Key Takeaways
- • Prologis executives forecast a near-term slowdown in industrial development starts and property sales as higher borrowing costs and rising Treasury yields weigh on capital markets, per the firm's third-quarter earnings call.
- • CEO Dan Letter said rents needed to justify new construction have risen to 27% above current market levels, leaving room for rent growth before new supply becomes economic.
- • Prologis spent $644M acquiring real estate in Q3, broke ground on $1B in new development, and reported core FFO of $1.5B, up 8.3% year over year.
- • CFO Tim Arndt said a widening bid-ask spread is expected to moderate transaction volumes in the near term as buyers and sellers recalibrate.
- • Demand held up, led by e-commerce, advanced manufacturing and data-center-support firms, which accounted for 17% of leasing; the company leased 60M SF with 95.1% average occupancy.
Summary
Prolgis, the world's largest industrial REIT, warned on its third-quarter earnings call that higher borrowing costs and macroeconomic volatility will slow industrial development starts and property sales, at least in the near term. The company reported results slightly ahead of analyst expectations. According to the Bisnow report, bond traders' push up in debt costs has again exposed industrial operators to rising volatility.
On the supply side, CEO Dan Letter said "the bar for new development is going up," citing escalating construction costs, more expensive financing and higher return requirements. He said the rents needed to justify new construction now sit 27% above current market levels, and that "all else equal, we expect fewer starts and a more favorable supply environment."
Despite that backdrop, Prologis modestly raised the midpoint of its full-year development starts guidance, citing a large build-to-suit pipeline that Letter said is roughly 20% to 25% bigger than a year earlier. In the quarter, 80% of construction starts were speculative, but the company expects to finish the year with 55% to 65% of developments as build-to-suit. The REIT broke ground on $1B of new development, spent $644M acquiring real estate and made $58M in additional investments, while dispositions and contributions totaled $169M.
CFO Tim Arndt said that after a period of growing investor risk appetite, the rise in U.S. Treasury yields has shifted buyer calculations, with a wider bid-ask spread emerging. "We expect transaction volumes to moderate in the near term as buyers and sellers recalibrate," he said.
Leasing fundamentals remained solid. Prologis inked 60M square feet of leases in the quarter, maintained 95.1% average occupancy, and said in-place rents were resetting 38% higher on a net effective basis at expiration. E-commerce, advanced manufacturing and data-center-support businesses drove demand and together accounted for 17% of leasing activity. Core FFO reached $1.5B, up 8.3% from a year earlier, and rent and other revenue collected totaled $2.2B.
JPMorgan Chase analysts wrote that the results suggested "pricing power remains healthy even as customers continue to manage inventory tightly." Prologis shares rose in premarket trading but dipped after the open and were down more than 2% midday Thursday.
On the supply side, CEO Dan Letter said "the bar for new development is going up," citing escalating construction costs, more expensive financing and higher return requirements. He said the rents needed to justify new construction now sit 27% above current market levels, and that "all else equal, we expect fewer starts and a more favorable supply environment."
Despite that backdrop, Prologis modestly raised the midpoint of its full-year development starts guidance, citing a large build-to-suit pipeline that Letter said is roughly 20% to 25% bigger than a year earlier. In the quarter, 80% of construction starts were speculative, but the company expects to finish the year with 55% to 65% of developments as build-to-suit. The REIT broke ground on $1B of new development, spent $644M acquiring real estate and made $58M in additional investments, while dispositions and contributions totaled $169M.
CFO Tim Arndt said that after a period of growing investor risk appetite, the rise in U.S. Treasury yields has shifted buyer calculations, with a wider bid-ask spread emerging. "We expect transaction volumes to moderate in the near term as buyers and sellers recalibrate," he said.
Leasing fundamentals remained solid. Prologis inked 60M square feet of leases in the quarter, maintained 95.1% average occupancy, and said in-place rents were resetting 38% higher on a net effective basis at expiration. E-commerce, advanced manufacturing and data-center-support businesses drove demand and together accounted for 17% of leasing activity. Core FFO reached $1.5B, up 8.3% from a year earlier, and rent and other revenue collected totaled $2.2B.
JPMorgan Chase analysts wrote that the results suggested "pricing power remains healthy even as customers continue to manage inventory tightly." Prologis shares rose in premarket trading but dipped after the open and were down more than 2% midday Thursday.
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