Warehousing Space Is Effectively Sold Out for Prologis

A variety of factors across North America have impacted demand for big-box industrial facilities. While most sectors struggled through the global COVID-19 pandemic and the emergence of the Delta variant, the industrial market continued to go against the grain. 

Case in point last week, when Prologis reported better-than-expected third quarter results. “Our third quarter results were underpinned by record increases in market rents and valuations,” Chief Executive Hamid Moghadam, said in prepared remarks. “With vacancies at unprecedented lows, space in our markets is effectively sold out.”

Said Prologis CFO Thomas S. Olinger: “Our earnings potential is unrivaled. Most of the benefit from the current environment will accrue to the future given our 22 percent in-place-to-market rent spread, the valuation impact on our promotes, our leverage capacity, the $21 billion of development build-out and, most importantly, the vast opportunity set that our global footprint provides.”

Prologis’ net income more than doubled to $722.0 million, or 97 cents a share, from $298.7 million, or 40 cents a share, in the year-ago period. Core funds from operations per share increased to $1.04 from 90 cents, beating the FactSet consensus of $1.03. Total revenue rose 9.3% to $1.18 billion, above the FactSet consensus of $1.04 billion. 

Average occupancy was 96.6%, up from 96.0% in the second quarter, and with 98.0% of property leased as of Sept. 30. Cash rent change was up 12.9%, with cash same-store net operating income grew 6.7%. 

For 2021, the company raised its core FFO guidance range to $4.11 to $4.13 from $4.04 to $4.08, compared with the FactSet consensus of $4.07

Cap Rates Continue to Fall

Separately, Colliers issued a report recently on the big box industrial market stating, “On the investment side, capitalization rates continued to fall to 5.6%, down from 6.5% at the end of 2020.”

Despite the rare headwinds to the industrial sector, the big-box market remains poised for continued growth. The North American economies continue to recover from the pandemic-related challenges, which will benefit the big-box market in the years to come.”

Colliers said that core markets – including the Inland Empire, Dallas-Fort Worth, Atlanta, Chicago, Northern-Central New Jersey, Southern New Jersey-Eastern Pennsylvania and Toronto – continue to be the destinations of choice for many occupiers. Meanwhile, emerging secondary markets that are near the fastest-growing population centers — and in close proximity to the most utilized logistics hubs in the region — continue to grow.

“The supply chain disruptions, partly induced by the global pandemic of the past 18 months, sparked immense change for occupiers of bulk product throughout North America,” Colliers wrote. “However, the rapid growth of e-commerce was the bright spot throughout the economic upheaval for the industrial sector because, at the time of this report, e-commerce as a percentage of non-automobile retail sales topped 13% and is expected to grow to up to 23% by 2025. 

Occupiers are responding to this continued change in consumers’ purchasing presence by expanding to more locations. At midyear, more than 128 million square feet of occupancy gains were recorded in the big-box market — a record for a six-month period. 

By Mid-Year, Amazon completed 77 transactions for Big-Box Space

This positive momentum in the e-commerce sector related to occupancy gains is largely aided by the sheer dominance of Amazon as an online retailer. By far the largest e-commerce occupier, Amazon completed 77 transactions for big-box space at midyear to occupy 33.1 million square feet across North America. 

The rapid growth of e-commerce — a trend fast-tracked during the past couple of years — not only increased Amazon’s demand for larger fulfillment centers, but also for other large traditional retailers such as Walmart and Target.

Third-party logistics companies, including XPO Logistics, FedEx and Geodis ramped up their space needs as well. Supply chains continue to be right-sized and the third-party logistics industry, in particular, is expanding its e-commerce distribution capabilities faster than any other major industrial occupier.

This looks to continue in the coming quarters and will be a major demand driver going forward. 

Five markets posted occupancy gains greater than 10 million square feet at midyear – Dallas-Fort Worth (17.7 million square feet), Southern New Jersey-Eastern Pennsylvania (17.4 million square feet), Atlanta (15.8 million square feet), Chicago (15.3 million square feet) and the Inland Empire (11.5 million square feet). At the other end of the spectrum, while still positive, Cincinnati’s gains posted the least, at 2.6 million square feet, followed by Houston at 2.9 million square feet. However, the Cincinnati market improved the most year-over-year after posting less than 200,000 square feet of occupancy gains one year ago. 

The Southern New Jersey-Eastern Pennsylvania region continues to be the best performing big-box market in North America because of its excellent location, available land for development and strong labor force. At midyear, the region led North America with nearly 19 million square feet of new leasing activity and produced an impressive 17.4 million square feet of net absorption.