West Coast Leader Talks New Industrial Market – Commercial Observer

The industrial boom might be over, but the warehouse lights — and the need for e-commerce and logistics space — aren’t going dark anytime soon.

The U.S. market is still operating at historic levels, and Prologis (PLD) — the nation’s biggest real estate investment trust, handling nearly 3 percent of the world’s gross domestic product — is growing with it. Last year, which was less than stellar for most in commercial real estate, Prologis made $733 million in acquisitions and $1.61 billion in asset sales, and started $3.4 billion in new development. 

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The San Francisco-based firm expects its expansive portfolio to remain between 96.5 to 97.5 percent occupied. The plan is to make between $500 million to $1 billion in acquisitions this year, along with another $800 million to $1.2 billion in sales, and up to another $3.5 billion in estimated development starts again this year.

Megan Creecy-Herman joined Prologis in 2018, and became the company’s president for the Western U.S. in 2023. That means, among other things, managing Prologis’ more than 250 million square feet of space in the West. She built her career focused on acquisitions, dispositions, development and leasing, and previously spent six years at Liberty Property Trust, which Prologis eventually acquired for $13 billion four years ago. 

Creecy-Herman spoke with Commercial Observer recently from one of the firm’s corporate bases in Orange County, Calif.

The following has been edited for length and clarity. 

Commercial Observer: Can we start with last year, even though we’re already almost through February. Every year is different. But last year seemed kind of unique with a lot of factors pulling the market in different directions. What stands out most, or what would you say defined the market?

Megan Creecy-Herman: Obviously, we saw unprecedented growth over the prior 24-plus-month period coming out of COVID, particularly in the West Coast. 2023, for us, really reflected just more of a normalization. But that’s to varying degrees across the U.S.

Vacancy rates, even looking at the end of the year, still remain extremely low by historic standards. Vacancy in the U.S. finished 5.5 percent or so at the end of 2023. So, while the markets normalized, I think we still feel pretty good, and I think 2023 was a decent year. 

We’ve definitely heard “normalization” a lot, or “reset” or “correction.” But it sort of feels like from an outside standpoint that we’ve entered a past-the-pandemic era. Are we past the reset period now or is that still playing out?
We’re now entering a period where we’re going to be consistent with pre-COVID levels of demand and activity. Anytime you’re descending from those historic highs it can be uncomfortable, so to speak. But when you’ve got an owner like us who’s been in the business for over 40 years and is very diversified geographically, we can see data patterns, things and trends that others don’t. 

Taking a step back, looking at the levels today being consistent with what we would have seen pre-COVID, that gives us some confidence relative to what lies ahead beginning at the end of this year and beyond that.

What are some of the biggest challenges to overall market growth this year? Is it still just higher interest rates and rising inflation?
On the capital markets side, yes. Until we get certainty with what the Federal Reserve is going to do on interest rates, I think we need to see that — just as our customers do, by the way. Any business trying to make decisions needs an understanding of the cost of capital that they’re going to be facing. As we get clarity, relative to the interest rate environment, that’s going to be integral in overall health and return of transaction volumes to the market.

When you talk about headwinds, for us, from a vacancy perspective across the U.S. — around 5 to 5.5 percent vacant — we think that’s going to increase through the beginning of 2024 and probably hit 6 percent. And, then, with the pullback in new construction starts in 2023, supply is going to tighten up by the back half of 2024. So that will play to our favor.

Speaking of the large new deliveries: Both nationally and in the Inland Empire, 2023 saw the largest levels for industrial construction on record. How do you see this hitting Prologis’ portfolio?
We’re very intentional, relative to how we cultivate our portfolio from even under the submarket perspective. It’s pretty well known in the industry that we typically outperform the market because of the intention we have in our investment strategy.

On the Inland Empire, when you look back to when that pipeline was started, back in 2022, it’s going to take time to absorb that supply. But we feel really confident in general in the long-term outlook for Southern California. It has an unprecedented consumer base here: You’re talking 25 million-plus consumers in Southern California, as well as the L.A.-Long Beach ports which are regaining market share. Plus, considering how complex it is to develop and grow in California, that’s going to continue to constrain supply and drive an increase in values.

Do you think Prologis is going to be adding many new developments this year?
Between $3 billion and $3.5 billion in starts with an estimated build-to-suit mix of about 40 percent in 2024.

So there were obviously fewer investment sales nationally due to higher interest rates and higher construction costs and other headwinds, but it still seems like industrial activity is pretty healthy, especially in relation to other asset classes. Does that prove that it’s in a much stronger place than other asset classes moving forward?
I don’t want to disparage anyone else outside of the industrial sector.

