Logistics real estate investment trust Prologis said fewer development starts, a shrinking construction pipeline and “subdued” but “improving” demand will keep industry vacancies from stepping materially higher.
Prologis (NYSE: PLD) reported core funds from operations (FFO) of $1.34 per share on Wednesday, which was 1 cent better than the consensus estimate but 49 cents lower year over year.
Management from the company told analysts on a Wednesday call that an increase in container volumes at the ports, an uptick in lease proposal activity and warehouse space utilization already near normal at 85% are the components shaping the constructive outlook. It noted some hesitancy in decision making among customers due to uncertainty around the economy, interest rate policy and the political backdrop, which it said could continue to delay lease signings in the near term.
“January of next year the presidential uncertainty will be gone. I’m pretty sure that the Fed uncertainty will be gone. … What we know for a fact, which is not a prediction, is that start volume is very low and replacement costs have continued to go up,” said Hamid Moghadam, Prologis co-founder and CEO, on the call.
Table: Prologis’ key performance indicators
Occupancy across its portfolio was 96.1% in the second quarter, 140 basis points lower y/y and 70 bps worse than the first quarter. The occupancy rate on Prologis’ U.S. portfolio, however, was 320 bps higher than the rest of the market. It historically outperforms the market by 175 bps.
The company expects vacancies to peak in the next couple of quarters before the market tightens again and reiterated full-year 2024 occupancy guidance of 95.75% to 96.75%.
Rental revenue increased 12% y/y to $1.85 billion, but consolidated revenue fell 18% y/y to $2 billion. An 80% drop in strategic capital revenue, or revenue generated by providing asset and property management services to its co-investment ventures, drove the decline.
Prologis commenced leases covering 46.6 million square feet in the period, an 8% y/y increase.
Net effective rent change (over the entire lease term) was 73.9%, which was down 460 bps y/y.
The company said global rents were off 2% y/y on average in the quarter, with Southern California seeing the most pressure. The southeastern U.S., Latin America and Europe were the strongest regions, with sites ranging from 250,000 to 500,000 square feet seeing the most interest.
It said rents outside of Southern California are expected to be flat to down slightly over the next 12 months. The overall rent expectation is down 2% to down 5% when Southern California is included.
The company’s longer-term expectations call for rents to increase 4% to 6%.
Prologis’ lease mark to market (resetting in-place rents to current market rents) was 42% during the quarter, representing approximately $2 billion in incremental net operating income. It said leases in Southern California (approximately 23% of rents over the next 12 months) will see the largest mark to market. Rents from “weakish markets” represent 21% of the rent portfolio over the next year, while the remaining 56% of rents are tied to markets that are healthy.
Prologis raised the bottom end of its full-year 2024 FFO guidance by 2 cents to a range of $5.39 to $5.47. The consensus estimate was $5.42 at the time of the print.
Shares of PLD were up 1.5% at 2:31 p.m. EDT on Wednesday compared to the S&P 500, which was down 1.2%.
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