Despite Tariffs, Strong Outlook For Prologis, Industrial Sector

While the question lingers of whether a trade war sparked by tariffs could have a chilling effect on the economy in the year to come, the industrial sector continues to perform well, as evidenced in the recent earnings of San Francisco-based Prologis.

Last week, Prologis reported third-quarter earnings from operations of 72 cents/share, which was up 7% from a year ago and just beat analyst expectations.

Edward Jones analyst Matt Kopsky said the company's Q3 earnings were good overall with continued strong growth, and the company did a good job integrating DCT, which Prologis purchased for $8.4B, including debt, in an all-stock deal in August. He rates the company's stock a "buy."

Still, there is a possible risk from increased tariffs between the U.S. and other countries, particularly China.

The U.S. started placing tariffs on Chinese goods in January, with the most recent round of tariffs at 10% on $200B worth of Chinese goods. China has responded with tariffs on U.S. goods.

U.S. industrial demand kept vacancy rates at 4.8%, a record low, in Q1 2018, but there is the concern that tariffs might pull down the U.S. economy in the coming year and slow growth of industrial asking rent, JLL reported in September. The report cautioned that the tariffs on $200B in Chinese goods approved in late September, and subsequent retaliatory tariffs, will have more severe effects on the industry. Demand for industrial space could decline in coastal markets, where much of the demand is import-driven.

While a full-blown trade war is unlikely, Kopsky writes that slowing global trade from increased tariffs could hurt Prologis, since long-term demand for the company's warehouses largely depends on global trade.

Prologis CEO Hamid Moghadam addressed trade concerns on the company's earnings call. He said they had not had any measurable impact on Prologis' business.

"Sure, if we search real hard, we can point to one or two companies who backed out [of] our lease negotiations in the U.S., but the impact of those isolated cases was negligible in the context of our overall leasing volume," he said. "There are plenty of other customers that are waiting in line for quality space and are frustrated by the shortage of suitable options."

Prologis signed 289 leases in the U.S. last quarter.

Moghadam said the company had revised its forecast upward for net absorption for the year to increase by 15% to 260M SF. Completions this year will again fall short of demand — for the ninth consecutive year — by 10M SF.

Kopsky said in an email that he expects the U.S. to continue to be a strong market in 2019.

"In regards to the overall industrial REIT space, we are not seeing any meaningful impact due to tariffs," he wrote. "Companies continue to invest in their supply chains to remain competitive, and well-located logistics is a vital piece of the solution. We expect headline risk to remain, but leasing demand to stay strong unless the tariffs cause the overall economy to slow, which we are not seeing yet."

Prologis released a report in July looking at trade sanctions. The report found that logistics real estate remains insulated from tariffs, which so far have carried the greatest risk for production as opposed to the consumption end of the supply chain, which makes up most of Prologis' portfolio.

There is additional buffering against slowing trade through diversification.

On the recent earnings call, Moghadam also focused on Prologis' growth in Europe, where vacancies are at historic lows and rental rates are increasing.