The fundamentals of real estate still hold up, even when there is an elephant in your warehouse. Supply and demand are favoring the U.S. industrial space, despite fears of China’s slowing economy sucking the wind out of the sector’s sails.
Prologis, the largest warehouse REIT in the nation, reported strong fourth-quarter funds from operations on Tuesday, beating expectations by 2 cents per share. Revenue of $643.2 million was considerably higher than expected, up 43 percent from one year ago.
“The dynamics of the business are very positive,” said Prologis CEO Hamid Moghadam. “Rental growth is by far the biggest driver, because we’ve driven occupancy as far as we can. There is a lot of room to run on the rent side, and the reason for that is very constrained supply. The development machine has not kicked in.”
Warehouse has benefitted strongly from retail’s move online. As companies strive to get goods to consumers faster than ever before, they are filling warehouses, especially those close in to major metropolitan markets.
Prologis, which, according to its website, owns more rooftops than any other real estate company, reports its properties are 97 percent occupied, the highest occupancy rate Moghadam said he has seen in his 30-year career. Its customers include Amazon, Home Depot, FedEx, UPS and Wal-Mart.
“Demand is modest,” he admitted, “But when you overlay that on tight supply, it is really giving us pricing power and rental growth like I’ve never seen before.”
Moghadam brushes off concern that warehouse demand could be hurt by a slowdown in China’s economy.
“There is still a pretty spectacular rate of economic growth. Exports from China are definitely slowing down, but domestic consumption in China is growing at double-digit rates, and that creates warehouse demand in China, and we’re active in china,” he said.
China accounts for 5 percent of Prologis’ gross business and 1 percent of its earnings.
Chinese exports may be slowing, but the volume is still substantial. In addition, analysts say lower U.S. gas prices are bolstering consumer spending, which benefits the warehouse sector.
“Our propensity to buy stuff isn’t going away, and China’s propensity to produce stuff more cheaply than we can isn’t going away,” said Mitch Roschelle, a partner at PwC.
In April, 2015, Prologis acquired the real estate portfolio of KTR Partners. That increased its supply in several major markets like Chicago and Seattle.
“It is one of the few deals you just have to make,” said Moghadam in an exclusive interview with CNBC at the time.