Prologis pushes into data centers with a 5 GW pipeline, but the stock's 25x FFO multiple prices in returns the REIT hasn't yet delivered.
A shift at Prologis, the world's largest industrial landlord, is getting a closer look from analysts who question whether its push into data centers justifies the premium the stock carries.
The real estate investment trust has been pivoting more aggressively toward data center development, betting that the AI buildout will sustain demand for powered shell space long after the e-commerce warehousing boom fades. Prologis said its data center pipeline now exceeds 5 gigawatts. The company is redeveloping older industrial properties into data center sites in Northern Virginia and other key markets.
The problem, several analysts covering the REIT sector said, is that the market has already priced in the success of that strategy. Prologis shares trade at roughly 25 times forward funds from operations, a premium to the broader industrial REIT group. That multiple assumes data center returns will match or exceed the company's warehouse returns.
Data center development comes with a different risk profile. Shell space requires a tenant commitment before Prologis outfits the electrical and cooling infrastructure. If hyperscalers slow their leasing pace, the development pipeline sits half-finished. The multiyear construction timeline means capital is locked up long before any rent check arrives.
Prologis has also been buying land for future development. That land bank carries holding costs. If the AI-driven demand wave peaks before those sites are leased, the capital employed earns nothing.
Some investors point to the data center push as a natural evolution – Prologis already owns the sites, knows the construction process, and has a tenant base that includes the largest cloud providers. The counterargument is that data center development is a different business from warehouse leasing. Construction costs per megawatt are higher. Lease structures are different. Tenant concentration is higher.
The company reports second-quarter earnings in July. The key number will be the data center leasing volume and the yield on those projects relative to the cost of capital. Until those numbers show the expected returns are real, the premium price just reflects an unproven thesis.
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