Data centers and industrial property are two of the fastest-growing industries in the commercial real estate (CRE) market today. Both CRE sectors have seen unprecedented growth over the last few years as limited supply and high demand have driven up rental rates. 

Prologis (PLD 0.85%) and Digital Realty Trust (DLR 0.75%) are two of the dominant leaders in these respective industries. Despite both reporting strong earnings, the stocks are down 32% and 43%, respectively, this year. 

Considering both have long-term demand drivers that should help them soar in the next bull market, let's see which stock is the better buy of the two today.

The leading industrial REIT

Prologis is the largest publicly traded real estate investment trust (REIT) by market capitalization. With over 1 billion square feet of industrial space in its portfolio, it's also the largest industrial operator in the world. The company has a wide range of tenants it leases to in the manufacturing, e-commerce, logistics, and transportation industries, helping it have a diverse income stream -- something that's becoming increasingly important as economic growth and retail spending slow.

2022 has been absolutely stellar for the company with net operating income (NOI) growing by 9.3% year over year and rental growth exceeding record levels. In the third quarter of 2022, its net effective rent jumped by close to 60% since 2021, thanks to a severe shortage of industrial supply primarily in the U.S. and European markets. Its core funds from operations (FFO) has increased 30% for the nine months ended 2022 compared to the same period last year.

REITs like Prologis aren't known for this rate of growth. Being high dividend payers in more mature industries means NOI and FFO growth is usually around 2% to 5% per year. So, this rate of growth is absolutely exceptional.

As more supply enters the market and the economy feels the impact of high inflation, there is a good chance Prologis' growth rate will start to slow in 2023. But it doesn't mean its growth opportunities are over. The company just completed the acquisition of industrial REIT Duke Realty, which will add to its accretive FFO in the fourth quarter of 2022. It also has a strong cash position to help fuel further growth in strategic markets.

Industrial real estate provides an essential service for our global economy by helping store, manufacture, and distribute goods. It's a service we need and will still need 40 years from now. Leading industrial REITs like Prologis are the first to adopt and offer new technologies that give tenants the start-of-the-art facilities they are looking for, so demand should remain healthy over the long term.

The up-and-coming data center REIT

Data centers play a critical role in keeping our digital world moving by safely storing and aggregating digital data. Digital Realty Trust has just over 300 data center facilities that are leased to roughly 4,000 tenants across 54 metro markets.

Unlike Prologis, Digital Realty Trust isn't the largest data center REIT in the space today. That title goes to its larger peer, Equinix. But what Digital Realty Trust may lack in size it more than makes up for in growth and dividend history.

Since it went public in 2004, the data center REIT has provided a 17% annualized return. That's far greater than the 9% provided by the S&P 500 and 10% provided by Prologis during that same period. It's also managed to grow its dividend payouts by 680%, which is double the rate of the S&P.

As the world adopted technology during the pandemic, data center demand soared. 2021 was a record year for nearly all data center providers, including Digital Realty Trust. Now that demand is returning to more normalized levels, its growth rate has slowed comparatively.

As of the third quarter of 2022, its NOI per share grew by 70% while revenue and FFO per share grew by a mere 5% and 1%, respectively. Record bookings in the third quarter are positive signs of healthy demand within the data center space despite investors' worries. The company is facing broader economic challenges including currency exchange fluctuations, but based on its leasing performance its growth opportunities remain strong.

Which is the better buy for 2023?

Company

Market Cap

Dividend Yield

Price-to-FFO

Debt-to-EBITDA

Dividend Payout Ratio

Prologis

$105 billion

2.7%

22 times

3.7 times

36%

Digital Realty Trust

$28 billion

4.8%

14 times

6.7 times

73%

Data source: Company earnings reports and y-charts. FFO= Funds from operations. EBITDA= Earnings before interest, taxes, depreciation, and amortization.

Both stocks are solid long-term investments giving investors exposure to very different industries backed by reliable companies. I personally own shares in both companies and plan to hold them for the long term. However, if I had to choose I would say Prologis is the better buy of the two right now.

Prologis has one of the best credit ratings and is in an extremely strong financial position to weather any economic challenges that may be coming. It also has much more room to grow its dividend in the coming years given its dividend payout ratio is an extremely conservative 39%.

Digital Realty Trust offers a higher dividend yield and boasts a much longer history of dividend increases, 17 years compared to eight. But it has far less wiggle room to maintain those dividend increases if its operations slow in 2023. Prologis may trade for a premium compared to Digital Realty Trust, but it's still a great valuation for a company with such a large portfolio and healthy financial profile.