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Prologis CEO To Tenants Fighting For Its Properties: I Know What You Did Last Summer

A Tracy, California, distribution center owned by Prologis

When it comes to Prologis and industrial real estate, it's good to be the king.

The largest owner of distribution centers in the world broke record after record in its first quarter as it finds itself in the enviable position of being able to handpick its tenants, Prologis CEO Hamid Moghadam said on the company's quarterly earnings call on Monday. The valuation of Prologis' assets increased 7.5% over the past two quarters while it received 93M SF in lease proposals — both all-time highs.

About 84% of Prologis' warehouse space is currently in use, with leases having been signed for an additional 12%, amounting to a 4% vacancy rate, Prologis Chief Financial Officer Tom Olinger said. The tenant retention rate is 69%, as Prologis has been willing and able to turn over buildings at the end of leases to push rent.

Across Prologis' U.S. portfolio, rents rose 2.4% in Q1, outperforming expectations and causing the company to increase its rent growth projections for the full year to 6.5% in the U.S. and 6% worldwide, Olinger said. In the overall U.S. industrial market, Prologis expects 300M SF of deliveries to be more than offset by 300M SF in net absorption.

Though Amazon is by far the largest single source of demand in many of Prologis' markets, the company reported delivering build-to-suit warehouses for FedEx and cereal maker Kellogg's. Prologis is seeing "lots of evidence of the Chinese players making their way to the U.S. and Europe as well," Global Strategy and Analytics Managing Director Chris Caton said.

The broad demand, combined with the benefit of hindsight after seeing how its tenants reacted to the initial shock of the coronavirus pandemic last year, allows Prologis to deny lease renewals for tenants it believes attempted to use pandemic conditions to gain forbearance and concessions in rent without really needing it, Moghadam said.


"We can make the occupancy whatever we want and retention be whatever we want," Moghadam said. "We're taking very careful notes on who is behaving and who is not behaving when the markets really soften, and there were people who were requesting deferrals and were really trying to take advantage of the situation when the businesses were not distressed. And those are the people that, given a fight between two tenants on a given space, are going to be on the losing end of that fight."

Prologis' scale even allows it to gain an advantage in the area that is providing the biggest headwinds for industrial development: the price of raw materials like steel. From the start of 2020 to the end of 2021, Prologis projects replacement cost to increase between 20% and 25%, another record, but the company has been able to obtain steel at 5% to 10% below market prices and have it delivered 10 to 20 weeks faster than its competition, Chief Operating Officer Gary Anderson said on the call.

"This is the first time, in my view, in the company’s history that we’ve actually taken advantage of our scale in a way that I think is really meaningful, and you’re starting to see it show up in development margins and operating margins," Anderson said.

In the first quarter, Prologis purchased $225M in land, and the company expects its pace of both acquisition and development to accelerate in the coming year across its portfolio.