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Logistics real estate market moderating but rents going higher

Prologis reels in parts of 2022 guidance

"An economic slowdown" is now the base case for Prologis. (Photo: Jim Allen/FreightWaves)

Logistics real estate operator Prologis Inc. pulled in 2022 financial forecasts on Wednesday as its base case now assumes “an economic slowdown.” The change in direction was a reversal for a company that has seen tremendous growth throughout the pandemic as operators invested heavily in their supply chains, adding incremental warehouse space to meet record consumer demand.

Prior to the market open, Prologis (NYSE: PLD) reported core funds from operations (FFO) of $1.73 per share in the period, which was 6 cents better than analysts’ expectations. While the updated FFO guidance for 2022 was mostly unchanged, net earnings guidance was reduced 18% at the midpoint of the range to $4.25 to $4.30 per share.

On the likelihood of a recession and the impact Fed rate hikes will have on demand for logistics properties, Prologis co-founder and CEO Hamid Moghadam told analysts the psychology of the market has changed.

“My view of the economy is that the Fed was behind the eight ball and they’re now really running hard to catch up and they’re going to overshoot in their reaction,” Moghadam told analysts on a Wednesday call. “I think we’re going to whipsaw this economy.” However, he said changes usually take two years to play out. “I am concerned about inflation. I think the Fed is going to overdo it.”

In the third quarter, occupancy tightened 110 basis points year over year (y/y) to 97.7%. Leases commenced in the period increased 3% y/y to 51 million square feet and the average rate change over the lease term, or net effective rent change, reached an all-time high of 59.7% across the global portfolio, up 67% in the U.S.

The utilization of space reached 86.6%, the 95th percentile historically, but proposals for available units slowed to 2019 levels, which is “indicative of less urgency to renew space far ahead of expiration.” True months of supply, which compares current vacancies plus the development pipeline to trailing net absorption, increased to 22 months from 18 months in the quarter. The metric is expected to reach 30 months over time, however, that is a level still reflective of a strong operating environment.

Table: Prologis’ key performance indicators

For 2022, Prologis raised its rent forecast by 300 bps to 26% globally and 28% in the U.S. Management said rents are likely to climb again next year by mid- to high single digits.

“Rents are still going up. I mean we started 2022 thinking rents are going to be up 11%; they’re up 28%,” Moghadam said. “If a normal range of market outcomes is kind of 0 to 10, we were operating in an environment that was maybe a 12 for the last 18 months and that’s coming down to sort of a 9, 9.5 today. By any measure, other than the last 18 months, I would say we’re in very strong market conditions.”

Management sees supply potentially outpacing demand by 100 million square feet next year. However, it believes the incremental capacity will not push vacancies above 4%.

New development activity is slowing across the industry as construction and capital costs increase. Prologis reduced development starts guidance for 2022 by 7% at the midpoint of the range to $4.2 billion to $4.6 billion out of an abundance of caution. Guidance around year-ending average occupancies remained unchanged at 97.25% to 97.75%.

“Occupancies are high, utilization is high, there’s a lot of ongoing demand and we’re starting off at 98% occupancy. Even if the global financial crisis were going to repeat itself, we’ll be at 94% occupancy; … we can get rent growth at those kinds of numbers.”

Prologis Ventures is an investor in FreightWaves.   

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.