Real estate investment trust (REIT) Prologis is reportedly positioned against volatility in the case of elevated interest rates and the recent credit downgrade to U.S. debt. Chris Caton, Prologis Managing Director of Global Strategy and Analytics, joins Yahoo Finance's Jared Blikre to discuss the resiliency of the logistics real estate industry, while also acknowledging scarcity challenges for customers.
Video Transcript
JARED BLIKRE: Fitch has downgraded the US government's credit rating. This is only the second time it's ever happened. The first was in 2011 when fellow credit rating agency, S&P, took the rating to the same level, that would be AA+. Now Fitch said its move reflects an quote, "erosion of government's which has manifested in repeat debt limit stand offs. So what's the fallout for business and how capital is actually deployed. We're going to bring in now Chris Caton, Prologis managing director for global strategy and analytics.
You've taken a look at what's happened today, and there must be some kind of spillover effect in your neck of the woods. I'm just wondering how in general you're looking at this development.
CHRIS CATON: Hey, Jared, glad to be here. Sure, so Prologis is the world's largest owner and developer of logistics real estate. So many of our customers, whether it's Amazon, Walmart, DHL, this doesn't directly, I think, impact the flow of goods around the world.
Now, we do acquire and develop properties everywhere around the world. And so the cost of capital matters. Whether it's a change in interest rates today or the change in interest rates over the last 18 months. And we are looking forward to providing recapitalization opportunities. We're going to be an investor through this uncertainty and recovery. And we have already factored in this change in interest rates into our thinking. So in some respects, we had anticipated volatility and have priced things accordingly.
JARED BLIKRE: Well, sounds pretty prescient there. Let me ask you about your wheelhouse here. At July, industrial business indicator, that's the IBI, it's showing an uptick in the goods economy. And I'm just wondering because we're so worried about inflation with respect to the service side, is this something else that we should be concerned about or is this actually a good thing that we're looking at?
CHRIS CATON: Well look, I think it for sure is a good thing. So for those who may not be familiar, Prologis surveys their customers on a monthly basis. We are the world's largest provider of space. And for many of our customers, we are their largest provider of space. We ask them after their activity, and we're publishing today our July report. And that figure tells us growth is not just resilient but actually pretty good.
And that's a key question, I think, that we've been facing this year as economic crosscurrents have surfaced and wondering what direction the logistics real estate industry might head. And so indeed, we've been calling for normalization in the market environment, and that's what we think we're seeing.
For further historical context, 2021, 2022 were exceptional years. And so this normalization is taking us back to 2018, 2019 levels in a rather steady glide path if I'm candid. And so what that's revealing to us is the importance and ongoing support that we get from the structural drivers of our industry.
JARED BLIKRE: And talk to me then about the supply of I guess, real estate units on the market right here square footage. I'm reading some from your report here. The true months of supply TMS rose to 36 and 1/2 months, and that's increased by 6 and 1/2 months from the prior quarter. Contextually, how does this relate historically? Because 6 and 1/2 months increase in supply might seem a lot to us but historically, we've seen it probably surge quite a bit more during the global financial crisis, for instance.
CHRIS CATON: You're exactly right. So indeed, the industry is one that still faces scarcity. The market vacancy rate across the United States is 4%. The typical historical range is 7% to 10%. And we had, like you just said, a market vacancy rate of 10% through the global financial crisis. And you're right, that other metric that we maintained from a proprietary standpoint was 100 or more on the global financial crisis. So indeed, there remains scarcity. And this is a key challenge for our customers who need to plan earlier and more proactively to secure the real estate they need to ensure the efficient flow of goods around the world and into the United States.
And so what this means is we have ongoing pricing power. Rent growth continues to grow in line or in many cases, faster than inflation really nearly everywhere around the world.
JARED BLIKRE: Well, so if I'm hearing you correctly, it sounds like business people should be a little bit more concerned about scarcity, at least future scarcity in this market. Anything else that investors-- and let me know if I have that right or wrong. But anything else that investors, people who use your services, just people in the economy in general should be keeping their eye on?
CHRIS CATON: No, you're spot on. You're totally reading the situation correctly. I think one thing that we're starting to do is peek into 2024 and ask, what could happen to that two months of supply metric? What could happen to that market vacancy rate? And one thing that we haven't discussed though is hey, how are new suppliers, new product coming to the market in response to this scarcity and this ongoing rent growth.
And there's a little bit of a paradox here. In fact, we're seeing a complete deceleration in new supply coming to the market. New development starts are off 50% from a year ago, and this really relates to the move in interest rates and also candidly, the cost to build our buildings and the availability of debt, say from the banking community and how they're managing their relationships as well as their capital reserves. And so that presents opportunity and risk as we peek into 2024.
JARED BLIKRE: Some surprising insights there. Really appreciate you stopping by. Chris Caton, Prologis managing director for global strategy and analytics.
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