With offices, hospitality and retail all on the slide, industrial property looks set to become the best bet in global real estate.
While much of the global property market is in a bear market spiral, the pandemic has been a dramatic money-making opportunity in the shares of industrial property landlords. I recommended the shares of Prologis (PLD), the New York-listed logistics REIT, at $60 on 15 April 2018; Prologis closed on 14 August 2020 at $102 – a 70% profit in the past 28 months. The company is now the world’s largest owner of logistics and industrial assets, the most attractive segment of the global property markets. This is the safe haven sector for sovereign wealth funds, pension funds and life insurance companies, which need to invest for decades and crave long-term value, stellar tenant credit risk and rising rental yields.
Prologis is a classic beneficiary of the dramatic rise in demand for warehouse space since online sales have risen from 6% of retail sales a decade ago to 30% at the height of the global pandemic lockdowns. Is this trend overdone? Absolutely not. Amazon, Prologis’s largest tenant, intends to lease 35m sq. ft of new warehousing space in the US alone in 2020. Property economists estimate that every $1bn in online/e-commerce sales translates into demand for 1.2m sq. ft of logistics space. With rents expected to rise by 6% in 2021 as Amazon and its peers opt for colossal high-tech fulfilment centres on the outskirts of the world’s major cities, there is no doubt that Prologis’s competitive advantage as the planet’s pre-eminent industrial landlord will only increase.
Given that shopping malls, hotels and even office buildings are all victims of the pandemic, I see no reason why logistics and data centre assets should not become the most profitable niches in global property. This is an investment theme I have recommended ad infinitum since at least 2012, but the tragedy of the pandemic has only underscored the urgency with which investors must grasp its nuances in order to make money in real estate. The investment thesis on Prologis is as compelling as it is simple. Prologis owns more than 700m sq. ft of state-of-the-art warehouses, logistics, distribution centres and industrial parks in the US, Europe and Asia. Amazon rents 60m sq. ft of industrial property from Prologis, making this company a proxy for the exponential secular growth of e-commerce.
Property economists estimate that every $1bn
in online/e-commerce sales translates into
demand for 1.2m sq. ft of logistics space
The writing on the wall has been crystal clear to me since early 2013: e-commerce will destroy traditional retailing and shopping malls. This is the reason Prologis has soared from $25 to $102 in the last seven years. The Covid-19 pandemic will only accelerate the death of the shopping mall, once viewed as a preferred commercial property asset due to its high barriers to entry and defined catchment area. Game, set, match and tournament to the new king of retailing – e-commerce.
E-commerce requires three times the warehouse space of traditional retailing. So as online sales become a higher proportion of total sales, the chronic supply deficit in warehouse space will only get worse. I was stunned to hear that the US Air Force is leasing 1m sq. ft of land in its ultra-secret Cold War era air base in the Nevada desert (think Area 51 and UFOs) for Amazon to build giant warehouses. Amazon also intends to build a mega 2.3m sq. ft fulfilment centre near London, creating what will become Britain’s biggest logistics asset. Who benefits from this existential reality and sector trend? Prologis. Its tenant list includes the world’s top retailers, led by Amazon, and the credit risk of tenants is absolutely critical to success in property investing. Prologis’s corporate tenant constellation is a landlord’s dream come true.
The greater the barriers to entry in a given property niche, the greater the pricing power (rental increases over time) and capital growth a landlord enjoys. This is the reason I refuse to invest in bricks-and-mortar commodity segments in real estate such as residential or offices, where any Tom, Dick or Azizi can add supply to a glutted market. This is obviously impossible in a technologically advanced industrial property space like the one Prologis dominates. After all, Prologis owns five times more warehouse space than its nearest publicly traded competitor. The economics and mathematics of oligopolistic markets can be super yummy, as Prologis’s more than 140% total return since I first recommended its shares proves with a vengeance.
Prologis has the world’s most attractive assets in global port complexes such as Los Angeles/Long Beach, Seattle, Shanghai, Canton (aka Guangzhou), New York/New Jersey and San Francisco, where it has built high-tech, multistorey warehouses with 100% occupancy. Its land banks, tenant lists, development pipeline, intellectual capital and management are all world-class.