I would say, yes, when you look at the long-term trajectory for logistics real estate. Even as e-commerce grows as a percentage of total retail sales. Data for last year shows it grew 8 percent year-over-year through October 2023, and we’re estimating that it’s going to accelerate 10 percent or more in 2024, year-over-year e-commerce growth. Look at how much industrial demand that’s going to drive in addition to the already organic demand coming off the other business sectors. 

To your point, no, I don’t think any of the competing other areas of commercial real estate have the kind of fundamental momentum that industrial has right now. 

Sticking with transactions, do you think Prologis will be very active on the transaction front this year?
We’re always growing. When we look at our land bank, it’s over $40 billion of opportunities for us to develop. That’s unprecedented when you look around the industry and the peer group. So I think that speaks for our intent to continue to grow our portfolio. Yes, through acquisitions when it’s appropriate. But we’ve got an unmatched development pipeline and our land bank that we can tap into and put into play when we feel like the market dynamics are right.

If the anticipated interest rate cuts happen this year, how do you think that will affect the market overall, and potentially Prologis’ outlook?
Just as a general statement, understanding your cost of capital is integral for any decision-maker. We’ve absolutely seen that sentiment begin to shift in our customers. We’ve got over 6,700 customers around the globe, who we are constantly talking to on a very regular basis. And that sentiment has begun to shift. And I think as people get clarity relative to the cost of capital, I think they’re beginning to see that there’s this potential of a soft landing and a chance to step up, and invest and expand.

Just from a cash flow and rent standpoint — coming out the years of eye-popping growth with 50 percent year-over-year rent growth — how do you see that advancing for your portfolio this year?
We’re anticipating market rent growth will average 4 to 6 percent annually over the next three years. We think 2024 is going to be mildly positive, and then ramp up from there. Which again, by historical context, is strong.

So, as the industry evolves, speaking more broadly again, what do you think is going to define the market this year?
There’s been a lot of coverage relative to the tumult in the global supply chain, relative to what’s going on in the Red Sea, the Suez, the drought in the Panama Canal. I think that’s going to be a major determining factor in where we see port volumes around the globe, market share for the various port volumes, and then how customers respond to that as they’re trying to execute their supply chain as cost effectively and efficiently as possible. That’s going to be a major story.

Can you talk about Prologis’ Essentials business and how that’s helping Prologis to differentiate with so much competition?
You may have heard us talk about customer centricity, and how customers really are at the core of what we do. Our differentiation strategy has to do with understanding their businesses, understanding their pain points, and then bringing solutions.

Our Operations Essentials Business really provides customers with solutions in their warehouses, sort of “in the box,” like material handling. That was really born from dialogue with our customers, talking about challenges that they have. And we have the scale to leverage our portfolio, better understand them, and then bring those solutions in a way that our real estate peers can’t. 

Also, under Essentials we have Mobility and Energy. Mobility is our electric vehicle charging platform. A lot of our customers are electrifying their fleets, and they need charging infrastructure to do so. We think there’s a major opportunity there for us to partner with our customers.

And then our energy business as well, when you’re talking about solar and alternative energy. For us, our installed base is just over 500 megawatts today on solar, and we have a goal of a gigawatt by next year. We’re No. 2 in the U.S. for on-site solar capacity. We’re very proud of that.

With Prologis’ EV charging efforts, our first two deals were here in Southern California. And we’ve set our own net zero goals, which is net zero by 2040 across our value chain.

So, when I look at what differentiates us versus the peer group, I think it’s also things like our proprietary data that we’re able to harness because of our scale. We can pattern-spot, we can see things happening all over the industry because of our scale and the data that we have behind it.

Then back to our customer-centric attitude: You haven’t heard me once say the word “tenants,” you’ve heard me say “customers.” That’s a very different perspective than a lot of our peers. And I’d say with all this I just talked about, I don’t think there’s anybody that’s a true competitor when you look at the platform in its totality, between our real estate and all of our other business lines and everything we’re driving as we look into the future.

Finally, can you talk a little bit about how you got interested in commercial real estate, and how that led to your role at the biggest REIT in the country?
I was a real estate major and undergrad through the business school. In addition to real estate, I also really always just had an interest in supply chain. I’ve always found it intriguing to think about how the shirt you’re wearing made it from raw materials to your doorstep. 

So I think it’s sort of always been a fascination relative to the logistics and interest in real estate from the time I was in college. And I went into the industry right when I was 21, so I’ve spent my whole 20-plus career in this industry, and it’s been fascinating to watch it evolve.

With my role today, I am extremely fortunate to be able to lead the best team in the business here on the West Coast. We have a team of over 200 people in the West region. And I think what we’re doing from a culture aspect is another thing that I would bring up as a differentiator.

Greg Cornfield can be reached at gcornfield@commercialobserver.com.