Management from logistics real estate investment trust Prologis Inc. said during a call with analysts on Wednesday that the outlook for available warehouse space continues to tighten. The catalysts: increased consumption, demographic growth, growing e-commerce fulfillment demand that requires faster service and many supply chains looking to rebuild inventories.
Prologis (NYSE: PLD) estimates a 25% increase in inventory will be required as inventory-to-sales ratios are 10% lower than before the pandemic and operators are looking to add 10% to 15% in safety stock to avoid future disruptions. Those actions by themselves will require 800 million square feet of space in the U.S. alone.
“While 2021 was a year of many records, the bulk of the benefit from the current environment will be realized in the future, providing a clear, tangible runway for sector-leading growth for many years to come.” CFO Thomas Olinger said.
The company reported fourth-quarter core funds from operations (FFO) of $1.12 per share, 18% higher year-over-year and 2 cents ahead of the consensus estimate. The metric increased 9% to $4.15 per share for full-year 2021. Guidance for 2022 implies a 22% increase in core FFO at the midpoint of the range ($5 to $5.10 per share), notably higher than the $4.64 consensus estimate at the time of the print.
“For our customers, the importance of the health of their supply chains, and the real estate that underpins it has never been so critical,” Olinger continued. “We believe the current global supply chain challenges will continue well beyond this year.”
Occupancy across its 1 billion-square-foot portfolio jumped 160 basis points year-over-year to 97.4%. The year closed with 98.2% of Prologis’ portfolio under a lease. Activity was elevated again in the quarter as the company signed 62 million square feet of leases and issued proposals on 90 million square feet.
Prologis now estimates that new construction underway throughout the market is 70% leased, well above historical levels.
“I’ve never seen 70% pre-leasing in 40 years of doing this in the development portfolio,” Hamid Moghadam, co-founder and CEO, said on the call. “Also, the interest in build-to-suits is a pretty good indication that the product just isn’t there … people simply cannot get the space that they need.”
Net effective rent change (average rate over the life of the lease) increased 33% in the fourth quarter, 500 bps higher year-over-year. Full-year rents were 20% higher in the U.S. and up 18% globally.
Net absorption — square footage becoming occupied less square footage becoming vacant — is expected to increase 375 million to 400 million square feet during 2022 in the 30 primary markets where Prologis operates. Vacancy is expected to hit an “ultra-low, all-time record” of 3.4% to 3.5%.
New development starts at Prologis will equal $4.5 billion to $5 billion in 2022, one-third of which is tied to build-to-suit space. In 2021, Prologis signed 357 leases with 265 unique e-commerce customers. E-commerce accounted for 19% of new leasing in the fourth quarter.
Debt-to-market capitalization was 13.5% at the end of the year with an average weighted interest rate of 1.7%. The company has total investment capacity of $15.5 billion and a land bank that can support $26 billion in new starts.
Prologis Ventures is an investor in FreightWaves.
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