Management from logistics real estate investment trust Prologis said Wednesday that uncertainty around the timing of interest rate cuts has slowed leasing demand in the near term but that its favorable longer-term outlook remains unchanged.
Prologis (NYSE: PLD) reported first-quarter core funds from operations (FFO) of $1.28 per share, in line with the consensus estimate. However, it lowered its full-year guidance by 1% to a new range of $5.37 to $5.47 compared to analysts’ expectations of $5.50 at the time of the print.
The slight pullback in outlook represents some hesitancy in the market, which management believes will last for the next two to three quarters. Looking two and three years out, it said it’s potentially more bullish than before as deferred demand continues to build.
“If you are sensing any acute change in our outlook, you are not reading our call correctly, said Hamid Moghadam, co-founder and CEO, on a Wednesday call with analysts.
He said lease signings have been pushed out somewhat due to geopolitical concerns and higher interest rates. However, he expects that to change once rates start moving lower.
“People are just scared of pulling the trigger until the Fed gives the all-clear sign with the first rate cut,” Moghadam said.
Rental revenue increased 12% year over year (y/y) to $1.83 billion in the first quarter. Consolidated revenue was 11% higher at $1.96 billion.
Occupancy across its portfolio was 96.8%, which was 30 basis points lower than the fourth quarter and 120 bps lower y/y. The company said occupancy rates have fallen 310 bps across the broader industry since the peak two years ago, but only by 80 bps across Prologis’ portfolio.
Prologis now expects average occupancy in 2024 to be between 95.75% and 96.75%, which is a 75-bp reduction from the midpoint of the prior range. It said available supply is down 80% from the peak and one-third lower than pre-pandemic levels. It expects vacancy rates to reach the mid-6% range, quickly moving quickly lower later this year.
It views a 6% vacancy rate as market equilibrium for rent negotiations.
Net effective rent change (over the entire lease term) was 67.6% in the quarter, 120 bps lower y/y.
Global market rents were down 1% in the period, with most markets in the U.S. seeing little change. Prologis noted weakness in Southern California (rents down 6% in the first quarter) and the Inland Empire of California due to general demand softness. But Moghadam believes some of that sluggishness is tied to protracted labor negotiations at the West Coast ports over the past two years.
However, rent changes on multiyear leases rolling over were 120% higher across the U.S. and 156% higher in the Inland Empire. The company said marking its whole lease portfolio to current market conditions would produce $2.2 billion in additional rents, or about a 50% increase to the current lease rates.
“The worst that we are projecting in this period is almost as good as the best we’ve seen in other cycles,” Moghadam said. “We’ve just been spoiled by a market … where vacancies have been lower than they’ve ever been.”
Shares of PLD were down 6.9% at 2:40 p.m. EDT on Wednesday compared to the S&P 500, which was off 0.2%.
