Prologis: Industrial Leasing Has Reached 'A Clear Turning Point'
The wind is shifting in the industrial leasing market after several quarters of doldrums, according to executives at Prologis.
The third-quarter earnings results of the world’s largest industrial landlord released Wednesday reflect a year of shocks and subsidies for the sector — from tariffs to tax incentives in the One Big Beautiful Bill Act. But Prologis' leadership said Wednesday that the market had shifted, and tenants are looking to make deals.
Prologis had a record 65.6M SF worth of leases commence in the third quarter, but occupancy in its 1.3B SF portfolio was practically flat.
Across the third quarter, Prologis landed 19.6M SF in new leasing, a 15% increase on the prior quarter, and another 42.7M SF in renewals.
“We can look at our own leasing activity, and there's a clear turning point in demand, there's a clear move higher,” Chief Financial Officer Tim Arndt said on the firm’s earnings call, adding that Prologis forecasts about 60M SF of quarterly leasing in the months ahead.
Prologis reported a 4.2% increase in core funds from operations and $2.2B in revenue, up 8.7% from the prior year. Average occupancy across its portfolio of owned and operated properties was 94.8% at the end of September, down 10 basis points from the prior quarter and 110 basis points from a year earlier.
Large businesses are the most comfortable transacting amid the current macroeconomic uncertainty, but operators of all sizes are running out of time to delay decisions, President Dan Letter said.
“Customers have definitely become more desensitized to the short-term noise as they look at making long-term decisions,” he said. “It's great to see these well-capitalized, large companies leading the way, because we typically see the small, medium businesses follow suit.”
The industrial giant adjusted its projections for development starts for the third time this year, adding $500M to its projected pipeline, which now ranges from $2.75B to $3.25B. Prologis had cut the upper bound of its development forecast by $1B at the end of the first quarter, before boosting it by $750M in the second quarter.
Taken together, the adjustments amount to a net $250M increase from what Prologis was expecting to spend on new construction at the start of the year. The development activity is being driven by build-to-suit projects, which accounted for 64% of Prologis’ $446M in third-quarter starts.
The firm has signed 21 build-to-suit deals this year and is negotiating with customers to build another 30M SF, Letter said.
Prologis is also boosting investment in the data center business it launched last July to meet what it says is strong demand. The REIT secured an additional 1.5 gigawatts of power in the third quarter, bringing its total capacity to 5.2 GW, all of which has a potential user lined up.
“Every megawatt we can deliver over the next three years is already in dialogue with customers,” Letter said. “We have strong conviction in the depth of our pipeline and look forward to announcing a handful of starts in the coming quarters.”
Letter said the firm didn’t see a limit to the number of data center projects it could have underway at any given time, only that it was committed to working with high-quality operators.
“I hope it's getting underscored here the incredible amount of energy we have now gathered, and the volume of customer conversations that we're having is also very high,” he said.
Prologis modestly boosted its guidance for operations along with the earnings beat. Its midpoint for core FFO is up 2 cents, and the forecast for same-store net operating income growth was increased by half a percentage point. Investors reacted positively to the earnings report, with the stock up more than 4% midday Wednesday.
Third-quarter net effective rent growth was 49.4%, down from 67.8% a year earlier as the long tail of pandemic-era rent growth continues to taper.
Prologis has another 29M SF in leases set to expire this year and 176M SF, or 15.3% of its total occupied square footage, worth of deals rolling over in 2026. The firm’s top 10 customers — Amazon, Home Depot and FedEx are its top three tenants — occupy 159M SF.
In a note to investors ahead of the earnings call, JPMorgan Chase analysts said the increased NOI figures and boost to development starts suggested that management expect market conditions to improve.
“The combination of the improved ending leased level and management ‘voting with dollars’ by increasing its capital allocation to new starts seems to underscore management’s conviction in an upcoming turn,” they wrote.
