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Prologis CEO on Disruption, Demand and Duke Realty Rejection

Prologis Inc. co-founder and CEO Hamid Moghadam didn’t dance around Wednesday’s chatter of Duke Realty showing the industrial real estate company’s nearly $24 billion purchase offer the door.

Duke called the proposal “insufficient” and “unchanged from [Prologis’] prior proposals,” but Moghadam didn’t appear to view the public statement as the end in an interview with CNBC Thursday.

“The timing of the offer was not actually this week. The timing of our dialogue started about six months go. So, we have a great business as it is. We have scale. We have the opportunity to service clients around the world and the addition of another good company would actually enable us to do that even better,” Moghadam said during CNBC’s Evolve event Thursday. “Either way, it’s going to work out great for our shareholders and I hope that the other company will also take a decision that would be good for their shareholders.”

Moghadam commented little beyond those initial thoughts during his talk, outside of staying upbeat when asked if Prologis was still moving forward on a potential acquisition.

“At the end of the day, the leadership of the company and the board, I think they’re going to do the right thing, but the shareholders need to express their view on our offer, which they will, I think,” he said.

Duke, with nearly 165 million square feet of industrial space in 19 U.S. markets and a $20.3 billion market cap, bills itself as the largest “domestic-only” player in the industrial real estate space. It’s small compared to Prologis, whose industrial portfolio spans roughly 1 billion square feet in 19 countries and companies such as Amazon inking lease deals at its properties. Prologis had a recent market cap of $91.7 billion.

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Still, in a tight industrial market where land costs are high, municipalities want little to do with distribution centers and warehouses in their communities, and companies’ supply chains in the midst of mammoth changes, there’s no such thing as having too much square footage from a landlord’s perspective.

Moghadam can hardly complain with business on the up, saying shifts in goods movement and overall supply chains end up benefiting players in the logistics industry.

“Any kind of disruption ultimately creates more demand for warehouse space because that’s where goods go when they’re incomplete and can’t get to the consumer,” he told CNBC.

While some bright spots in the supply chain may have been peaking through, factors such as the war in Ukraine and the Covid lockdowns in China have set back more positive strides.

“There are some improvements, but every time we gain a couple of steps, we step back a little bit,” he said, citing the lockdowns in China. “But to look back, we need to understand the cause of these supply chain problems and go back to policies in the last 10 or 20 years where companies have, in the interest of efficiency squeezed supply chains. They’ll try to get away with less and less inventory and, yet, the customers’ demand is for more goods, more variety and quicker. So those two things are in conflict with one another.”

Prologis Japan
The 7-story Prologis Park Tokyo-Ohta in Japan. Multistory may be industrial real estate’s story in the U.S. with the lack of available land to build and rising costs. Courtesy

This new reality is now becoming clear with supply chains shifting to the “just in case” model to be more risk averse by increasing available inventory.

“Companies have realized that they don’t want to run quite as lean as they were before the pandemic because they realize that these are highly engineered supply chains working great in theory until something breaks and they’re really backed up in a big way,” he said.

Prologis has held the view that normalization, whatever that may mean anymore, is not likely until next year or 2024.

Meanwhile, the company is focused on what’s coming next, with a number of programs outside of real estate that have been in play for several years, driven by limited real estate to build, a worker shortage and sustainability trends.

“It starts with preparation,” Moghadam said of how Prologis has evolved its business over the years. “We really set our strategy about 15, 20 years ago. We reduced our footprint in out-of-the-way areas and focused our real estate in major metropolitan areas where the majority of the consumption takes place, and we got really close to the end consumer by being in those population centers.”

The CEO went on to explain how doing real estate has historically been about price and location, but a deeper relationship between tenant and landlord is key in running a company that stays one step ahead of market trends. The Prologis team tries to anticipate the consumer shifts driving their tenants’ real estate strategies before they happen and then plan their own moves accordingly.

An example of that is the Prologis Community Workforce Initiative, which stemmed from the company continually hearing about a worker shortage leaving tenants in a bind.

A little over three years ago Prologis launched the training program in Los Angeles, offering a logistics curriculum and certification to workers that helped pipe them into entry-level or mid-career positions at companies. That’s now rolling out globally, with the goal to train 25,000 people by 2025. The program’s already trained 13,000 and Prologis as a result has further solidified tenant relationships to understand other pain points, Moghadam said.

That’s since born out in the real estate company starting an electric vehicle charging business. It’s also building up and going multi-story on projects to account for the land shortage and rising real estate costs.

Ultimately, Moghadam and Prologis are in the business of trend forecasting.

“My job is to see around the corner, look in the future and figure out how to position this company to take advantage of the trends that are inevitable,” he said.