Despite Tariffs, Prologis Is Propelled By Big Build-To-Suits And A Boost In Leasing

Prologis bucked a modest tariff-induced slowdown in the industrial sector and posted strong second-quarter earnings, reporting historically high leasing demand and boosting its development forecasts. 

The industrial giant’s core funds from operations grew 9% in the second quarter to $1.46 per share, including $2B in rent and other revenue. Occupiers signed 51M SF worth of leases with Prologis in the second quarter, a 9% increase on the same period a year earlier, and the firm’s leadership said tenants are signing deals that had been delayed by economic uncertainty. 

“The second quarter exceeded our expectations, reflecting the strength and versatility of our team and portfolio in a challenging environment, against a backdrop of subdued net absorption and a modest rise in market vacancy,” Chief Financial Officer Tim Arndt said on the firm’s earnings call Wednesday.

Leasing velocity accelerated in May and June but was down about 10% from where Prologis would expect it to be without tariff uncertainty. Executives said leasing conditions are expected to be choppy in the coming quarters, but occupiers' ability to defer decision-making was running up against space needs.

On two occasions during the earnings call, CEO Hamid Moghadam cited the fear of missing out as the driver that would eventually lead to a wave of activity.

“If you have people that are going to pull the trigger on big capital improvements or capital expenditures, they're going to take comfort in seeing other people make the same decisions,” he said. 

Still, he acknowledged that profound uncertainty clouds the long-term outlook for the company and its customers. 

“There's a lot of confusion right now,” Moghadam said. “That's why I think it is nearly impossible to predict things quarters in advance. I know you want us to, but it's kind of hard to do it, and anything I would tell you should be ignored.” 

Prologis updated its full-year guidance and signaled that it plans to be more active in the market than previously indicated. The firm increased its midpoint on development starts by $750M to a range of $1.75B to $2.5B. The upgrade is a reversal for Prologis, which had cut the upper bound of its development forecast by $1B at the end of the first quarter. 

The rising forecast in development starts reflected additional data center construction that wasn't previously included in guidance, as well as better visibility into demand from tenants. Build-to-suit projects are expected to remain a historically high percentage of the firm’s new construction starts through the year.

Prologis’ entire 1.3M SF of U.S. development starts in the second quarter are preleased, and the 4.2M SF it has started to build since the start of the year is 83.6% preleased.

“Our build-to-suit starts for the first half total $1.1B, which is the largest start to a year that we have ever had,” Arndt said. “The strong demand by some of our biggest customers underscores our observation that many of them are moving beyond the noise and making significant capital investments into their business.” 

Moghadam said the build-to-suit market was the strongest it has been in his career as companies execute on long-term strategies. 

“The only part of our business that's slow is the leasing of spec space,” Moghadam said.

The company raised its disposition forecast by $250M. Its planned contributions to funds, which would include joint ventures and other partnerships, went from a range of between $150M and $500M to between $500M and $1B.

Rents declined by approximately 1.4% in the second quarter on subdued absorption totaling 28M SF and a 10-basis-point increase to vacancy, which is now at 7.4% for the portfolio, Arndt said. 

The firm would get more pricing power on rents when vacancy returned to something closer to 5%, which Moghadam said was likely to come in the next couple of years. 

“And when you do, it's going to be really above inflation in the short term, because the pipeline hasn't started, construction costs have been going nuts, and I think they're going to continue to go up,” he said of landlords' ability to push rents.

The industrial giant’s Q2 performance came in better than expected, and rent spreads around 53% on a net effective basis continued to be a silver lining for the firm, analysts at JPMorgan Chase wrote in a note to investors early Wednesday.   

“Net-net, the occupancy datapoints, sticky rent spreads, and development start actions have us feeling better heading into today’s call than we thought heading into this morning’s print,” they wrote before the earnings call.

Net earnings per share slipped nearly 34% to 61 cents in the second quarter, which the firm attributed to lower gains and unrealized losses related to currency exchange rates. Still, the firm lifted the floor on its full-year guidance for core FFO by 10 cents, narrowing the overall range to between $5.75 and $5.80 per share. 

The stock opened the day up more than 4% before giving back some gains and closing up more than 1.5%. 

Prologis reported improving leasing fundamentals amid President Donald Trump’s ongoing trade war, with the volume of lease proposals climbing quickly in 2025 to 136M SF, or 40% of Prologis’ net rentable area. Leases are also getting signed faster, averaging 52 days in the second quarter.

“The implication of this larger pipeline is that when the pace of signings picks-up there should be a notable occupancy impact,” the JPMorgan Chase analysts wrote.

Arndt said the industrial giant’s customers were continuing to build out their supply chains despite macroeconomic uncertainty and that long-term trends would drive growth across the business.  

“One prominent user describing the exhaustion of adapting to shifting tariffs and concluded that they need to just run their business and will, quote, figure out the tariff details when there is some clarity,” he said.