Logistics house in excessive demand, rents shifting up

Logistics real estate provider Prologis Inc. (NYSE: PLD) pointed to continued positive momentum from the fourth quarter as a catalyst for better-than-expected first-quarter results.

The San Francisco-based company reported core funds from operations on Monday at 97 cents per share, 3 cents ahead of consensus and 14 cents higher than the prior-year quarter.

“The demand due to the strong economic recovery, the revolution in the retail trade and the higher inventories has developed more strongly than expected,” said CFO Tom Olinger in the conference call of the company with analysts.

Lease proposals for the first quarter were 93 million square feet, a new record and 13% higher when adjusted for the larger company portfolio size. The contract was signed for 60 million square meters. This was the second highest quarter ever recorded. Management said e-commerce providers accounted for 25% of the new leases signed during the reporting period.

Hamid Moghadam, chairman and CEO of Prologis, said there has been significant demand within consumer products, food and beverage, and all e-commerce-related industries. He noted that the demand for logistics space from healthcare companies has increased and expects the demand from the housing industry to accelerate as well.

According to Moghadam, Amazon (NASDAQ: AMZN), which has been very active in the logistics real estate market, is pushing for smaller properties on the last mile.

“They’ve expanded the basic infrastructure of the big buildings by a long way, and now it’s a trench warfare to find and stand behind those locations with the finishing touch,” Moghadam said. “It won’t be the same impressive numbers in terms of area, but that’s a much higher dollar-per-foot investment and that’s where your focus will be. I would say they are way ahead of everyone else in terms of backbone infrastructure, and now it’s a race for last touch. “

Management said the industry is expected to add 300 million square feet of leased industrial real estate in 2021, the highest level ever recorded. Despite the expansion of capacity, the supply in many markets continues to be restricted by the scarcity of land.

The average utilization of the Prologis portfolio was constant year-on-year at 95.4% and rose to 96.4% at the end of the quarter. However, management said vacancies in several top markets such as Southern California, Toronto and Tokyo, as well as some key markets in Germany, fell below 2%.

A prolonged period of increased retail sales and import volumes to replenish thin inventory levels has resulted in a lack of available logistics space. Rising equipment replacement costs (around 20-25% higher, according to Prologis), tenants with higher inventory levels, and rising interest rates are driving industrial rents up.

US rental growth in the quarter was 2.4% above expectations. Management raised expectations for rent increases to 6.5% domestically and 6% worldwide in 2021. Net effective rent change, which measures the percentage change in rental rates over the life of the lease for new and renewed leases during the quarter, increased 27% across the portfolio (+ 32% in the US). The growth rate increased by 190 basis points compared to the previous year.

Customer retention fell 640 basis points year over year to 69.1%, but management said Prologis was more selective on rental rates and credit quality.

Table: Prologis key performance indicators

Instructions raised

The outperformance in the first quarter led to an increase in Prologis’ guidance. The company now expects to produce core FFO in a range of $ 3.98 to $ 4.04 per share in 2021, compared to the current consensus estimate of $ 3.98.

The utilization is expected to be in a range of 96.25% to 96.75%, 50 basis points higher than originally stated.

New build programs were increased 16% to $ 2.75 billion to $ 3.05 billion. This was the case in the past when the company’s portfolio was about a quarter of its size today. Management said the relatively lower percentage of new developments compared to a decade ago reflects difficulties in obtaining land. However, they see it as supportive of rental growth.

Prologis Ventures is an investor in FreightWaves.

Click here for more FreightWaves articles by Todd Maiden.

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