The head of Prologis Inc. (NYSE: PLD), the world’s largest logistics real estate company, urged the Federal Reserve Wednesday to throttle back on its aggressive policy of interest rate increases and the hawkish rhetoric supporting it, warning that the Fed’s actions may “spook this market into places that they don’t want to go.”
Hamid R. Moghadam, co-founder, chairman and CEO, was not specific about what market he was referring to. Co-keynoting his company’s annual Groundbreakers event in San Francisco, Moghadam said the Fed is “getting a little carried away” with rate increases and with “the language that they’re using” to justify its policies.
Since March 2022, the Fed has hiked the federal funds rate — the rate that banks charge each other for overnight loans — by 525 basis points from a range of 0% to 0.5% to current levels of 5.5%. The most aggressive rate-tightening policy in 40 years has been designed to bring down the rate of inflation, which in June 2022 hit its highest level since the early 1980s but has since come down considerably to the low 3% range. Fed Chairman Jerome H. Powell has set a goal of 2% inflation and has pledged to keep rates higher for longer until the Fed sees a sustainable move down toward that level.
The rapid pace of increases has led to calls for the Fed to pause and let the higher borrowing costs work their way through the economy. Rate adjustments typically have a lag effect, and the concern is that all of the Fed’s hikes have not yet been fully felt throughout the economy.
The Fed’s actions have raised borrowing costs for all aspects of commerce, notably commercial real estate. Activity in the industrial sector, which is considered a subset of commercial real estate and is dominated by logistics warehousing, has slowed in 2023 as higher rates have made deals less attractive. Some tenants have also pulled back from the market due to a softening of overall demand that has lessened the need for warehouse capacity.
However, demand from third-party logistics providers and e-commerce retailers continues to prop up the market, and few expect both sectors to reduce their appetite for warehouse space.
Moghadam expects 2024 to be a good year for Prologis because current rents in its portfolio are substantially lower than markets, giving the company an opportunity to play catch-up on new deals and renewals. The spread between Prologis’ and market rents provides an opportunity for the company to grow substantially for at least a decade, he said.
Profits will be reinvested to build out Prologis’ growing array of services that extend beyond traditional real estate and to effectively reposition it as a “logistics solutions company,” Moghadam said. Most of the company’s 2024 growth will be organic rather than through acquisition, said Moghadam. The company has a global network of more than 1 billion square feet, and manages the equivalent of 3% of global GDP that moves through its buildings.
Moghadam shared the keynote with Ted Decker, chairman, president and CEO of The Home Depot, Inc. (NYSE: HD) and one of Prologis’ largest tenants. Both executives said global supply chains appear to have normalized following the pandemic-related dislocations in 2020, 2021 and part of 2022. However, both said that global networks are one devastating event away from again blowing up and causing disruptions in the flow of goods.
Moghadam said those concerns will incentivize businesses to invest more in buffer stock and the facilities to hold it. Businesses will rather invest more in restocking than run the risk of widespread inventory stockouts in the event of another crisis, he said.
Both companies are committed to expanding their use of AI. Prologis will focus its power on helping the company make better decisions regarding leasing and the deployment of capital. Moghadam said. Home Depot will use it to optimize inventory replenishment and mass personalization, which mines data to dig into customer preferences, Decker said.