Real Estate Sector Ideas

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>>> Prologis' 2 Can't-Miss Insights for Real Estate Investors


Motley Fool

May 18, 2021

by Matthew DiLallo


https://www.millionacres.com/real-estate-investing/articles/prologis-2-cant-miss-insights-for-real-estate-investors/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article


Prologis (NYSE: PLD) is a global leader in logistics real estate. The industrial REIT, or real estate investment trust, operates more than 4,700 buildings, with nearly 1 billion square feet of space, leased to 5,500 customers across 19 countries. That makes it one of the largest REITs in the world. It's significantly bigger than its next industrial REIT rival, Duke Realty (NYSE: DRE), which operates 543 logistics properties with 162 million square feet across the U.S.

Given its mammoth size and global scale, Prologis knows the industrial real estate market better than anyone. That's why investors should listen to what its management team has to say about what they see in the sector. With that in mind, here are two crucial insights they recently made that real estate investors won't want to miss.

Demand is blistering hot

Prologis CEO Hamid Moghadam made a jaw-dropping statement in the company's recent earnings report. He said that:

The robust demand from the fourth quarter has carried into 2021 and is as strong as I have seen in my career. Global supply chains are pushing to keep pace with accelerating economic activity, retooling for faster fulfillment and resilience. With our well-positioned portfolio, differentiated customer offerings and abundant investment capacity, we expect to continue to outperform while delivering exceptional customer service.

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.

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