Pandemic-fueled e-commerce growth has created a need for warehouse space, observes Tony Sagami, editor of Weiss Ultimate Portfolio.

Today’s online shoppers are not patient. And no matter how slick or how user-friendly an e-commerce retailer’s website is, delivery is the cornerstone of an online shopping experience.

The process of packing and shipping orders is invisible to consumers, but it’s quite complex — and the key to fast delivery is a vast network of logistics real estate.

Logistics real estate are the warehouses, distribution facilities and fulfillment centers that temporarily house the goods purchased on the internet. Whenever a retailer sells something to a consumer, it has to move its goods from point A to B — which means it must deliver it to a property at point A and point B.

And with the growth of e-commerce, the need for logistics real estate has grown accordingly. According to Bloomberg News, “The growth of online shopping and the desire for quick delivery times has really driven a need for more warehouses, especially in the last mile.”

Prologis (PLD) is the second-largest owner/manager of industrial warehouse space in the world, with almost 1 million square feet of warehouse space in 19 countries on four continents.

Get this: $2.2 trillion — or 2.5% of world’s entire gross domestic production (GDP) traveled through Prologis warehouses last year. Amazon (AMZN), FedEx (FDX) and Walmart (WMT) are some of its largest tenants … and business is very, very good. 

The reason for the firm's red-hot growth is simple: the accelerating adoption of e-commerce, which is creating huge demand for warehouse space. And the reason for the growing demand is that the closer distribution warehouses are to the consumer … the lower the transportation costs.

According to Bank of America (BAC), hard transportation costs represent 45% to 55%, and the cost of labor adds another 25% to 30% of total shipping costs. Warehouse rental costs, however, are only 5% of supply chain costs. In short, the closer a warehouse is to the consumer, the higher the transportation and labor savings.

Business is booming at Prologis. I mean really booming. Prologis has rented out almost every square foot of its warehouse space. The soaring growth of e-commerce and online shopping has created unprecedented demand for logistical warehouse space.

You’ve read about the supply chain problems plaguing our country. Companies are increasing the amount of inventory they carry, and that new inventory is largely held at logistical warehouse facilities.

Corporate America has fully absorbed 115 million square feet in just the third quarter of 2021, and a total of 280 million square feet in the first nine months of 2021, which is more than double the same period last year.

That soaring demand has pushed Prologis’ vacancy rate to an all-time low of 3.9%. Demand is at an all-time high and companies are now signing leases on warehouse space that is currently under construction. Rents have increased by 7.1% in just the past 90 days. For the year, Prologis expects 2021 rental prices to rise by 19%.

Those powerful fundamental forces are pushing up the value of Prologis’ existing properties. The company is the largest industrial real estate landlord in the world and owns 995 million square feet in 21 markets across four continents.

Best of all, once someone becomes a Prologis customer, they stay a Prologis customer. The company has a 96%-plus occupancy rate and has been able to raise its rents by an average of 4.3% over the past year. And as a real estate investment trust (REIT), Prologis must distribute at least 90% of its profits to shareholders. Prologis currently pays a 63 cents quarterly dividend and the next one will be in mid-December.

The next quarterly report will be in early January and Wall Street just doesn’t understand how strong business is for Prologis, which has crushed expectations the past two quarters in a row. The company has the second-highest Weiss Performance Ranking in our universe and is ready to deliver another blockbuster profit report in January.

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