Prologis Expects Lower Average Occupancy in the Year Ahead

SAN FRANCISCO–Skittish customers determined to keep a tight rein on costs are holding back on leasing additional logistics space, executives of Prologis reported in their 1Q 2024 earnings conference call.

“While operating conditions are healthy in the majority of our markets, customers remain focused on controlling costs, which is weighing on decision making and the pace of leasing,” Prologis CEO Hamid R. Moghadam stated. He cited volatile high interest rates and mounting geopolitical concerns as factors that contributed to this hesitancy. But he described the effect of this indecision on net absorption as short-term.

“We remain optimistic about the fundamentals of our business, while being prepared for a slower environment in the next quarter or two,” he said.

CFO Timothy D. Arndt said the year got off to a good start, with strong rent growth. However, delays in decision-making resulted in below average net absorption and lower leasing volume. Net absorption in the U.S. was very low this quarter, at 27 million SF, he noted. Occupancy was slightly below forecasts for the near term, affecting same-store activity in the company’s higher-rent markets. “This was punctuated by a pronounced period of correction in Southern California,” he commented.

“However,” Arndt added, “new starts continue to be surprisingly disciplined, adding to expectations of limited new supply in the back half of 2024 and extending deeper into 2025.

“We arrived at the view that the operating environment has only changed modestly in the aggregate, and that demand is pushing outward by a few quarters. The outcome of this may simply mean moving toward a long-term occupancy expectation more swiftly this year, which sets up for a better next year.”

Arndt said the broader economy is generating a normal amount of demand, with broad economic data including unemployment, retail sales and the health of the consumer that is positive.

At the same time, some customers have sublease or underutilized space available. This dynamic, combined with the desire for cost containment and volatile interest rates, has led to low absorption. “This plays out at different rates among markets and customers,” Arndt said. In addition, when companies have choices, they may take their time because they expect better deals if they wait, which can result in significant savings in the short term. Leasing is expected to remain competitive.

Arndt pointed to signs that large ecommerce and retail customers are actively contemplating new leases. He cited Amazon, which was very cautious two years ago, but has now publicly committed to leasing “significant amounts” of space.

“Our current view calls for lower average occupancy in the year. Accordingly, we have reduced full-year guidance ranges for occupancy, same-store growth and earnings, but view the adjustments more as a matter of timing as the outlook on new supply remains very favorable,” Arndt said.