Logistics warehouse operator Prologis said Wednesday the market appears to be nearing an inflection, noting it experienced “record leasing” activity in the third quarter. Customer sentiment is strengthening, with more tenants committing to long-term, build-to-suit spaces. The company said occupancy rates are bottoming and rents will begin to move higher.
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The San Francisco-based real estate investment trust reported consolidated revenue of $2.21 billion for the third quarter, which was up 9% year over year and ahead of a $2.03 billion consensus estimate. Core funds from operations (FFO) of $1.49 were 5 cents better than expected.
Prologis (NYSE: PLD) management said on a Wednesday call with analysts that large customers “have definitely become more desensitized to the short-term noise [a trade war] as they look at making long-term decisions.”
Near term, it expects mid-7% vacancies to linger market wide, with improvement occurring through 2026 as supply tightens and new property deliveries decline. Development starts are now 75% below the peak and 25% below pre-Covid levels.
New leases commenced in the period represented 65.6 million square feet, a 29% y/y increase. Average occupancy fell 110 basis points y/y to 94.8% (290 bps better than the U.S. market average), but appears to have bottomed. Occupancy was 95.3% to close the third quarter.
Market rent declines slowed to 1% in the period. Net effective rent change on Prologis’ portfolio of multiyear leases was 49%. Lease mark to market (resetting in-place rents to current market rents) was 19%, which equates to $900 million in future net operating income.
“I know when the market stabilizes it will stabilize with a much higher level than today’s rents,” said Hamid Moghadam, Prologis co-founder and CEO, on the call. He estimated rents could reset 40% above in-place rents and 20% to 25% above current market rents when the cycle inflects.
“One of the most compelling setups I’ve seen in 40 years,” Moghadam added.
Moghadam will retire at the end of the year but will continue to serve as executive chairman. Prologis President Dan Letter will succeed Moghadam as CEO.
Prologis slightly raised its full-year FFO guidance to a range of $5.78 to $5.81 per share, which was ahead of a consensus estimate of $5.77 at the time of the print.
The revised outlook assumes average occupancy in a range of 94.75% to 95.25% (no change from the second quarter) and development starts between $2.75 billion and $3.25 billion (a $500-million increase at both ends of the range). The company is expanding its data center portfolio, which currently includes 5.2 gigawatts of utility-fed capacity already installed or committed.
Shares of PLD were up 6.6% at 2:02 p.m. EDT on Wednesday compared to the S&P 500, which was up 0.2%.
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