Largest US Industrial REIT Reports Surge in Activity

Prologis, the nation’s largest logistics real estate investment trust, said the accelerating embrace of e-commerce by retailers and other firms is pushing its leasing and earnings ahead of pre-pandemic projections.

The San Francisco-based company reported almost 49 million square feet in new leases in the third quarter, a 28.4% year-over-year increase, and said it projects its development starts this year could be as much as double what the company expected in the second quarter. Operating conditions are better than three months ago, Prologis Chief Financial Officer Thomas Olinger told analysts on Tuesday in discussing the company's earnings.

“Activity in our portfolio is robust and broadening, a reflection of increased demand in the quarter across multiple sectors, the adoption of e-commerce and the need for higher levels of inventory,” Prologis CEO Hamid Moghadam said in a conference call.

Prologis is the largest U.S. industrial REIT by square footage, revenue and market value, according to the National Association of Real Estate Investment Trusts. The company is the first major public real estate investment trust to report its third-quarter earnings, and often, its results can be a bellwether for the broader industrial real estate market's performance.

Nationwide, the heightened propensity for consumers to receive groceries and other goods at home using e-commerce apps has created demand for storage and customer fulfillment space, driving warehouse leasing to above pre-pandemic levels.

For Prologis, the number of signed leases was up 31% in the third quarter compared to a year earlier and up 4% year to date. Due to the better-than-expected results, Prologis raised its 2020 earnings guidance for core funds from operations to between $3.76 and $3.78 per share, up from $3.70 to $3.75.

Food and beverage, healthcare and consumer product companies generated nearly two-thirds of new leasing in the third quarter, Olinger said.

E-commerce continues to grow, representing 37% of new leasing in the quarter, well above its historical average of 21%, Olinger said. For example, Amazon preleased the entire Building 14 in the International Park of Commerce at 6250 Promontory Parkway inTracy, California, in the San Joaquin Valley, according to research data.

However, a range of omnichannel and pure online retailers is growing, and while Seattle-based Amazon is very active, it represents just 13% of the Prologis's new leasing totals, Olinger told analysts.

Third-party logistics companies represented more than one-third of new e-commerce leasing in the quarter, a record as customers raced to augment their fulfillment networks, Olinger said. Many of the parcel carriers such as FedEx are also expanding their networks.

Prologis expects a surge in new construction starts in the final three months of the year, as an estimated 16 projects delayed early in the pandemic break ground. The company increased its projected new development starts to a range of $1.6 billion to $2 billion, up from the $800 million-$1.2 billion range Prologis provided in the second quarter.

The global company started $392 million in developments in the third quarter, bringing its total construction pipeline to $3.3 billion, with 63.3% of its projects preleased.

Prologis's new building acquisitions are expected to range from $700 million to $800 million for the year, the company said.

"Prologis has set the tone, which highlights the strength of high-quality industrial assets and an excellent management team, and they continue to earn their premium valuation," said Ki Bin Kim, an analyst for Truist equity research, in a note to clients.