Industrial’s “Promising Path” Continues Into 2017

BY PAUL BUBNY

SAN FRANCISCO—Prologis CEO Hamid Moghadam says that as the industrial sector enters the new year, “we are now at the cusp of yet another important market transition.”

Prologis Park Desoto, near Memphis, one of the nation’s leading logistics markets. (Photo courtesy of Prologis)

SAN FRANCISCO—First out of the gate in reporting fourth-quarter results for industrial REITs was Prologis, which said Tuesday morning that net earnings per diluted share rose to $0.82 for Q4 and $2.27 for the year, compared to $0.23 and $1.64 for the same period in 2015. Core funds from operations was up 15% for the year to $2.57 per diluted share. In all instances, the logistics giant attributed the improvements to improved operating conditions and higher net promote income.

Looking at the year to come, Hamid Moghadam, the REIT’s chairman and CEO, says, “We are now at the cusp of yet another important market transition to a phase for which Prologis is ideally positioned. We entered 2017 with significant embedded earnings potential from the combination of rolling in-place leases to market and building out our land bank in the world’s premier consumption markets.”

Moghadam’s upbeat appraisal is shared by Jason Tolliver, head of industrial research for the Americas at Cushman & Wakefield. He observes that economic data reflect an increasingly confident consumer, and backed by solid labor markets and firmer wage growth, consumer spending should power industrial absorption, especially for warehouse product.

“When consumers are confident the industrial market benefits, and consumers ended the year upbeat with multiple measures of consumer confidence reaching cyclical highs,” says Tolliver. “Considering that consumer spending is a dominant driver of industrial demand, an optimistic US consumer will be a boon to industrial leasing. It’s also worth noting that other important industrial-related indicators, such as containerized traffic flows, manufacturing indices and business inventories demonstrate that the industrial market remains on a promising path.”

John Morris, Cushman & Wakefield’s executive managing director of logistics & industrial services for the Americas, also expects continued growth for industrial. “The market continues to be strong,” Morris said, “And while we are certainly all interested to see what the new administration’s and new Congress’ policies could mean to the overall real estate market, the industrial business continues to be fueled by the fundamental changes in how Americans work, shop and live.”

Backing up Morris and Tolliver are the Q4 and full-year demand metrics. Cushman & Wakefield data show that US industrial markets absorbed 63.6 million square feet of space in the last quarter of 2016, propelling net absorption for the year to a record-setting 282.9 million square feet. The sector has registered 27 consecutive quarters of net occupancy gains, and the three-year total for net absorption, 825.5 million square feet, was nearly 100 million square feet ahead of the strongest period of three-year occupancy growth in the prior cycle, 1997 to 1999.

A Capital One Securities team led by Thomas Lesnick provides a generally positive outlook for the sector headed into earnings season, although with a few clouds on the horizon. After outperforming the MSCI US REIT Index by 17.35% through Q3 of last year, “industrial REITs cooled into the end of the year, with the SNL US Industrial Index only outperforming by 38 basis points” in Q4, they write.

“Industrial REITs continue to trade at a premium to the overall REIT universe,” according to the Capital One Securities analysts. “However, with demand expected to modestly exceed supply in 2017, a continuation of strong fundamentals helps to justify the premium, in our view.”

In the firm’s most recent Broker Sentiment Survey, industrial brokers remained bullish about both current and future conditions. “In fact, sentiment has increased since the election, with more brokers citing increased activity into year end and to start the new year,” although the Capital One team notes that sentiment “cooled slightly” this month.