Prologis Raises Outlook Amid 'Healthy' Industrial Property Demand, Rising Warehouse Rents

The world’s biggest industrial developer said rents are rising and warehouse demand is holding steady even as the softening economic picture starts to weigh on some of its customers.

The San Francisco-based real estate investment trust reported 98% occupancy in its massive global portfolio in the first three months of the year — a slight increase from the same time in 2022 — as e-commerce spending picked up and helped drive leasing of warehouses.

The gains in rental income contributed to a more than 45% increase in Prologis revenue to $1.77 billion from the same a year earlier. It raised the low end of its 2023 occupancy and profit estimate ranges.

“Market rents have continued to grow amid sharp declines in new construction, limiting future supply,” Chief Financial Officer Tim Arndt said during a conference call to discuss first-quarter earnings. “While logistics real estate is very healthy, the macroeconomic picture continues to be a concern and we anticipate it could weigh on customer sentiment over the balance of the year, translating into some warehouse demand that could be delayed into 2024.”

The company said in January it expects rents to grow 9% year-over-year globally in 2023 and by 10% in the United States, its largest market.

Prologis, based on its unexpectedly strong performance in the first quarter, slightly raised the low end of its full-year outlook for average occupancy in its warehouse portfolio to between 97% and 97.5% from three months ago, when it was 96.5% to 97.%. The company increased its full-year estimate of net earnings attributable to common shareholders from a range of $3.00 to $3.15 per share to $3.10 to $3.25 from the earlier quarter.

“Though some Prologis customers are reevaluating their expansion plans, industrial market conditions remain very good and few companies are giving back space,” Prologis CEO Hamid Moghadam said on a call to discuss earnings.

“They’re not exceptional like they were a year and a half or two years ago, but they’re very good to excellent,” Moghadam said. “We’re not seeing a lot of shadow space. So far, it doesn’t appear that customers are giving back a large amount of space.”

Despite the concerns about online retailer Amazon, a major user of U.S. warehouses, slowing its growth in industrial property,

“Prologis’ largest tenant, the Seattle-based e-commerce giant, basically isn’t giving any space back,” Moghadam said.

Amazon CEO Andy Jassy said in a letter to shareholders last week that the company started using its fulfillment center sites in the past year to move from a national fulfillment network to a regionalized network model, changing the way it uses some of its industrial property to fill orders faster.

The changes include logistics software, processes and physical operations as the company has spent billions of dollars in recent years to buy real estate for conversion to logistics centers as it shifts their use.

Prologis, like most over industrial developers, has pulled back sharply on new construction projects.

“While the company broke ground at few sites in the first quarter, it still expects to start projects valued at a total of $2.5 billion for the full year, mostly in the second half,” Arndt said.

The REIT expects the current 3.5% U.S. vacancy rate will increase to the low 4% range toward the end of this year before falling back to the mid-3% range toward the end of 2024 due to the industrial construction slowdown and softening demand.

“We anticipate a similar path in European markets,” Arndt said. “Remember, even a 5% vacancy rate is historically excellent and supportive of strong rental growth.”

Industrial net absorption, which represents the change in space occupied by tenants and owner-users across the country, decelerated notably in the United States during the first quarter to a level only half as strong as first-quarter absorption last year, according to Adrian Ponsen, national director for industrial market analytics at CoStar.

Inflation and the higher interest rates accompanying it last year finally began to curtail the largest commercial real estate construction boom by square footage recorded for any property type in the United States since the 1980s, according to Ponsen.

About 134 million square feet of U.S. industrial property development began construction during the final three months of 2022, a drop of nearly 40% from the quarterly tally averaged during the prior 12 months.

“The fourth quarter represented the the lowest quarterly construction-starts total recorded since the initial outbreak of the pandemic in early 2020,” Ponsen said. “The trend continued in the first quarter of 2023.”

Source: CoStar