Prologis's Struggle to Keep Pace: Sector Risks and Operational Gaps Weigh on Industrial REIT

The industrial real estate sector, once a poster child for secular growth, is showing signs of strain. Prologis Inc. (NYSE:PLD), the global logistics real estate leader, has underperformed the S&P 500 by nearly 28 percentage points over the past 12 months, with its stock down 10.37% compared to the index's 17.46% total return, according to a CreAnalyst analysis. This divergence reflects a broader malaise in the sector, driven by shifting trade dynamics, supply-demand imbalances, and operational misalignments that have left even the most dominant players exposed.

Sector-Specific Risks: Trade Uncertainty and Vacancy Pressures

The industrial real estate market is grappling with a perfect storm of macroeconomic headwinds. U.S.-China tariffs, now in their sixth year, have disrupted global supply chains, causing a 35% drop in arriving cargo vessels at the Port of Los Angeles as of May 2025 compared to the prior year, according to a KBS report. This uncertainty has led to cautious behavior among industrial occupiers, who are prioritizing lease renewals over new expansions. Meanwhile, the U.S. industrial vacancy rate has climbed to 6.3% in Q1 2025-the highest since 2014-due to a combination of new supply entering the market and slowing economic growth, the KBS report found.

The sector's internal fragmentation further complicates the outlook. While light industrial spaces (smaller facilities for local distribution) face tight vacancy and robust demand, large distribution centers are seeing downward pressure on rents. High construction costs and limited infill land availability have exacerbated this disparity, the KBS analysis adds. For Prologis, which has historically thrived on economies of scale, this bifurcation poses a strategic challenge: how to allocate capital between segments with divergent growth trajectories.

Operational Misalignments: Debt, Development, and Strategic Shifts

Prologis's underperformance is not solely a function of external risks. The company has acknowledged rising debt costs and a 70% decline in new warehouse supply deliveries since the post-COVID peak as key headwinds, according to the CreAnalyst analysis. While reduced supply should theoretically support rent growth, the lag between construction slowdowns and market absorption has created a period of uncertainty. Prologis's recent $900 million in Q2 2025 warehouse developments, with 65% pre-leased, suggests confidence in demand-but also highlights the need to balance speculative construction with tenant caution, the CreAnalyst piece notes.

The company's valuation metrics, meanwhile, tell a mixed story. As Simply Wall St. noted, a 12.3% year-to-date stock gain and a price-to-earnings ratio of 31.6x suggest resilience, yet these figures remain in line with industry benchmarks, offering little differentiation in a sector under pressure. Prologis's pivot toward ancillary sectors like Essentials (a platform for small-format retail and service tenants) and data centers is a strategic response to these challenges, but such diversification efforts require time to bear fruit, the CreAnalyst analysis observes.

A Path Forward: Balancing Risks and Opportunities

Despite these headwinds, Prologis's long-term fundamentals remain intact. The company's 130 million-square-foot leasing pipeline and strong demand in regions like Latin America and Europe were highlighted in the CreAnalyst analysis, underscoring its competitive positioning. Moreover, the Federal Reserve's anticipated rate cuts could ease financing conditions, potentially reigniting transaction volumes in the industrial sector, the KBS report suggests.

However, investors must weigh these opportunities against near-term risks. Additional tariffs on Mexico and Canada-key near-shoring destinations-could further disrupt demand patterns, the KBS analysis warns. Prologis's ability to convert logistics buildings into data centers, noted by CreAnalyst, offers a hedge against these uncertainties, but such transitions require capital and regulatory clarity.

Conclusion

Prologis's underperformance is a microcosm of the industrial real estate sector's broader struggles. While the company's strategic pivots and robust leasing activity offer hope, sector-specific risks-from trade policy turbulence to supply-demand imbalances-remain formidable. For investors, the key question is whether Prologis can navigate these challenges while maintaining its role as a bellwether for a sector still grappling with its identity in a post-pandemic world.