SAN FRANCISCO—During a session at the ULI Fall Meeting on Thursday, Hamid Moghadam, chairman and chief executive officer of Prologis, and John Stumpf, chairman and chief executive officer at Wells Fargo, agreed that an interest rate increase would have a minimal effect. Stumpf reasoned that a 25-basis-point rise will not be a shock to either markets or consumers and may even act as a stimulus by acting as a demonstration of confidence in the strengthening economy.
"The debate has become bigger than the rate. Now is a great time to borrow money," Stumpf said.
Moghadam said that the cost of capital remains low and that rate increases are not a big issue to businesses such as Prologis, which is only 37% levered. He said the 10-year U.S. Treasury rate was a far more relevant rate to real estate investors.
"We are interested in the long-term cost of money," Moghadam said.
Moghadam was also not overly worried about the impact of a slowdown in Chinese economic growth.
"People get over-excited about the slowdown in China. Nothing grows at 10% forever," he said.
Moghadam went on to say China was still growing at approximately 4.5 to 5% per year, which still represents significant growth for a major world economy. He remained confident about the long-term prospects for both China's economy and real estate market.
Stumpf noted that 97% of Wells Fargo's business was in the United States and as a result, the company saw China through the eyes of its customers. He agreed that Chinese growth was not a major concern; however, he estimated that weaknesses in economies outside the United States were probably costing the domestic economy 1% growth per year.
Moghadam pointed out that muted supply was a key difference between the current real estate cycle and previous ones.
"Demand is currently a six on a scale of 10, but supply is only at a two," he said. He surmised that most major markets normally would have been overdeveloped five years into a cycle.
Moghadam identified e-commerce as continuing to be a key driver for industrial space. He noted that 25% of Prologis's new business comes from e-commerce and that related industries now account for 9% of the company's overall portfolio. He pointed out that e-commerce is a global phenomenon, with many emerging markets moving straight to e-commerce rather than to other forms of traditional retail. For more mature markets, Moghadam saw potential for infill development in locations close to cities with large consumer populations in order to support online retailers' rapid delivery models.
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
