July 13, 2024

Brad Marolf

Business & Finance Wonders

E-commerce, elevated inventories to keep warehouse demand hot, Prologis head says

E-commerce, elevated inventories to keep warehouse demand hot, Prologis head says

The chairman and CEO of logistics warehouse titan Prologis Inc., Hamid R. Moghadam, said the unprecedented tightening of logistics warehousing space that has severely disrupted U.S. supply chains in the wake of the COVID-19 pandemic is likely a “temporary event” that lasts two to three years. However, the growth of e-commerce and increases in inventory levels could become permanent parts of the warehousing and supply chain landscape, Moghadam said.

Speaking to analysts Friday following Prologis’ (NYSE:PLD) third-quarter results, Moghadam said most people are too busy struggling with the current environment to focus on long-term issues. However, the twin secular phenomena of elevated e-commerce levels and permanently higher inventories are ever-present and not going away, he said. 

The San Francisco-based company, the world’s largest operator of logistics warehouses, on Friday reported better-than-expected results, with core funds from operations (FFO), the benchmark of its financial performance, coming in at $1.04 per diluted share, a penny above Wall Street consensus. 

Occupancy rates in Prologis’ markets — it operates 995 million square feet in 19 countries — averaged more than 96% during the quarter. It ended the quarter at 98% occupancy. Space in its markets is “effectively sold out,” Moghadam said in a statement that accompanied the results.

Prologis posted an extraordinary 27.9% increase in third-quarter “net effective” rental prices on new and renewed leases over the 2020 period. Company executives kept returning to that number during the analyst call. Moghadam said the spike in rental prices has overwhelmed any negative impact from higher interest rates that could otherwise affect Prologis’ results.

In a sign businesses continue to fight each other tooth-and-nail over available space, Prologis said its U.S. pre-leasing activity in the quarter hit an all-time record. That lessees are willing to lease quickly and pay dearly for space reflects a “panic mode” mindset in the market, Moghadam said.

The company raised its full-year estimates for domestic net absorption–the amount of square footage occupied in a specific period minus the square footage left vacant–to a record 375 million square feet. Prologis expects vacancy rates in its U.S. markets to hit 4% by year-end, another company record.

Moghadam said that in West Coast port markets and big industrial distribution nodes in Victorville, California, home of the gargantuan Inland Empire complex, and in New Jersey and central Pennsylvania, there is no available land to build on. A market like Dallas, which the company never considered to be space-constrained, has tightened up meaningfully in the more desirable pockets of the area, he said.

Supply increases are inevitable, but Moghadam said they are unlikely to cool down the market, 

 “Demand would be higher if supply was higher,” he said.