When Moghadam states that demand for logistics space is "as strong as I have seen in my career," he's making a bold statement, given his illustrious career. He co-founded Prologis' predecessor, AMB Property, in 1983. He led that company through its initial public offering in 1997 and its merger with Prologis in 2011. Suffice it to say, he's seen his share of boom markets, and the current one stands out to him as the strongest thus far.
He noted two tailwinds are driving red-hot demand. First, accelerating economic activity coming out of the pandemic is stretching the global supply chain thin. That's forcing companies to secure space to store inventory so they can keep up with demand. Second, the accelerating adoption of e-commerce is driving demand for additional warehouse space so that companies can fulfill orders even faster.
Because demand is so strong, Prologis expects higher occupancy, rental rates, and development starts this year. As a result, it boosted its full-year forecast.
Inflation is heating up
Another nugget came from CFO Tom Olinger on the accompanying conference call. He stated that: "We've begun to see a rapid acceleration in replacement costs. In the U.S., we expect replacement cost to increase 20% to 25% over the two-year period through 2021, the fastest rate ever."
This statement implies that it's getting increasingly expensive to build new supply as inflation drives up the cost of things like steel. Olinger also noted that "many of our markets faced shortages of land [for] logistics uses" in the quarter.
These inflationary and scarcity issues make existing facilities increasingly more valuable, especially in the face of tailwinds like "strengthening demand and ultra-low vacancies," which Olinger reported on the call. That's "leading customers to increasingly compete for space, which is translating into pricing power."
As a result, Prologis is enjoying strong rent growth. Overall, the company now expects 6% global rent growth this year, driven by its ability to capture significant rate increases as contracts on existing space expire.
A mega trend investors won't want to miss
Demand for industrial real estate is red-hot right now. Moreover, the dual tailwinds driving it are unlikely to abate for several years, implying significant growth potential for the industry. Because of that, real estate investors should seriously consider increasing their exposure to this sector, since it could prove to be a big winner in the years ahead.