Prologis Sees The Bottom Of The Industrial Market As It Beats Q3 Forecasts
The stagnation in tenant demand and rent growth that has plagued the country’s industrial market for roughly a year is likely approaching its lowest point, setting up a rebound in pricing in the latter half of next year, Prologis executives said Wednesday.
Industrial leasing has remained sluggish after falling sharply in 2023 as tenants stayed in cost-cutting mode amid elevated inflation and interest rates. But during a third-quarter earnings call, Prologis’ leaders indicated the end of the slowdown may be in sight.
“Overall, [the] bottoming process is underway, and we expect demand to remain soft in the near term,” said Tim Arndt, the firm’s chief financial officer. “Looking ahead, market vacancy is at or near its peak. It will hover there as utilization improves, and global rents will bottom sometime mid-next year.”
The country's largest industrial landlord continued to perform well despite the softness in the warehouse market. Prologis beat earnings projections in the third quarter with total revenue of more than $2B, better than the $1.9B consensus estimates, and 46M SF of new leases and renewals commenced.
Prologis’ 96% occupancy rate, which the company says is 300 basis points ahead of the industry average, is still at its lowest level since at least the third quarter of 2023 amid broader weakness in the sector. But executives said the industrial market had reached an inflection point.
The firm’s management team believes the market is at or near peak vacancy, “which we expect to endure maybe throughout 2025, with a recovery in that vacancy emerging late next year and then accelerating thereafter,” President Dan Letter said on the call.
“We know the trend and will capture that rent growth in the longer term. We just don't necessarily know the slope of that recovery.”
Industrial vacancy rates in the U.S. reached 6.4% in the third quarter, according to Cushman & Wakefield. Asking rents bumped up from the prior quarter by 11 cents to $10.08 per SF.
Vacancy growth is slowing, according to C&W, and it is largely concentrated in certain markets like Southern California, Phoenix and Chicago. And while the rate is higher than the historic lows posted in the years immediately following the pandemic's arrival, it is lower than the prepandemic average of 7%.
Rents were down roughly 3% globally, driven in large part by a struggling Southern California industrial market, Arndt said. Leasing activity has been broadly sluggish because of a backlog of space that was originally leased during the pandemic to add resiliency to supply chains but is now being used to contain costs.
“In the near term, we just recognize that utilization has really been the culprit of keeping a lid on demand,” Arndt said. “The message we're trying to send here is that that has an end to it.”
Prologis spent $1.3B on acquisitions in the third quarter, $784M to stabilize projects and another $392M on new construction, roughly half of which is built to suit.
Lease renewals accounted for 31M SF worth of third-quarter activity, while the firm also locked in 11M SF worth of new leases at existing buildings and 4M SF at properties under development. Total leasing was 4.3M SF off from the same period last year.
The industrial REIT's net earnings per share grow 35% in Q3, and the firm narrowed its guidance for the year by boosting its low-end forecasts.
Rental and other revenues totaled $1.9B in Q3 and $5.5B year to date, up from $1.7B and $5.1B over those respective periods in 2023. The remaining $135M in revenue in the third quarter came from strategic capital investments.
The firm is also seeing success in standing up its new data center arm that launched earlier this year, Letter said. The firm has focused on securing power, locking in 1.6 gigawatts to date with roughly a third of it earmarked for under-construction projects. It also began the conversion of another under-construction powered shell into a turnkey data center, Letter said.
Prologis raised $4.6B in new debt in the third quarter, with a weighted average 4.6% interest rate and a nine-year maturity date.
The market reacted positively to the quarterly report, boosting the stock nearly 2% in premarket trading and up more than 4% at the end of the call Wednesday afternoon.
“There are these tailwinds of economic growth, of trade growth, of consumption growth, and the acceleration of e-commerce continues,” Letter said. “I think we should just, over the near term, have a measured level of optimism. We just need to watch the market advance.”
