Prologis Revises Rent Growth Forecast to 22% Amid Historic Demand, Vacancy

Industrial giant Prologis is running out of space to rent, as vacancy remains at historic lows for the overall sector and rents continue to climb. That’s led the company to revise its annual rent growth estimates up 11% from last quarter.

Prologis ended Q1 with 97.4% occupancy, a figure that was consistent with Q4 2021 and counters the typical Q1 decline.

“Given this pace in our outlook on demand, we’re revising our annual rent growth forecast to 22% in the US and 20% globally, in line with 2021,” said Tim Arndt, Prologis’ new chief financial officer, on a recent earnings call.  Market rents in coastal cities are predicted to rise by up to 26%. Over the course of the first quarter, market rents for warehouse space in the US overall grew by 8.5% and by 6.5% globally.

In the same earnings call, Prologis CEO Hamid Moghadam said industrial rents are in “unprecedented territory.”

“They’ve never grown at these levels, but we’ve never had market conditions like we have now,” Moghadam said. “We’ve never had e-commerce at this level of importance. We’ve never had resilience becoming such a big factor. We haven’t had these bottlenecks in the supply chain that clog up the network.”

In the past, the Prologis CEO has said the industrial CRE market is “effectively sold out,” and he said Tuesday that rising rents, economic uncertainty and geopolitical tensions are “really part of the same equation.” And while inflation and materials and labor shortages continue to plague the ability of developers to bring on new supply, Moghadam notes that those bottlenecks have caused a rush to “catch up just with the demand they’re seeing from their end customers, and they’re not getting there.”

“They’re always behind, so the first stage is for them to catch up with what they need to have to get even with pre-pandemic kind of levels of service,” he said. “And then they need to think about their long-term strategies.”

Arndt echoed those sentiments, noting that supply chains have yet to return to normal as measured by in-stock rates and equipment lead times.  The overall flow of goods has improved, he said, but the inventory to sales ratio is still 10% or more below pre-pandemic levels. That means inventories need to compensate not only for that 10%, but must also build an incremental 10% in safety stock.  Arndt said that even if retail sales declined by 5%, Prologis still anticipates the market will require an incremental 800 million square feet of space in the US alone.

Moghadam also spoke at length about cap rates, predicting that they’ll likely hold due to large mark-to-market increases from quarter to quarter. He said that the markets with the biggest mark-to-market will likely have the strongest cap rates, and that markets that have had the strongest growth in the past will also have the strongest cap rates and growth going forward.

“Basically, you’re buying a below-market income stream,” he explained. “So just look around for the markets that have experienced the biggest rent growth in the last three or four years, and those are the cap rates that are going to remain the strongest, absent any capital market considerations.”