News headlines with the word inflation in them are everywhere right now. So, too, are stories about supply-chain disruptions. So it isn't too shocking that industrial real estate investment trusts (REITs) like Prologis (PLD 2.07%) and Duke Realty (DRE +0.00%) that have a heavy focus on warehouse space have been able to increase the prices they charge tenants. Here's a look at how good things are for this pair today and what that could mean for the future.
If you are feeling it, so are they
Go to the grocery store and it won't take long for you to realize that prices are heading higher. That's inflation at work, but it doesn't just take shape at the end of the line with consumer prices. Price increases have been happening from base ingredients all the way through to the transportation of products to the stores that sell them. A vital real estate cog in this process is warehouse space.
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That's the specialty of Prologis and Duke Realty, both of which are laser focused on owning logistics assets. Think warehouse and distribution space located in key transportation hubs and ports in both cases. The big difference between the two is that Prologis has a global portfolio while Duke Realty's assets are located largely in the U.S.
Both of these REITs have reported fourth-quarter 2021 earnings, and the one number that stands out the most is rent increases. Prologis was able to hike rental rates on leases that were renewing by 33%. Duke Realty was able to hike its rates by even more, pushing through an average 40.8% rental increase. Although these leases are probably coming off of a low base set years ago, the change is still humongous and shows just how in-demand distribution-related property is right now.
Room to run
Prologis Chief Executive Officer Hamid Moghadam noted in his company's earnings release that, "Demand for our 1-billion-square-foot global portfolio shows no signs of slowing." That's great news for these REITs because it means that future rent hikes on properties that are coming to the end of their lease could be just as strong as recent increases. But here's the interesting thing: The big benefit from these increases will really be felt as more and more leases in the portfolio come up for renewal. Both companies are expecting high single-digit adjusted funds from operations (a key profitability measure for REITs) growth in 2022.
What's even more interesting, however, is what the demand means for ground-up construction. Prologis had nearly $1 billion worth of development starts in the fourth quarter of 2021. Duke Realty, which at a $22 billion market cap is less than a quarter the size of $115 billion market cap Prologis, started $466 million worth of investments in the fourth quarter.
Duke Realty made a point of noting that all nine of the buildings it's constructing are speculative. That means it doesn't have customers for them, but it believes there's enough demand in the market that it won't have a problem filling the space. In other words, demand staying high is actually quite important. The same is generally true of Prologis, given that the more space it builds, the more it needs to fill as well.
A lot of positive news
The shares of both Duke Realty and Prologis have cooled off some so far in 2022. However, it seems like demand for their properties remains strong. And as long as that demand remains strong, both will have the ability to keep building out their portfolios and pushing through significant rent increases. Although it would be hard to call either cheap today, Prologis and Duke Realty both appear to be hitting on all cylinders right now and could be worth a closer look for growth-minded income investors.
