Blackstone, Prologis Bet Big On Industrial, Still A Pandemic Darling

The coronavirus pandemic has dealt a body blow to retail and hospitality real estate, while multifamily has its own problems, with mass eviction a much-discussed possibility. Even the office market is treading water, with landlords more flexible in leasing terms than before. 

The industrial market, by contrast, is seeing positive demand, despite the turmoil in the economy, according to recent preliminary reports on the sector. Major owners and investors also report strength in the sector.

The U.S. industrial market absorbed 43.9M SF in the second quarter, bringing the total for the first half of 2020 to 89.8M SF, Cushman & Wakefield reports. Occupancy growth is slower than a year ago (it was almost 250M SF for all of 2019), but industrial absorption is still positive in pandemic times, and will remain so into the second half of 2020, the company predicts. 

The pre-pandemic industrial market was strong. U.S. industrial vacancy roughly halved between the last recession, more than 10 years ago, and 2019, from around 10% to around 5%, JLL reports. As of Q1 2020, the national vacancy rate stood at 5.2%.

Industrial real estate is responding to demand with full pipelines. Currently about 330M SF of industrial space is under construction, up from 248M SF a year ago, according to Avison Young. About a third, or 30.6%, of that total is pre-leased. The market is also responding to demand from e-commerce operators, by undertaking retail-to-industrial space conversations. These projects total about 13.8M SF of retail space converted to 15.5M SF of industrial space nationwide, CBRE reports. 

It is not a vast amount, considering the largest industrial markets (about 1.2B SF in the case of Chicago), but it is enough to hint at a sudden shift in demand toward e-commerce uses. Much of the new demand is being met by existing industrial space.

"Logistics is the firm's largest exposure overall and comprises over one-third of the real estate portfolio," Blackstone Group Chief Financial Officer Michael Chae said during the company's most recent earnings call on Thursday.

"These investments continue to benefit from growing e-commerce demand, which based on our internal data analysis is up over 60% year-over-year in the U.S. since the onset of the crisis. Indeed, market pricing for warehouses today is higher than it was pre-COVID reflective of these positive trends," Chae said.

Industrial isn't the only successful component of Blackstone's holdings, just a major part of it, Chae said. "Our performance and our platform overall continues to benefit from superior sector selection and asset quality, and it’s not overly concentrated in shopping malls or hotels like many other real estate funds, which has negatively impacted their performance," he said.

"In our BREIT vehicle, the largest non-traded REIT, approximately 90% of our real estate investments are in the well-performing asset classes: logistics, multifamily, housing and net leased assets, which are performing extremely well relative to other sectors in this environment," Chae said.

For a company like Prologis, industrial is the main game, and it reports a strong sector.

"The second quarter played out better than our expectations in terms of both our results for the period and outlook for 2020 and beyond," Prologis Chief Financial Officer Thomas Olinger said during his company's most recent earnings call Tuesday.

"Leasing activity in our portfolio, market fundamentals, valuations and rent collections are all trending favorably," he said. "Overall, rent collection trends are excellent, collect[ing] 98% and 92.1% of our June and July rents, respectively. We've seen the pace of rent receipts accelerate each month since March, with collections ahead of 2019 levels for each month as well."

Over the last 30 days, Olinger said, the company has inked leases totaling 16.3M SF, up 24% year-over-year. Lease proposals have risen 21% compared with a year ago, and lease gestation has declined by 14 days to 44 days.

CORRECTION: JULY 28, 3 P.M. ET: A previous version of this story had an error in Prologis Chief Financial Officer Thomas Olinger's title, and the total of recent leases signed by the company. The story has been updated.