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Duke goes on buying spree to locate in key markets: Developer gets footholds in D.C., Savannah, Baltimore

February 20, 2006

Less than two months into the new year, Duke Realty Corp. has already made three major moves designed to fuel the company's growth long beyond 2006.

The Indianapolis-based real estate investment trust has announced or completed acquisitions in the Washington, D.C., area; Savannah, Ga.; and Baltimore worth more than $1 billion.

In the case of Savannah and Baltimore, the deals give Duke prime positions near city ports-locations company officials believe will be key to the distribution business in coming years.

So where does that leave Indianapolis, Duke's industrial stronghold and one of the nation's top spots for distribution centers?

"I don't think that's going to change," said Duke CEO Dennis Oklak. "We still see strength and a tremendous amount of demand on the industrial side."

He noted that at the end of 2005, Duke's modern bulk industrial portfolio-most of it in the Midwest-was nearly 96-percent leased, the highest occupancy since the end of 2000. Of Duke's nine markets for industrial space, all but two had occupancy over 95 percent. Those two had recently finished buildings that hadn't been leased, driving down the occupancy rate.

Port positioning

The focus on port distribution centers, Oklak said, comes from a combination of two factors: more goods will come through the nation's ports via ships in the coming years, and ports on the West Coast are already crowded.

Shippers will increasingly use East Coast ports like Savannah and Baltimore, Oklak predicted, rather than wait for goods to be unloaded at Los Angeles or other western ports-even if they're coming from Asia and have to take an extra day or two to travel through the Panama Canal.

Once goods are unloaded at ports, they'll still travel to inland distribution centers like Indianapolis and Ohio cities Columbus and Cincinnati, Oklak said. He pointed out that Duke, before its recent acquisitions in new markets, already had land that can support up to 70 million square feet of new industrial and office development, most of it in its existing markets.

Among projects Duke builds with the intention of owning, rather than selling to occupants or other investors, about 55 percent is industrial and 45 percent is office. A small-but-growing development pipeline comes from Duke's year-old national development group, which focuses on retail, build-to-suit and medical office projects through a joint venture agreement with locally based Bremner Healthcare Real Estate.

Duke will continue to acquire land, especially in its new geographic markets, Oklak said. Those include the Baltimore and the Washington, D.C., area, as well as Phoenix and Houston.

New offices

Those markets will soon have full-service Duke offices, with the intention of becoming major outposts for the company. In the D.C. area, Duke will immediately gain employees when it closes on its acquisition of the commercial operations of the Mark Winkler Co. The deal includes 2.9 million square feet of office and light industrial buildings, and 166 acres of undeveloped land. The company will use that acquisition as its base for an office that will eventually have up to 70 employees, Oklak said.

Like that deal, the acquisition of a former General Motors Corp. facility for a reported $800 million near Baltimore's port also includes undeveloped land. Duke will raze a 3.1-million-square-foot facility on the site and redevelop it and the 184 acres it sits on into nearly 3 million square feet of industrial buildings.

Duke's land deals keep the company's focus on new development, rather than acquiring existing buildings, Oklak said. Like REITs nationwide, Duke is facing increasing competition on existing buildings from private investors looking to sink their money into real estate and driving up prices.

With the exception of the Savannah portfolio, purchased from a private investor who had a relationship with Duke, recent acquisitions have also followed that trend, Oklak said.

"Washington, D.C., is expensive," Oklak said of the company's acquisition there. Duke has declined to divulge the price for the deal until it closes. "But it gets us into a new market and gives us a presence, some land and an operating team."

Analysts guarded

Although Wall Street has reacted generally favorably on Duke's recent moves, many analysts are still guarded on the company overall.

Nearly all-14 of 16-analysts who cover Duke rate the company's stock a "hold" or the equivalent, according to Bloomberg News.

Duke shares have risen 16.2 percent in the past year, to just over $34 each, but their year-to-date increase of 2.5 percent falls behind the 4.7-percent average increase of office and industrial REITs tracked by the National Association of Real Estate Investment Trusts.

"Duke is making strides to distance itself from slow Midwest markets," wrote Stifel Nicolaus analyst David M. Fick in a Jan. 27 report. "The problem is that they own billions of dollars of slow-growth ... real estate that they have to drag around as they try to embrace better markets with more growth."

Late last year, Duke shed some of that albatross, selling a 14-million-square-foot light industrial portfolio for about $1 billion. That sale helped fund Duke's recent buying spree and boost leasing occupancy.
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