Prologis: European rent growth to surpass U.S. in 2019

Logistics market rent growth in Europe continued to accelerate, and it may surpass that of the U.S. in 2019, according to Prologis CEO Hamid Moghadam’s comments to investors during the company’s third-quarter earnings conference call.

“Europe remains a bright spot for us,” said Moghadam. “Our markets in continental Europe are strong and getting stronger, vacancies are at historic lows, customer sentiment is improving, and escalating replacement costs are driving up rental rates.”

Moghadam continued, “In spite of somewhat moderating [logistics property] rents in the United Kingdom, overall rent growth in Europe for the first three quarters has already made 2018 the strongest year in more than a decade. Looking to 2019, there’s a real possibility that market rent growth in Europe could overtake that of a very strong U.S. market, which is great news for us in terms of continued same- store growth well into the next decade.”

An investor asked how well positioned Prologis is around a hard Brexit or a soft Brexit outcome.

Moghadam answered, “Well, yes, I wish I knew all those answers with precision. I mean, I don’t know. Our U.K. portfolio is in the high 90 percent leased; the average lease term in the United Kingdom is well over 10 years. The credit is exceptional as you know, particularly the United Kingdom is a tough place to get entitlements and processing land is a multiyear exercise.

“So we think the United Kingdom has been on fire. Literally, I would put the United Kingdom right on top of the list since the global financial crisis in terms of rent recovery and performance compared to the best of the best markets in the United States. I mean Los Angeles, San Francisco and all that.

“You would expect that to moderate at some point. I don’t know if it’s related to Brexit or not, but still I would take the United Kingdom as one of the best markets in Europe or anywhere. It’s just not as crazy as it was a year or two ago. A year or two ago, you had Brexit that spooked a lot of people that were planning to put on development and demand didn’t change so you had a very, very unusual situation that led to very big rent increases. But we’re very comfortable about the business in the United Kingdom.”

Moghadam predicted for the United States to catch up with Europe in rents and NOI growth the United States would need a couple of years.

“A while because you need many years of rental growth to create that spread,” Moghadam continued. “The mark-to-market in Europe is approximately 10 percent, and it’s in the high teens in the United States, approximately 19 percent. So, the U.S. is double what Europe is and you need to have a couple of years of pretty steep rental growth.”

For the firm’s latest forecast for the U.S. this year, net absorption was revised up by 15 percent to 260 million square feet. Completions in 2018 will fall short of demand for the ninth consecutive year, this time by an estimated 10 million square feet.

“The United States is doing extremely well,” said Moghadam. “Europe was later in recovery and has more to recover and we’re getting it more all at once; we think in 2019. 2018 was really the turning point for Europe, and we just see that spread accelerating going forward. We fully expect the U.S. to continue to be a strong market.”

Moghadam expressed high interest to invest more in Los Angeles.

“We’d love to buy more real estate in Los Angeles,” said Moghadam. “So, if you think anybody is spooked by the trades and tariffs, turn them our way; we’d like to increase our position. That is the most dynamic market in the United States. And California is now the number five economy in the world. We love that market and every day costs are going up, entitlements are getting tougher, real supply constraints not just in terms of physical land, but in terms of all the other hoops that you have to jump through to be able to build a building. So, we love those markets.”

Prologis’ multi-year disposition plan is now complete. Since the Prologis-AMB merger in 2011, it has sold more than $14 billion in non-strategic assets and reinvested the proceeds into acquisitions and development, the combination of which increased the firm’s percentage of holdings in global markets from 79 percent to approximately 90 percent today.

Disposition and contribution activity in the third quarter was approximately $460 million. As previously announced, it closed a $1.1 billion sale to Maple Tree in early October, with its share of the proceeds totaling more than $600 million. Prologis expects to close the second phase of this transaction, totaling $170 million, by year-end.