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Prologis Expects E-Commerce Expansion, Tight Logistics Supply to Help Offset Mixed Industrial Growth Indicators This Year

World’s Largest Industrial Real Estate Company Forecasts U.S. Market Will Remain in Supply/Demand Balance Until Late This Year, Despite Global Macroeconomic Challenges
January 27, 2016
Prologis is managing development of Daikin Industries Ltd's  4 million-square-foot headquarters and manufacturing campus outside of Houston, the nation's largest under-construction industrial real estate project, slated for third quarter delivery.
Prologis is managing development of Daikin Industries Ltd's 4 million-square-foot headquarters and manufacturing campus outside of Houston, the nation's largest under-construction industrial real estate project, slated for third quarter delivery.
Demand for bulk warehouse space by e-commerce and other occupiers in the U.S. industrial real estate market should result in robust market conditions for Prologis Inc. (NYSE: PLD) through this year. This despite concerns from some analysts about weakening industrial indicators and the ripple effect from China’s economic slowdown, the CEO of the world’s largest industrial real estate company told investors Tuesday.

Record-high occupancy of 96.9% in the fourth-quarter 2015 and an eye-popping 13% increase in rental rates -- including an 18% increase in the U.S. -- combined with logistics inventory that’s expected to remain tight through most of the year, are creating strong conditions around the world for San Francisco-based Prologis. The top industrial REIT reported a 19% increase in funds from operations in the final quarter of 2015 compared with a year earlier.

"Business remained exceptionally strong in the fourth quarter, wrapping up a year that exceeded expectations in virtually all aspects of the business," Prologis CEO and Chairman Hamid Moghadam said in reporting the company’s fourth-quarter financial results. Moghadam believes business momentum will continue in 2016 due to broad-based demand from such sectors as food and beverage, automotive and electronics.

"Industrial real estate market conditions are healthy in most of the world, in spite of concerns about emerging market economies, including slower growth in China," Moghadam added.

The 202 million square feet of U.S. industrial property absorbed during 2015 was the strongest total so far in the current cycle, and the second-highest annual total on record behind the 213 million square feet in 2006, the height of the previous boom, according to CoStar’s national index of large U.S. markets.

Developers added 145 million square feet of new industrial space in the U.S. last year. But with a 5% increase in demand the U.S. vacancy rate dropped 60 basis points for logistics and light industrial property, to 7.8% and 4.2%, respectively.

Editor's Note: For expert analysis of commercial property markets, CoStar subscribers can register for CoStar's upcoming State of the CRE Market 2015 Review & Forecast webinars for the office (1/28) industrial (2/4) retail (2/11) and apartment (2/18) sectors by logging on and clicking the Knowledge Center tab.

By this all-important measure, the U.S. logistics market is healthier than at any time since 2000, according to CoStar Senior Real Estate Economist Shaw Lupton. Rents for industrial space ended 2015 up 5.6% for logistics space and up 6.4% for light industrial, comparing favorably to the 2.4% rent growth in retail, 4.4% for office and 6% in apartments.

Despite an "incredibly healthy" industrial property market, several key U.S. indicators, such as the ISM Purchasing Managers’ Index, have weakened in recent months as manufacturing slowed. The manufacturing declines are signs of a slowing global economy and stronger U.S. dollar, even as U.S. goods consumption and housing continue to expand, Lupton noted.

Prologis’s Moghadam acknowledged that although macroeconomic indicators around the world paint a mixed portrait for industrial real estate, "those most correlated with our business point to favorable business trends," citing rising global consumption as well as another year of double-digit e-commerce sale growth.

Demand is expected to continue to exceed supply in the U.S. until a balancing point is reached, expected later this year. However, Prologis said it is focused on profitability rather than volume of its speculative developments, and other industrial developers and lenders have also shown discipline over the last few years, Moghadam said.

More of the firm's customers are investing in ways to squeeze more efficiency out of their supply chains, in part as a result of the 15% growth in U.S. online sales compared to 2% growth for traditional retail.

Moves by bricks-and-mortar retailers to grow online shopping platforms are expected to drive demand for warehouse and fulfillment center space, with retailers such as Home Depot and Walmart well under way with major supply chain reconfigurations, Moghadam said.

"On balance, we expect 2016 to be another strong year for the U.S. industrial market as consumer-driven and housing market growth both continue to stimulate demand for industrial product of all shapes and sizes," CoStar’s Lupton concluded. "But we’ll be watching economic indicators closely for signs of a slowdown."

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