significant holdings in Chicago, launched an aggressive portfolio makeover in the fall of 2009.
At the time, the company’s portfolio of industrial, office and medical office properties had its heaviest investment in office product — notably Midwest suburban office properties. The office segment represented 55 percent of Duke Realty’s portfolio, while industrial and medical office accounted for 36 percent and 5 percent, respectively.
Given the new realities of the latest recession and the company’s focus on growing total shareholder return, Duke Realty leadership made the decision to adjust its business model and increase its investment in industrial and medical office sectors and reduce its office holdings to the most reliable markets. Duke Realty announced that its goal was to transform its portfolio to 60 percent industrial, 25 percent office and 15 percent medical office by the end of 2013.
This was a formidable goal given that Duke Realty has a $7 billion portfolio. However, our executive team was confident we could reach our target and was explicit in its plan for getting it done.
Acquisitions and dispositions
Once the Duke Realty team had a clear direction, it began aggressively taking steps to reach its portfolio goal. Acquisitions of industrial and medical office properties in identified growth markets and dispositions of assets that no longer meet its investment goals are being used strategically by Duke Realty.
In 2010, the company executed several significant transactions including the acquisition of a 4.9 million-square foot portfolio in South Florida that included 51 industrial buildings. On the disposition side, Duke Realty agreed to the sale of an 80 percent interest in 20 suburban office assets, mostly in the Midwest, to a joint venture partner.
A stabilizing economic environment in 2011 further helped Duke Realty’s plan, allowing it to complete several acquisitions and dispositions that accelerated its progress toward its investment goals. During the year, the company acquired $747 million of primarily bulk industrial and medical office assets. Among these were several key purchases in Chicago, which added more than 1.8 million square feet to the company’s market portfolio.
Asset sales in 2011 totaled more than $1.6 billion, with the key transaction being a $1 billion sale of suburban office properties, located primarily in the Midwest. Included in this sale was more than 2.5 million square feet of office properties in Chicago.
So far in 2012, Duke Realty has continued its strategy of using acquisitions to increase its investment in industrial and medical office properties. In the first quarter of this year, Duke Realty closed another $157 million in acquisitions, including the purchase of the 827,268-square foot Crate and Barrel warehouse building in Naperville, and the 104,329-square foot Burr Ridge Medical Center, leased to Loyola University.
Duke Realty remains a premier commercial property developer, but is continuing to be selective in development projects for its own portfolio. The company is focusing on high-quality industrial and office build-to-suit projects, as well as medical office buildings for leading hospital systems. New development starts in 2010 and 2011 totaled more than 3.2 million square feet.
In the first quarter of 2012, Duke Realty saw an uptick in development, launching three new build-to-suit projects: two industrial buildings and a medical office building — totaling nearly 1.5 million square feet.
Progress in other metrics
Duke Realty’s portfolio realignment has also resulted in higher occupancy of its in-service portfolio. At the end of the first quarter of 2012, Duke Realty’s overall occupancy was 92.1 percent, with bulk industrial occupancy at 93.6 percent — the highest since the economic downturn.
Geographically, the company also has shifted its investment in assets. Since the repositioning plan was introduced in late 2009, Duke Realty has decreased its Midwest portfolio to 46 percent from 54 percent and increased its investment in its south, east and west portfolios according to its strategic plan.
Where we are and what’s ahead
As a result of its repositioning efforts, Duke Realty’s investment in the industrial segment of its portfolio had risen to 54 percent at the end of 2011, up 18 percent from just two years ago. The company also increased its investment in medical office properties by 4 percent and, in accordance with its plan, decreased its investment in office properties by 22 percent.
Chicago remains a key market for the company and one in which it has significantly expanded its industrial footprint. In fact, the company has grown its industrial portfolio in the market by nearly 80 percent in the last three years, raising it to almost 11 million square feet. The company continues to look at other acquisition opportunities and has land available in key markets for future development.
Though Duke Realty has made tremendous progress on its portfolio repositioning plan, it won’t be content until it reaches its ultimate goal. So in 2012 — its 40th year in business — Duke Realty plans to continue working diligently toward its asset investment goals and to remain focused on transactions that enhance the overall quality of its portfolio and increase its presence in strategic new markets.
Its acquisition, disposition and development activities in the first quarter of this year are evidence of its ongoing commitment to reach its asset strategy goals.
As senior vice president for Duke Realty’s Chicago office, Steve Schnur is responsible for the market’s industrial and office portfolios. In addition to leading the asset management and leasing operations, he works to identify new land positions, acquisition and development opportunities, and prospects for built-to-suit development.