Prologis (NYSE: PLD) is a behemoth in the industrial REIT space. The company currently clocks in with a $74 billion market cap, which is more than $60 billion above its closest rival, Duke Realty (NYSE: DRE). Because of its enormous size and global scale, it has excellent insight into the industrial real estate market.
The REIT provided investors with a glimpse of what it's seeing in that market when it reported its third-quarter results. Here are some of the most interesting nuggets, including a quote investors won't want to miss.
What economic downturn?
Prologis tallied $0.90 per share of core FFO during the third quarter, which is noteworthy for two reasons. First, it beat analysts' expectations by $0.02 per share, which is a sign of strength. Second, its results are "now ahead of pre-COVID levels," according to comments by CFO Thomas Olinger on the third-quarter conference call, which is impressive considering the severity of the economic downturn.
The CFO also spent some time on the call discussing what Prologis is seeing in the market. He stated that "our proprietary data reveals that operating conditions are meaningfully better than they were 90 days ago," pointing out that the "Prologis IBI Activity Index rebounded sharply to more than 59 in September, above our long-term average, and up from 50 in June."
Another important data point he referenced on the call was space utilization, based solely on customers' data. This number, according to Olinger, was "84% at quarter-end and indicates our properties are returning to near-peak capacity." He also noted lease signings were up (31% during the quarter and 4% year to date), as were proposals (up 3% sequentially and 12% year to date).
As a result, the company boosted its market forecast for net absorption to 210 million square feet versus 295 million square feet of completions, a 50 million square feet increase for each from its previous estimate.
Demand is robust and widespread
One of the most interesting tidbits this quarter came from chairman and CEO Hamid Moghadam in the earnings press release. He noted that "activity in our portfolio is robust and broadening -- a reflection of increased demand in the quarter across multiple sectors, the adoption of e-commerce, and the need for higher levels of inventory." This quote is one investors won't want to miss, because it confirms a key trend while suggesting another is emerging.
Moghadam confirms one of the main drivers of the increase in demand for industrial space is increasing adoption of e-commerce. That's because, for every $1 billion in e-commerce sales, companies need 1.2 million square feet of distribution space. Thus, with the pandemic pushing more sales online, it's accelerating the need for more distribution space. At the current projected growth rate, the industry will need to build an additional 1 billion square feet of industrial space in the U.S. alone by 2025. For perspective on the size of this market opportunity, it's bigger than Prologis' current global portfolio.
Moghadam also notes that the currently strong market for industrial space isn't solely due to e-commerce. He said demand is coming from multiple sectors and driven by the need for higher levels of inventory. These factors are also somewhat pandemic-related, as many companies found they didn't have enough inventory on hand to meet demand earlier this year, causing widespread shortages. That's leading more companies to change their view on inventory management from just-in-time to having more of a buffer to overcome supply chain disruptions. As a result, it could drive even more demand for warehouse space in the coming years, adding to the opportunity set for Prologis and its peers.
A red-hot real estate market
Demand for industrial real estate usually slows during an economic downturn as companies pull back the reins on expanding their businesses. However, that's not the case this time around, as demand for industrial properties like warehouses is stronger now than before the pandemic, powered by accelerated e-commerce growth and a broad-based need to keep higher inventory levels. Both trends don't seem likely to slow, suggesting the sector has lots more growth ahead.