SPACE RACE
The e-commerce boom has sparked an unlikely real estate revolution: Urban warehouses are now gold mines, and Prologis is sitting on the mother lode.
Peer out the 56 garage doors lining the walls of the warehouse giant Prologis’ new 260,000-square-foot facility in Oakland, California, and you’ll spot three highways. To the east there’s I-980 slicing through downtown Oakland; southbound I-880 leads to Silicon Valley; go north on I-580 and you’ll end up in the heart of Marin County. San Francisco is just 9 miles to the west. A railroad train could steam right up to the building and carry goods all the way to Chicago. But it’s those local roads that most interest Hamid Moghadam, Prologis’ CEO. “We are focused on the markets where there are large numbers of people and there’s lots of money in their pockets,” Moghadam says. “You rob a bank, because that’s where the money is. Where do you have consumption? Where people are.”
With 687 million square feet of warehouse space in 19 countries, Prologis, which is based in San Francisco, is the world’s largest owner of industrial real estate and the king of the proverbial “last mile” between the warehouse and a customer’s doorstep. Its closest competitor, Indianapolis-based Duke Realty, has 20% of its space. In the United States, 60% of the population lives within 100 miles of Prologis’ 379 million domestic square feet. And it’s not ignoring the rest of the world. Seventy percent of Prologis’ 45-million-squarefoot development pipeline is outside the country, in places were e-commerce is growing at a faster clip.
Because if you believe in e-commerce, you believe in Prologis. While internet shopping has devastated demand for traditional retail spaces, it has had the opposite effect on industrial real estate. Amazon is Pro-
logis’ largest tenant, occupying 16 million square feet. (Prologis is also Amazon’s largest landlord, accounting for 13% of the warehouse space it operates.) Why? Getting a book to you in less than 48 hours (Amazon Prime’s promise) means already having it—and several thousand other items—nearby when you order.
E-commerce accounts for about 9% of total retail sales in the United States, a share that has more than doubled since 2010. Prologis, which is structured as a real estate investment trust, is benefiting hugely from that growth. The company’s shares are up 22% this year (through October), producing a market capitalization of $34.8 billion. (REITS broadly are down 1.5%. Prologis’ direct competitors DCT Industrial and Duke are up 21% and 7%, respectively.) In 2016, Prologis’ net income was $1.2 billion, on revenues of $2.5 billion. Earnings have grown an average of 58% annually for three years. In the last quarter, rents on new or renegotiated leases were up 23% year-overyear and occupancy was at 96%.
Prologis’ e-commerce strategy dates in one way or another to 1998, when Moghadam met the bookstore entrepreneur Louis Borders, who was raising money for the online grocer (and soon-to-be dot-com-bubble poster child) Webvan. Moghadam was then running Prologis’ precursor, AMB Property Corp., which invested $5 million in Webvan, built it three warehouses and divested a $1 billion retail portfolio, plowing the proceeds into more industrial space. That $5 million briefly swelled to $55 million before crashing to nothing. But the loss had a big silver lining: Moghadam’s billion-dollar bet on warehouses formed the backbone of Prologis’ current portfolio.
Webvan “opened our eyes to the possibility of ecommerce very early,” says the 61-year-old Moghadam, who founded AMB in 1983 after the Iranian Revolution had squashed his plans to return home after studying civil engineering at MIT. Prologis as it exists today was created by the 2011 merger of San Francisco-based AMB and a troubled Denver-based rival.
Today, pure e-commerce customers make up about 10% of Prologis’ portfolio. But it’s where the growth is. Roughly 20% of new sales can be traced to these companies and to e-commerce-related demand from DHL, UPS and Fedex.
E-commerce is just now large enough to move the needle for a giant like Prologis. In addition to pure plays, traditional retailers are investing heavily in online shops. E-commerce “is driving a much greater volume of demand than you would otherwise see in a 2%-Gdp-growth world,” notes Eric Frankel, an industrial real estate analyst for researcher Green Street Advisors. Meanwhile, population growth and horrid traffic jams in major metro areas like Los Angeles and Seattle are making conveniently located warehouses more important than ever. In the past “you would just look for cheap space; if it was out in the hinterlands you could still get it to market pretty efficiently,” observes Dennis Duffy, a commercial real estate consultant at BDO. Now, instead of demanding a few large warehouses near key transportation hubs, retailers want lots of smaller ones near people.
For Prologis’ next phase, Moghadam is taking a cue from his tech neighbors, collecting data about what happens in and around its buildings. Sensors will calculate how many times a door can rise and fall before breaking. Drones will inspect roofs for damage. With $1.3 trillion of goods flowing through Prologis facilities every year and more than 800,000 people working under Prologis roofs, Moghadam envisions a database tracking the movement of goods globally, potentially creating an entirely new business.
Technology could also knock Prologis down: if, say, Amazon figures out how to get by with smaller warehouses; if electric, driverless trucks make transportation costs negligible; if 3-D printing turns us all into mini-manufacturers. But for now Prologis looks secure on its last-mile throne.