Here’s What Prologis Really Thinks About the Industrial Sector

Yesterday’s earnings release from Prologis didn’t make markets happy on Wednesday, as a downward revision turned into a 3.6% drop in share price.

With higher interest rates, concerns about inflation, and ongoing supply chain and construction labor shortage issues, that shouldn’t necessarily be a surprise, and investor reactions don’t last forever. (Prices were up 0.85% at the end of Thursday.)

But there was also the earnings call. Here are some of the remarks not just about Prologis, but the entire industrial market, from company execs.

Near the top of the call, CFO Tim Arndt said, “We are clearly in a volatile macro environment where ongoing inflation, steeply rising interest rates, and the war and energy crisis in Europe are pressuring the global economy.”

While making a quick mention of the company’s fundamentals being strong, Arndt added, “Yet, we will spend less time on these results and more time describing our view of the market and how we’re navigating the environment.”

There is a scarcity of space for new facilities, “robust” rent growth, and “healthy activity” that may not be at the level of pandemic peak demand, but then how could that sustain for long?

There is some dichotomy, perhaps the difference between reacting to immediate potential and longer-term basic industry needs. Arndt acknowledged that “certain customers have publicly announced a pause in capex spending, particularly those with more mature supply chains.” But other customers continued to see “an overarching need to increase space as supply chain resiliency remains a top concern.”

In the company’s coastal U.S. markets, which generate more than half of its global NOI, vacancies are 1.7%. “Geographically, we have an increased level of focus on Europe given the ongoing war and growing energy crisis,” Arndt said.

But he added that the company expects new industrial supply to decline by 15% in 2023. Prologis expects that price discovery will take a few quarters of 2023. Lack of availability still supports higher prices. But “we’re carefully managing the business and approaching our markets with a sense of caution much as we did at the onset of the pandemic,” says Arndt. “In leasing, despite the very strong spot environment, we are carefully watching for softening demand and will assume that there will be further macro deterioration.”

In answer to a question, chairman and CEO Hamid Moghadam said that key markets are “exceptionally strong,” but “there are markets where vacancy rates are in the 5%, 6% range.” Still low vacancy levels by historical standards, but significant compared to other markets.

“I mean, we started 2022 thinking rents are going to be up 11%; they’re up 28%,” Moghadam added. “So, yes, cap rates have gone up, but the rents that are being capped are significantly higher.” In his view, there’s financial room to manage the stress.

One interesting answer was on a question about reduced demand. “We have zero givebacks on Amazon, zero,” Moghadam said, even though Amazon has received significant attention for giving up some of the warehouse space it had acquired during the pandemic. “We thought we were going to have two out of like 160, we have zero. And they continue to take new space from us. So I don’t know what all this excitement is all about, but we haven’t seen it in the marketplace. They were on a tear in 2020 and ’21, and they probably overcommitted to space, and they just reeled that back a bit.”

And as Mike Curless, chief customer officer noted, the type of churn being mentioned in regards to Amazon is about 1% of their holdings, so relatively small.

Moghadam did say that he thought “that the Fed was behind the eight ball, and they are now really running hard to catch up and they’re going to overshoot in their reaction” and that the actual lag in reaction, often put at six months, can run as long as two years.