By: Randyl Drummer
Date: October 18, 2018
Link to article: ProLogis
Prologis, the world’s largest warehouse and logistics property company, has begun to consider its leasing options should space suddenly come available as a result of recent bankruptcies by retailers or the consequences of a trade war with China.
So far, San Francisco-based Prologis has yet to find any “measurable impact” from trade issues or retailer bankruptcies this year, Prologis Chief Executive Hamid Moghadam told investors during the company’s third-quarter earnings conference. In the latest sign of struggles among retailers, Sears Holdings Corp. filed for Chapter 11 bankruptcy this week and announced another 142 closings of Sears and Kmart stores.
“If we search real hard, we can point to one or two companies who backed out of lease negotiations in the U.S., but the impact of those isolated cases was negligible in the context of our overall leasing volume,” Moghadam said.
“I can think of 20 other reasons why tenants stopped negotiating or dropped out of a negotiation, and certainly the trade stuff has not yet in any way translated to any action on the ground that we can tell,” Moghadam added.
The company isn’t waiting for any trade war to start before monitoring possible effects on customers. Prologis is already making sure it’s aware of how long it would take to fill space should customers start vacating.
The fact that the largest company of its kind is concerned enough to seek signs of effects of tariffs and bankruptcies reflects the cautious nature of corporations at this point in the extended economic expansion since the recession.
The company has found that “there are plenty of other customers that are waiting in line for quality space and are frustrated by the shortage of suitable options,” Moghadam said.
The Trump Administration has levied tariffs on a total of $250 billion of imported goods from China, which has retaliated by announcing tariffs on $110 billion of U.S. exports.
About 25 percent of the most recent round of tariffs enacted in September is on consumer goods, unlike earlier announcements that mostly targeted materials and intermediate goods, according to Peterson Institute for International Economic, a Washington D.C.-based think tank.
Prologis has said that while a protracted trade war could increase the likelihood of a global downturn, about three-quarters of its U.S. customers are focused on local and regional business activity, including e-commerce delivery, rather than international trade.
Prologis now expects companies to take 260 million square feet of industrial space in the U.S. this year, 15 percent more than 2017, even as newly built space falls an estimated 10 million square feet short of tenant demand. As a result of the tight market, Prologis has been able to keep more than 80 percent of its tenants when their leases expire, despite imposing average rent hikes of more than 11.5 percent.
Not all companies in that industry can operate with that level of efficiency, meaning that Prologis could have a better chance of withstanding any downturn than smaller rivals.
“The markets are really strong and that’s why we’re getting these increases,” Moghadam said. “And not every discussion with every tenant starts out with the intention of them staying. In fact, many of them when they hear about the new rent get a little spooked.”
He said many tenants come back to Prologis and renew after shopping the market and failing to find lower rents.
Among the major commercial property types, only apartment and industrial real estate investment trusts have gained ground in their stock prices since the beginning of the year, according to National Association of Real Estate Investment Trust data.
Matt Kopsky, an analyst for Edward Jones, noted that about 30 percent of new Prologis leasing activity is related to space needed to fill online orders, with Amazon the company’s largest tenant at about 3 percent of total revenue from rents across its portfolio. The company also has demand from overseas to help insulate it from any downturn.
“Despite increasing competition from new construction and trade-tariff concerns, we think demand will remain robust,” Kopsky said. “Increased global trade is also a significant factor, particularly overseas, since Prologis leases space to third-party logistics firms providing warehouse and distribution to multinational corporations.”