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Prologis CEO: Amazon Talking Point ‘Single Biggest Myth for Investors’

Prologis cofounder and CEO Hamid Moghadam on Monday aimed to clear up some of what he referred to as “top market myths” as the real estate behemoth hiked its guidance for the year amid continued demand for its industrial properties.

At the top of that list of misconceptions the CEO mentioned during the company’s second-quarter earnings call Monday would be questions around Amazon subleasing excess warehouse space it no longer needs in response to the consumer demand correction from the height of spending habits during the pandemic.

“I didn’t listen to the Amazon earnings call, but I got more questions about that one comment than comments from the entire industrial real estate industry, which is pretty consistent,” Moghadam told analysts. “So I guess if you have a market cap of over a trillion dollars, people listen to you a lot more. But I think the single biggest myth for investors is that they’ve read too much into that commentary. And the facts on the ground just don’t support it.”

The e-commerce company’s chief financial officer (CFO) Brian Olsavsky told analysts in April Amazon had too much space after about doubling its warehouse portfolio in line with demand seen during the height of the pandemic.

A company spokesperson declined to say if Amazon was considering early lease terminations outside of sharing a prepared statement to Sourcing Journal in May explaining the merits of subleasing for companies.

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“We’ve heard the same rumors out on the street, the 10 to 30 million square feet [in subleasing],” Prologis managing director of global strategy and analytics Chris Caton said on Monday’s call. “None of that has been substantiated by Amazon and what matters is what we’re seeing on the ground. And, we’re not seeing much at all.”

Caton said there was talk during a broker meeting last week of one space available for sublease. Ultimately, Prologis is 99 percent leased in the 36 markets it does business in with Amazon, according to Caton.

The high inventory levels retailers are grappling with and to what extent that may be impacting industrial leasing was another topic that came up Monday, with Moghadam calling it the “second-worst understood point about our business” after the Amazon subleasing reports that came out earlier in the year.

“These kinds of numbers, particularly ratio-type numbers, can be very misleading if you don’t parse them out,” Moghadam said in response to a question on the impact of inventory-to-sales ratios on leasing activity. “For example, whether you include autos or non-autos, or general merchandise and non-general merchandise, you’ll see those conclusions to be radically different.”

Prologis Ontario
A Prologis distribution center in Ontario, Calif. Courtesy

The question in the context of how it’s impacting demand for space is one the real estate firm has been peppered with so much as of late, it is expected to release a paper on the subject this week, executives said.

“Look, the summary is the buildup of real inventories for resilience is really only half done,” Caton said. “And it’s progressing. It’s progressing with our views. Now, notwithstanding some of that excess inventory for some retailers for some products…the broader landscape has continued to focus on raising inventory levels, reducing stockouts and reintroducing product variety.”

While market normalization for industrial real estate demand may be occurring, and in some parts of the country may be stumbling, Prologis is upbeat on its outlook.

The company increased its guidance for the year on Monday saying it now expects net earnings in the range of $5.15 to $5.25 per share. That compares with prior guidance of $4.85 to $5 per share.

The real estate company, with a recent market cap of $89.2 billion, also said it expects occupancy to average between 97.25 percent and 97.75 percent in 2022, up from its previous estimates of 96.75 percent to 97.5 percent.

The upbeat outlook is based on the company’s 1 billion-square-foot portfolio, which does not encompass every real estate market. Prologis, within the U.S., owns buildings in markets such as Southern California, the San Francisco Bay Area, Chicago, Houston, Dallas/Fort Worth and New Jersey/New York City.

The company’s $26 billion all-stock deal, announced last month, to buy Duke Realty will broaden its footprint further, with 153 million square feet of industrial real estate in 19 U.S. markets. The transaction also includes 11 million square feet of real estate under construction and 1,228 acres of land.

CFO Tim Arndt described “healthy” demand during Monday’s call. Much of that demand in the recently ended quarter was driven by transportation, healthcare and automotive. Meanwhile, new leases from e-commerce companies slid slightly to 14 percent, compared to 25 percent last year.

Arndt downplayed the decline as a “shift we’ve long telegraphed.”

“E-commerce remains a positive long-term trend for our business,” Arndt said. “Clearly, COVID accelerated its adoption from a 15 percent share of retail sales pre-pandemic and running at 23 percent during [COVID]. At 21 percent today, it is roughly 150 basis points ahead of our pre-COVID expectations. We’re also seeing the emergence of supply chain resiliency as a secular and incremental demand driver for our business…. We expect that this need for safety stock will lift demand for years to come, although economic uncertainty could cause some delays this year.”