Prologis CEO Talks Amazon Real Estate Sublease and Inventory Correction – Sourcing Journal

Prologis co-founder and CEO Hamid Moghadam on Monday aimed to dispel some of what he called “major market myths” as the property giant raised its forecast for the year amid demand continues for its industrial properties.

At the top of that list of misconceptions the CEO mentioned during the company’s second-quarter earnings call on Monday would be questions about Amazon’s subletting of excess warehouse space. it no longer needs in response to the correction in consumer demand from the height of spending patterns during the pandemic.

“I didn’t listen to Amazon’s earnings call, but I got more questions on this comment than comments from the entire industrial real estate industry, which is pretty consistent,” Moghadam told analysts. “So I guess if you have a market cap over a trillion dollars, people listen to you a lot more. But I think the biggest myth for investors is that they’ve read too much into that commentary. And the facts on the ground just don’t back it up.

The e-commerce company’s chief financial officer (CFO), Brian Olsavsky, told analysts in April that Amazon had too much space after doubling its portfolio of warehouses in line with demand seen at the height of the pandemic.

A company spokesperson declined to comment on whether Amazon was considering early lease terminations outside of sharing a statement prepared for the Sourcing Journal in May explaining the merits of subletting for businesses.

“We heard the same rumors on the street, the 10 to 30 million square feet [in subleasing]”, said Chris Caton, managing director of global strategy and analysis of Prologis, during the call on Monday. “None of this has been proven by Amazon and what matters is that that we see on the ground. And, we don’t see much at all.

Caton said there was talk at a brokers meeting last week about space being available for subletting. Ultimately, Prologis is 99% leased in the 36 markets it does business with Amazon, according to Caton.

High inventory levels retailers are facing and how this may impact industrial leasing was another topic that came up on Monday, with Moghadam calling it the ‘second worst point understood about our business’ after reports from Amazon’s sublease that came out earlier. during this year.

“These types of numbers, especially ratio-type numbers, can be very misleading if you don’t analyze them,” Moghadam said in response to a question about the impact of inventory-to-sales ratios on rental business. “For example, whether you include automobiles or non-automotives, or general merchandise and non-general merchandise, you’ll see those findings be radically different.”

A Prologis distribution center in Ontario, California.

The issue in the context of its impact on demand for space is one that the property company has been so peppered with lately that it is expected to publish an article on the subject this week, executives said.

“Look, the bottom line is that building real inventories for resilience is really only half done,” Caton said. “And it’s progressing. It progresses with our views. Now, despite some of that excess inventory for some retailers for certain products…the broader landscape has continued to focus on increasing inventory levels, reducing stockouts, and reintroducing product variety.

While market normalization of industrial real estate demand may occur, and in some parts of the country may stumble, Prologis is optimistic about its outlook.

The company raised its guidance for the year on Monday, saying it now expects net earnings of between $5.15 and $5.25 per share. This compares to earlier forecasts of $4.85 to $5 per share.

The real estate company, with a recent market cap of $89.2 billion, also said it expects occupancy to average between 97.25% and 97.75% in 2022. , up from its previous estimate of 96.75% to 97.5%.

The bullish outlook is based on the company’s 1 billion square foot portfolio, which does not encompass all real estate markets. Prologis, in the United States, owns properties in markets such as Southern California, the San Francisco Bay Area, Chicago, Houston, Dallas/Fort Worth and New Jersey/New York.

The company’s $26 billion all-stock deal, announced last month, to buy Duke Realty will further expand its footprint, with 153 million square feet of industrial real estate in 19 U.S. markets. The transaction also includes 11 million square feet of real estate under construction and 1,228 acres of land.

Chief Financial Officer Tim Arndt described “healthy” demand during Monday’s call. Much of that demand in the last quarter was driven by transportation, healthcare and automotive. Meanwhile, new leases from e-commerce businesses fell slightly to 14% from 25% last year.

Arndt downplayed the decline as a “change we’ve been telegraphing for a long time”.

“E-commerce remains a positive long-term trend for our business,” Arndt said. “Clearly, COVID accelerated its adoption from a 15% share of retail sales before the pandemic and 23% during [COVID]. At 21% today, it is about 150 basis points ahead of our pre-COVID expectations. We are also seeing the emergence of supply chain resilience as a secular and incremental demand driver for our business…. We expect this need for safety stock to increase demand for years to come, although economic uncertainty could cause delays this year.