Even the world’s largest industrial property developer and manager operating in an industry that’s experienced unparalleled prosperity isn’t immune from the macroeconomic uncertainties surrounding it.
Real estate investment trust (REIT) Prologis, Inc. (NYSE:PLD) yesterday reported strong fourth-quarter results, capping what Chairman and CEO Hamid Moghadam called the best year in the company’s 28-year history. For the year, revenue exceeded $2.8 billion, up from more than $2.6 billion in 2017. Core funds from operations, a metric emphasized by the company, rose to $1.78 billion from $1.55 billion in 2017.
The industrial property sector’s fundamentals “remain as strong as I’ve ever seen it,” Moghadam said, based on a transcript of the call provided by SeekingAlpha. Vacancies are at historic lows, new supply is limited, and e-commerce remains a powerful tailwind for industrial demand, according to Moghadam.
Prologis, which operates, or is an investor in, 771 million square feet of property in 19 countries, reported a 97.5 percent global occupancy rate as of year-end. In the fourth quarter, it leased 35 million square feet in the quarter, with an average lease term of 83 months, the latter an all-time record.
In addition, space utilization is at all-time highs and is getting stronger as many tenants demand more space than they currently have, he said. As evidence, Moghadam noted an absence of “shadow space,” real estate-speak for portions of leased space that tenants are not using. The company signed leases for 17 million square feet during December and the first 20 days of January, typically the slowest period of the year, he reported.
At the same time, executives of the San Francisco-based REIT cautioned that a swirl of issues mostly beyond its or any company’s control could cloud business confidence and curb investment plans. The U.S.-China trade dispute, the partial shutdown of the U.S. government, the battle over Brexit, and the outlook for the U.S. economy nine years into its recovery could lead some users to “hit the pause button” until they saw further clarity, especially on the direction of the economy, Moghadam said
Moghadam stated that the current U.S. business environment reminds him of the dot-com era, when valuations reached nosebleed levels for many businesses with no history of profits. This led to an implosion of much of the technology sector, which was followed by a moderate recession. From peak-to-trough between March 2000 and September 2002, equity valuations of REITs increased by nearly 60 percent, Moghadam said. He noted that there were “uncanny parallels” between then and now, stating that while the leading information technology companies are established, profitable firms, there are still “plenty of unicorns that are highly dependent on the abundance of cheap capital – risk capital – for their survival.”
Industrial property has been on a multi-year tear since the Great Recession ended. Demand has surged, driven in large part by the need for massive e-commerce fulfillment centers. Meanwhile, overhead supply has been held in check for the past eight years. The result has been ultra-low vacancy rates – especially in coastal markets – leading to increasingly higher rents, and an end to any landlord concessions.
However, real estate services giant JLL Inc. (NYSE:JLL) has forecast a levelling off in 2019 as more supply comes online in key industrial markets. Moghadam said on the call he is seeing the start of oversupply conditions in Atlanta, Chicago, Houston and central Pennsylvania, all of which are major industrial centers.
Still, any material slowing will likely be caused by weakening demand, not by oversupply, he added.
In recent days, Prologis announced that it increased its global line of credit to $4 billion, and that it closed on an $880 million joint venture agreement in Brazil with investment firm Ivanhoe Cambridge.
(Correction: Due to an error in the digital transcription of Prologis’ conference call, Hamid Moghadam’s comments about the equity performance of REIT’s in the 2000-02 bear market were misstated. He said that REIT equity values appreciated by 60 percent during that time.)