Management from logistics warehouse operator Prologis Inc. observed some reduction in demand for logistics space on a Monday call with analysts, but with the proviso that the change represented only a minor step lower from recent all-time highs.
“On a 1-to-10 scale, let us call the top in terms of market strength on the demand side a 10,” said Hamid Moghadam, co-founder, and CEO. “I think the previous quarter and the quarter before were about 12 or 13 — they were just insanely amazing.” They’re probably 9.5 to 10 this quarter. This would be remarkable by historical standards.”
Before the market opened Monday, Prologis (NYSE: PLD) reported core funds from operations of $1.11 per share for the second quarter. The outcome was in line with the consensus forecast, but 10% higher year on year.
While the number of active bidders competing for logistics space fell somewhat from record highs in the quarter, the adjustments were not reflected in the results. The portfolio was 97.6 percent occupied in the quarter, which was 160 basis points higher year on year and 20 basis points tighter than the first quarter. The net effective rent change – the average rate rise over the lease term — was 45.6 percent or 1,410 basis points higher year on year. During the quarter, the metric averaged 54 percent in the United States.
According to management, 71 percent of leases up for renewal in the next 12 months are pre-leased or under negotiation, which is 15 percentage points more than the pre-pandemic average. The length of the bargaining process, however, has been prolonged by 10 days to 60 days as renters have slowed their approach to taking on extra space.
As interest rates rise, the leveraged renter of space is essentially squeezed out. In addition, some e-commerce froth is emerging from the market. In the period, e-commerce accounted for 14 percent of Prologis’ new leasing, compared to 25 percent during the 2021 craze.
“To be honest, everyone reads the same papers,” Moghadam added. “If you’re the CEO of a firm and you want to extend your operations, you’re going to take a little bit more time just to make sure you’re not making a stupid mistake.”
Prologis increased its full-year 2022 net earnings expectations to a range of $5.15 to $5.25 per share, a 5.6 percent rise from the previous three-month guidance and a 16.2 percent increase from the first forecast published in January.
On the supply side, Prologis anticipates 375 million square feet of net absorption and completions in 2022, with a 3.2 percent vacancy rate in the 30 major areas in which it competes. Rents in the United States are now predicted to rise by 25% this year, with larger increases in some coastal cities. This is 300 basis points greater than the previous quarter’s projection.
When comparing current market rates to current leases that will be up for renewal in the months and years ahead, management believes it has around $2 billion of embedded net operating income throughout its portfolio.
Looking ahead until 2023, management expects supply to outnumber demand by 50 million to 100 million square feet. However, it anticipates that the additional capacity will not increase vacancies above 4%.
Prologis likewise anticipates no influence on supply, despite the fact that Amazon (NASDAQ: AMZN) has been projected to put between 10 million and 30 million square feet of space back into the market. Any potential actions, according to management, look unlikely to have an impact on any of the company’s facilities. Prologis has a retention rate of 95% with Amazon, which is 20% higher than the portfolio average, and its properties are 99 percent leased in the markets where it works with them.
“In the end,” Prologis CFO Tim Arndt said, “we believe we are witnessing a normalization in the volume and velocity of demand, which we predicted as the world reopened from COVID and customers sought more in-person experiences.” “However, the fundamentals remain favorable given extraordinarily tight markets and availability.”
Prologis agreed to pay $26 billion to acquire Duke Realty (NYSE: DRE) in June. The all-stock deal is scheduled to be completed before the end of the year. On the call, there was no update on the deal.
