Prologis Ramping Up Development

CHICAGO—Many players in the commercial real estate market habitually express cautious optimism about the state of the economy and their own prospects, but officials from Prologis, the San Francisco-based owner, operator and developer of industrial real estate, seemed a bit more confident than most when they spoke with attendees at REITWeek, NAREIT's Investor Forum.

“We can pick and choose where we develop,” said Gary E. Anderson, chief executive officer, Europe and Asia. “I feel really good about that.” The company, which merged with AMB Property Corp. in the summer of 2011, owns or has investments in properties and projects with about 559-million-square-feet in 21 countries. And since they just finished what Anderson called their 10-quarter plan to reposition the newly-merged firm and realign its portfolio, jettisoning properties they did not want for the long-term, Prologis can now focus entirely on growth in strong markets like China, Mexico, Brazil or the U.S. Anderson said that Prologis planned to have $2.5 billion worth of starts on an annual basis. 

“The markets are very tight for big-box space,” added Thomas S. Olinger, chief financial officer. Prologis has recently launched several giant projects, both in the U.S. and abroad, and has a 100% occupancy rate for spaces with over 500,000-square-feet, he said.

Prologis has a big advantage when it comes to launching development projects, according to Olinger. We're still in the aftermath of the recession, he said, and financing has become more difficult to obtain, an obstacle large companies like Prologis can overcome by providing significant equity up front. Furthermore, many developers did not survive the recession, leaving the field to the survivors who have access to capital and land.

“This is the deepest [development] pipeline I've seen,” said Olinger, speaking of his seven years at Prologis.

Occupancy rates are somewhat lower in the smaller spaces in the Prologis portfolio, and the company officials believe even those will turn around. Buildings with less than 100,000-square-feet have a global occupancy rate of 89.6%, Olinger said. But he believes they will soon get “a little tailwind” from the pick-up in the housing market. Businesses that service homebuilding, such as tile and carpet companies, will see increased demand and “they will aggressively lease the 40,000 to 50,000-square-foot spaces.”      

“E-commerce is growing at an accelerating rate,” said Anderson, in response to a question about how the burgeoning sector would impact their plans for growth. “This is going to be a topic for us for the next four, five, six years.” He says the American market will go the way of Japan, where e-retailers have built their facilities closer to population centers so they can commit to delivering products the day after the orders are placed.

One questioner, however, worried that all of the construction in the e-commerce space would crowd out, or even replace, development of more traditional retail spaces. Anderson believes traditional retail spaces will survive since customers will still want to examine and test out products in person, and only then purchase them over the Internet.     

“You have to have two supply chains,” said Olinger, and construction and development efforts should go forth for both traditional retail and e-commerce. “It is additive to warehouse space.”