PLD Sees Light in Commercial Real Estates

Things are getting better
The world's biggest industrial REIT, Prologis (PLD) on Thursday shed some lights on the struggling commercial property market. While many argued that commercial real estate market is the next shoe to drop in the economy, PLD CEO's statement hinted that at least in the industrial area, things are getting better.

"Looking ahead, we see a global market that’s beginning to show signs of stability. Perhaps growth and expansion will come sooner than we thought. We'll see..................

Globally, industrial demand is still soft, but we are seeing signs of increased customer activity. We recently polled our top customers and not surprisingly, about two-thirds of those who we spoke with, expect a more positive outlook on their business by some time in 2010, although many of them felt that it may not occur until later in the year.........................................

Importantly, several of them mentioned supply chain reconfiguration, which sometimes means expansion and sometimes simply a search of greater efficiencies. Either way, it's good for us because there is likely to be movement in the higher-quality, well-located and in many cases, newly-built facilities and that’s our business."

Occupancy increases
The company's core occupancies trended up by 20 basis points in the third quarter, as the overall leasing activity was up 13% from the second quarter. During the quarter, PLD increased the lease percentage in its static 12/31/2008 development portfolio to 61.7%, up substantially from 54.1% in the second quarter and 41.4% at the beginning of the year. As a result, the company has reached the low-end of our 60% to 70% year-end goal for leasing in this portfolio.

"I never thought I would say this in 2009, but it seems like there are more buyers then sellers in the market right now. Market rents are still of course lower than a year ago, and we expect this to remain the case for the foreseeable future. Our rents on lease is turning, we're down 14.7% in Q3, versus down 12.6% in the second quarter...............................................

However, we believe this situation will reverse itself, when market occupancies trend upward, and as we’ve mentioned in our second quarter call, rental rates today make no sense relative to replacement cost, values and will certainly need to rise substantially to justify new developments spurred by any growth in the global economy..........................................

Remember, most markets did not get substantially overbuilt in this downturn and there is no new supply on the Horizon. As a result, we're clearly seeing an increase in request for build-to-suit proposals."

Cap rates decline

"Yields have declined by 75 basis points in the UK, with anecdotal evidence of them declining in other 50 basis points on deals not yet closed.

We’ve also seen a recent 50 to 100 basis points decline in cap rates on our assets dispositions in the US. There is capital on the side lines and we’re seeing evidence of this in the number of solicited offers and unsolicited increase we’re now receiving. "

My Takes
There are a few things that I look at to gauge the progress of commercial real estates (CRE) from going-on-bankruptcy to near-bankruptcy to stabilizing and then to getting better, and eventually to grow:
1. Occupancy
2. Cap rates or the credit market
3. Funds from operations (FFO)

Per the CEO of Prologis, we do get the vibe of "getting better" with occupancy and cap rates although this may just be limited to industrial CRE instead of CRE as a whole according to "Headlines on CRE" . As far as FFO is concerned, the 2009 guidance of PLD is $1.39-1.43 per share, doubled that of 2008 at $0.68 per share but disastrous if compared to the peak period of 2007 that generated $4.61 per share. It is getting better!

By looking at how these metrics evolve over the last 12 months, I do buy the "getting-better" story. How about you?




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Disclosure: The blog author does not have positions in PLD in her personal account as of October 23,2009