Rumors about Amazon’s impact on industrial real estate have been greatly exaggerated

e-commerce giant Amazon (AMZN -1.77%) sent shockwaves through the industrial real estate market earlier this year by claiming it had more warehouse space than it currently needed. Several reports have suggested the company wants to offload at least 10 million square feet of capacity. Investors worried that this flurry of new offerings could cool the scorching industrial market, leading them to sell shares of industry-focused real estate investment trusts (REITs).

However, leading Industrial REIT Prologis (PLD 0.97%) brushed off those concerns during his recent second quarter conference call. Here’s what the REIT had to say about Amazon’s feedback and the broader warehouse market.

Unsubstantiated rumors

Morgan Stanley Analyst Ronald Kamden brought up the elephant in the room on the call asking the Prologis management team for an update on Amazon, given the company’s comments and reports it was handing over a shipment space in the market. Amazon is the REIT’s biggest customer, with leases covering more than 33.5 million square feet, providing 4.8% of the company’s rental income.

Chief Account Officer Mike Curless addressed the situation, “We heard the same rumors on the street, the 10,000,000 to 30,000,000 square feet. None of this has been substantiated by Amazon.” He then said: “And what matters is what we see on the ground, and we don’t see much at all. We had calls to our national broker last week, literally heard about ‘space available for sublease in the markets we focus on.’

Curless further noted that the company is currently 99% leased in the markets where it does business with Amazon. In addition, rents on existing leases are 54% below market rates. These factors suggest there should be no problem finding a new tenant if Amazon were to exit a lease.

Prologis co-founder and CEO Hamid Moghadam also spoke about the situation. He said that given Amazon’s size, it’s no surprise people took a lot of heed to what he was saying. However, he lamented, “I think the biggest setback for investors is that they read too much into that commentary, and the facts on the ground just don’t support it.”

What the facts say

Prologis management took a long time during the call to process these facts on the ground. One of the key takeaways is that the company sees a shift in what is driving demand for warehouse space, not a slowdown. Chief Financial Officer Tim Arndt pointed out on the call that “e-commerce accounted for 14% of new leases” in the quarter, which was “down from around 25% in 2021.” However, it’s “a change we’ve been telegraphing for a long time”.

Other sectors largely compensate for this difference. Arndt pointed out that “overall occupancy and rental continued to grow with participation from a wide range of users, including transportation, healthcare and automotive.” The CFO also noted that the company was beginning to see the emergence of supply chain resilience as a secular and incremental demand driver. He said the need for additional inventory “will increase demand for years to come”.

Given the continued strong demand for storage space and a very low vacancy rate in its markets, Prologis has revised upwards its rental growth forecast for the year. It now expects rents to rise 25% in the United States and 23% globally, compared with 22% and 20%, respectively, in its first quarter forecast.

Market error looks like buying opportunity

Prologis shares lost more than a quarter of their value following Amazon’s revelation that it had too much storage space. However, market conditions have not softened one bit. Instead, they are stronger than ever, as evidenced by Prologis forecasts for even higher rent growth and occupancy rates this year. Given this disconnect, the sale of Prologis shares looks like a buying opportunity.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Matthew DiLallo holds positions at Amazon and Prologis. The Motley Fool fills positions and recommends Amazon and Prologis. The Motley Fool has a disclosure policy.

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