E-commerce giant Amazon (AMZN -4.41%) sent shockwaves through the industrial real estate market earlier this year by saying it had more warehouse space than it currently needed. Multiple reports suggested the company wanted to unload at least 10 million square feet of capacity. Investors feared that this wave of new supply would cool off the red-hot industrial market, leading them to sell off shares of industrial-focused real estate investment trusts (REITs).
However, leading industrial REIT Prologis (PLD -5.26%) brushed away those concerns on its recent second-quarter conference call. Here's what the REIT had to say about Amazon's comments and the broader warehouse market.
Morgan Stanley analyst Ronald Kamden brought up the elephant in the room on the call by asking Prologis' management team for an update on Amazon, given the company's comments and reports it was putting a boatload of space back on the market. Amazon is the REIT's largest customer, with leases covering more than 33.5 million square feet, supplying 4.8% of the company's rental income.
Chief Customer Officer Mike Curless addressed the situation: "We've heard the same rumors out on the street, the 10 million to 30 million square feet. None of it has been substantiated by Amazon." He then stated: "And what matters is what we're seeing on the ground, and we're not seeing much at all. We had our national broker calls last week, literally heard about one space that's out there for sublease in the markets that we focus on."
Curless further noted the company is currently 99% leased in the markets where it does business with Amazon. Additionally, rents on existing leases are 54% below market rates. Those factors suggest it shouldn't have a problem finding a new tenant if Amazon needed to get out of a lease.
Prologis' co-founder and CEO Hamid Moghadam also chimed in on the situation. He said that given Amazon's size, it's no surprise that people took a lot of stock in what it said. However, he lamented, "I think the single biggest miss for investors is that they read too much into that commentary, and the facts on the ground just don't support it."
What the facts say
Prologis' management took a lot of time on the call to address those facts on the ground. One of the big takeaways is that the company is seeing a shift in what's driving demand for warehouse space, not a slowdown. CFO Tim Arndt pointed out on the call that "e-commerce represented 14% of new leasing" in the quarter, which was "down from approximately 25% in 2021." However, that's "a shift we've long telegraphed."
Other sectors are more than making up for that difference. Arndt pointed out that "overall occupancy and leasing have continued to grow with take-up coming from a broad set of users, most notably transportation, healthcare, and auto." The CFO also noted that the company is starting to see the emergence of supply chain resiliency as a secular and incremental demand driver. He said the need for extra inventory "will lift demand for years to come."
Given the continued strong demand for warehouse space and very low vacancy rates in its markets, Prologis increased its rental growth forecast for the year. It now expects rents to rise 25% in the U.S. and 23% globally, up from 22% and 20%, respectively, in its first-quarter forecast.
The market's mistake looks like a buying opportunity
Shares of Prologis shed more than a quarter of their value following Amazon's revelation that it had too much warehouse space. However, market conditions haven't softened one bit. Instead, they're as strong as ever, evidenced by Prologis' guidance for even higher rent growth and occupancy rates this year. Given that disconnect, the sell-off in Prologis' stock looks like a buying opportunity.