Prologis CEO Moghadam: Industrial Is Returning To Normal After 'Ridiculous' Few Years

After three years of historic activity, the industrial market nationwide is getting back to a pre-pandemic normal, according to Prologis CEO Hamid Moghadam, speaking on his company's Q2 earnings call Tuesday.

Prologis continues to ride the wave of a strong, if more normal, industrial market, clocking $1.65B in rental revenues in the quarter, up 51% from one year ago. Total revenues shot up as well, to $2.45B in the company's portfolio, which is 97.5% occupied. Moghadam attributes the company's success to its planning based on more normal market conditions.

“The last three years have just been ridiculous, and for anybody to think that that was to continue forever — we certainly don't make our investment decisions based on that,” Moghadam said.

“The best way to summarize this call would be: We're back to 2019,” Moghadam said. “Demand, supply, rental growth, all of those things are trending back to 2019. If you take '20 to '22 out of the picture, and imagine that in 2019 somebody told you that in 2023, you'd still be talking about the dynamics of a 2019 market, I would be jumping up and down, happy about that.”

Prologis' second quarter was highlighted by record rent change and the acquisition of over $3B of real estate from Blackstone, which deepened Prologis' presence in key markets, Chief Financial Officer Tim Arndt said during the company's earnings call on Tuesday.

Net effective rent change for the industrial giant came in at a record 78.5% year-over-year, besting last year's 45.6% increase. Net effective rent change in the company's U.S. portfolio surged 91.7% year-over-year in Q2 2023, compared with a 54% increase from 2021 to 2022.

The company expects rents to continue growing, but some markets are projected to be softer than others for the remainder of the year. Southern California, home to the Inland Empire, the busiest industrial market in the country, is one area of slight concern, according to Arndt.

"Some customers are re-evaluating expansion in the Inland Empire, diversifying operations to other Southwest markets. With all this in mind, we've reduced our rent growth forecast for Southern California in 2023," Arndt said.

A longtime industrial powerhouse, Southern California has stumbled recently, with one local market report showing that absorption in the market went negative for the first time in 20 years.

Labor disputes at the Ports of LA and Long Beach, as well as constricted supply, have applied downward pressure to the leasing velocity in the market, Prologis Managing Director for Global Strategy and Analytics Chris Catan said on the call. 

A labor agreement was reached last month, but not before major shippers had to make decisions about where to send cargo for the busy holiday shopping season, Caton said. 

Prologis executives said the dynamics at play in Southern California, like in the rest of the country, represent a return to a more normal market after a period of remarkable activity. They also expect the coming supply of new construction to continue impacting the market. 

“We're watching markets closely and we expect vacancies to rise over the course of the year from a normalization of demand and elevated development deliveries,” Arndt said.

“We've indeed seen vacancy build and expected to reach the mid-fours in the U.S. by year end, but believe that fundamentals will regain momentum in 2024, with the outlook for new supply declining as development starts continue to fall this year,” Arndt said.

According to Cushman & Wakefield's U.S. Q2 2023 industrial report, this year marks a “normalization” of the U.S. industrial market. In the second quarter, net absorption nationwide came in at 44.9M SF, down from 71.4M SF in the first quarter of this year, and down from 126M SF in the second quarter of 2022.

Though down, the second quarter 2023 total is roughly at the pace of demand for industrial space in the years before the pandemic, which is at a historically healthy level, Cushman & Wakefield notes. Twenty-one markets posted at least 1M SF of net absorption in the second quarter of this year, led by Savannah, Georgia, Dallas and Houston, all of which experienced more than 3M SF of net industrial absorption.

At 4.1%, the national vacancy rate rose above 4% for the first time since midyear 2021, though it remains 110 basis points below the 10-year historical average of 5.2%, Cushman & Wakefield reports, with most markets historically tight.

Markets might loosen up before long, however, as new supply continues to come on line. Still, developers are slowing somewhat, with the current construction pipeline totaling 624.3M SF, down 12.7% from the previous quarter. Construction saw its most recent peak in Q3 2022, when 715M SF of industrial was in the pipeline.