Prologis: The logistics real estate market in “unprecedented territory”
Logistics warehouse operator Prologis Inc. sees the space market remaining tight for some time. During its first-quarter earnings conference call with analysts on Tuesday, management said supply available in the market was still at an all-time low.
Prologis (NYSE:PLD) has already exceeded first quarter expectations, announcing funds from basic operations (FFO) of $1.09, 2 cents above consensus and 12 cents higher year over year. ‘other.
A sustained period of strong consumer demand as well as delays in bringing new projects online kept supply tight. “True months of supply,” which compares current vacancies plus development pipeline to ongoing net uptake, fell to 16 months in 30 key U.S. markets tracked by Prologis. Historically, this metric hovers around 36 months during expansion periods.
During the first quarter, the occupancy rate did not experience the normal seasonal decline. It remained stable with the fourth quarter at 97.4%. The metric was 200 basis points higher year-on-year, with Prologis having leased 98.1% of its portfolio at the end of the period.
Hamid Moghadam, co-founder and CEO, said the US market needed an additional 800 million square feet of additional space, pointing to an inventory-to-sales ratio 10% lower than pre-pandemic levels. He said that in addition to the 10% replacement goods needed, many supply chains will look to add an additional 10% of cushion to prevent future stock-outs.
“People are running to catch up with the demand they see from their end customers and they can’t. They are always late,” Moghadam said.
He said there will be a temporary decline of about 5% in inventory tied to a shift in consumer habits from goods to services and experiences, which was the trend leading up to COVID. The net result, he says, is that 15% of inventory is still needed throughout the supply chain, which will require additional space.
Prologis expects US market rents to rise 22%, compared to 11% forecast in its latest update.
“We are in unprecedented territory,” Moghadam said. “Industrial rents have never increased to these levels, but we have never had market conditions like we have now. We’ve never had e-commerce at this level of importance. We never had [inventory] resilience becomes such an important factor. We haven’t had these bottlenecks in the supply chain clogging up the network.
The change in net effective rent in the first quarter (average rate over the lease term) was 37% across the portfolio and 41.5% in the United States
Moghadam said rents will continue to exceed acquisition and construction costs, but the gap is expected to narrow in the future. He pointed to soaring energy and labor costs as reasons. Importantly, rents are only 3-5% of total supply chain costs, making it easier for operators like Prologis to push through increases.
The company expects market rents to increase by 25% to 26% in coastal markets in 2022, with inland areas seeing increases of 1 to 10 years.
Prologis expects net profit to be between $4.85 and $5 per share in 2022, a 10% increase from its outlook provided just three months ago. The FFO baseline forecast was raised nearly 2% to a range of $5.10 to $5.16 per share, which was above the consensus estimate of $5.04 at the time of the press release. impression.
Moghadam ignored the likelihood of a recession, at least in the short term.
“We just look at what our customers tell us and what they do and the actions and words they use. The posture of our customers is very avant-garde because they benefit from certain secular trends which are favorable to them. He acknowledged that risks such as inflation, rising fuel prices, war in Ukraine and midterm elections are potential headwinds that could reverse favorable trends.
“We see our customers with their front foot forward and taking up more space, and that reassures us that we are not facing a recessionary environment, at least not as far as our business is concerned,” Moghadam said.
The debt to market capitalization ratio was 13.5% at the end of the quarter with a weighted average interest rate of 1.7%. The company has no significant debt maturities before 2026, making it “isolated in this rising rate environment.” Prologis ended the period with a total investment capacity of 18 billion dollars.
Prologis Ventures is an investor in FreightWaves.
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