Logistics real estate investment trust Prologis pointed to geopolitical unrest and rising interest rates as factors weighing on customer decisions around investment in warehousing space.
Prologis (NYSE: PLD) beat third-quarter expectations Tuesday, posting core funds from operations (FFO) of $1.30, which was 5 cents ahead of the consensus estimate but 43 cents lower year over year (y/y).
The company expects project completions to outpace net absorptions by 150 million to 250 million square feet over the next three quarters. At that point, however, the trend is expected to reverse with demand outstripping supply by 75 million to 125 million square feet over a three-quarter period. The forecast is rooted in a lack of macroeconomic clarity, which is expected to result in a lower level of development starts over that time frame.
“Demand is definitely softer — it’s closer to normal, maybe even a little bit below normal at this instant,” co-founder and CEO Hamid Moghadam told analysts on a Tuesday call. He noted “a lot of latent demand” among customers and said that most are reluctant to “pull the trigger.”
Portfolio occupancy remained high at 97.1% in the quarter but was 60 basis points lower y/y. Net effective rent change (over the entire lease term) increased more than 2,400 bps to 84%. The company said rent growth was the strongest in the Sun Belt, mid-Atlantic and Northern California regions but fell 2% in Southern California as vacancy rates have ticked up in that market.
The company said rent growth continues to stay positive by an amount that is in line with or outpacing inflation. For the full year, rent growth is expected to shake out 7% higher in the U.S., which implies a slight acceleration from a year-to-date mid-6% increase.
Prologis plans to provide more color on future rents at an investor day in December.
Marking existing leases to current market rents across Prologis’ entire portfolio (over the full lease term) equaled 62% at the end of September.
Prologis commenced leases on 46.4 million square feet of space during the third quarter, which was a 9% y/y decline. It said appraised values on its U.S. properties were down 3% in the period, largely due to changes in interest rates and an overall weakening in the market.
The company had nearly $1 billion in development starts in the period and raised the full-year outlook for starts by $500 million to a range of $3 billion to $3.5 billion. However, it noted that built-to-suits for data centers is driving demand while industrial-related demand is closer to flat.
Management said a loosening market is expected to provide it with more acquisition opportunities in the coming months.
Prologis raised the front end of its guidance range by 2 cents. The new range is $5.58 to $5.60, which brackets the current consensus estimate.
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