Prologis CEO Hamid Moghadam goes one-on-one with Jim Cramer

Key Concepts

• Logistics Facilities: Buildings and infrastructure used for storing and distributing goods.
• E-commerce: The buying and selling of goods and services over the internet.
• Vacancy Rates: The percentage of available space that is currently unoccupied.
• Pricing Power: The ability of a company to raise prices without significantly losing customers.
• Replacement Cost: The cost to build a new facility of similar size and quality.
• Nearshoring: The practice of transferring a business operation to a nearby country.
• Data Centers: Facilities that house computer systems and associated components, such as telecommunications and storage systems.
• Hyperscalers: Large cloud computing providers that operate massive data centers.
• Renewable Power: Energy derived from natural sources that are replenished at a higher rate than they are consumed.
• On-Premise Generation: Producing energy at the location where it is consumed.
• Transmission Constraints: Limitations on the ability to move electricity from where it is generated to where it is needed.
• E-commerce Multiplier Effect: The phenomenon where increased e-commerce activity drives demand for more logistics real estate.

Industry Outlook and Prologis's Position

Marc Rowan, co-founder, chairman, and CEO of Prologis, expresses a highly optimistic outlook for the logistics real estate industry, describing it as one of the "most compelling setups" he has seen in 40 years. He attributes this positive sentiment to a cyclical recovery following a period of overbuilding post-COVID.

Key Points:

• Post-COVID Correction: After a surge in e-commerce demand during COVID-19 led to significant construction, vacancy rates rose from approximately 4% to 7.5%, impacting pricing power.
• Current Trough and Recovery: The industry is now at a "trough," with signs of companies, particularly strong ones, committing to significant amounts of space. Small and medium-sized businesses are still recovering, but those with strong balance sheets are actively expanding.
• Supply Constraints: The replacement cost of logistics facilities has "shot through the roof." Furthermore, many jurisdictions are opposing the development of new logistics facilities, leading to curtailed supply.
• Resurgence in Demand and Pricing Power: The combination of returning demand and limited supply is expected to result in companies regaining significant pricing power. The cost to develop new logistics space will be substantially higher.
• Prologis's Advantage: Prologis possesses 1.3 billion square feet of real estate that will benefit from the strengthening market. The company anticipates a very active development business in logistics and is already undertaking substantial built asset development.

Global Leasing Momentum

Rowan highlights strong leasing momentum across the globe, with particular emphasis on Latin America.

Key Points:

• Latin America's Growth: Latin America is experiencing a boom due to its lagging e-commerce adoption compared to other regions. The e-commerce wave experienced by other countries during COVID is now reaching Latin America, creating massive demand.
• Nearshoring Impact: The nearshoring of manufacturing is also benefiting Mexico, contributing to excitement in both Mexico and Brazil.
• Long-Term Potential: Rowan believes this trend has "long legs" due to the cost differential and the ongoing shift in e-commerce adoption.

Data Center Development and Power Solutions

Prologis is actively involved in data center development, a sector facing unique challenges and opportunities.

Key Points:

• Power Availability as a Constraint: A primary issue in data center development is the availability of reliable power.
• Supply Chain for Components: The supply chain for data center components has not expanded, leading to increasing scarcity of parts.
• Prologis's Turnkey Solution: Prologis offers a "turnkey solution" by leveraging its balance sheet to pre-commit to purchasing components, enabling faster delivery for customers and providing a significant competitive advantage.
• No Overbuilding: Rowan does not foresee overbuilding in the data center industry, as power availability acts as a natural governor. The four to five large hyperscalers are in a race to build capacity ahead of AI-driven demand.
• Strategic Renewable Power Investment: Prologis invested in renewable power proactively, utilizing underutilized roof space for what was the cheapest form of energy generation. This was a "good business" decision, not driven by altruism.
• Utility Relationships: The renewable energy initiative fostered discussions and relationships with utilities, which are crucial for grid power.
• On-Premise Generation: Rowan sees Prologis's energy business extending beyond renewables to on-premise generation, which will become increasingly important due to the time and environmental constraints associated with central energy production and transmission.

The E-commerce Multiplier Effect

Rowan reiterates the enduring strength of the e-commerce multiplier effect.

Key Points:

• Shortening Delivery Expectations: Customer expectations for delivery times are continuously decreasing.
• Increasing Variety and Choice: Consumers demand a wider variety and choice of products.
• Real Estate Proximity: The only way to meet these evolving customer expectations is by locating logistics facilities closer to the customer, thus driving demand for more real estate.

Conclusion and Personal Reflection

Marc Rowan concludes by emphasizing the positive trajectory of the logistics industry, driven by a confluence of returning demand, constrained supply, and evolving consumer behavior. He also expresses his appreciation for Jim Cramer's mentorship.

Key Takeaways:

• The logistics real estate market is poised for a strong recovery due to a favorable supply-demand dynamic.
• Latin America presents a significant growth opportunity for e-commerce and logistics.
• Prologis is well-positioned to capitalize on data center development by addressing power and supply chain challenges.
• The e-commerce multiplier effect will continue to drive demand for strategically located logistics facilities.
• Proactive investments in renewable energy and on-premise generation offer strategic advantages.