Contact Us

Prologis Pivoting Away From Spec, Ramping Down Dispositions As Market Softens

Industrial giant Prologis plans to scale back spec development and instead focus on custom builds as volatility in the economy threatens to dampen demand.

Thus far, economic headwinds have done little to curtail torrid leasing activity and unprecedented occupancy levels at Prologis properties, but that could change as the year comes to a close, company executives said during a quarterly earnings call Wednesday. 

The company said it will be cautious heading into the rest of the year, including being more selective about new projects, and those that do break ground in the fourth quarter will be mostly build-to-suit.

A Prologis warehouse in Steinwerder, Germany

“We are carefully managing the business and approaching our markets with a sense of caution, much as we did at the onset of the pandemic,” Chief Financial Officer Tim Arndt said on the third-quarter earnings call. “In leasing, despite a very strong spot environment, we are carefully watching for softening demand and will assume that there will be further macro deterioration.”

The company reported record occupancy of 97.8% at the end of Q3, up 10 basis points from Q2, and rent growth of 60% on a net effective basis. The 165M SF Duke Realty Corp. portfolio, which Prologis acquired earlier this month, closed the quarter with 99% occupancy and a net effective rent change of 54%.

Market vacancy remains at historic lows, and rent growth has increased in response to scarcity, Arndt said. But a slowdown of Q3 proposals could indicate less urgency on the part of tenants to renew space, and certain large-scale tenants like Amazon and FedEx have announced pauses on new warehouse leases.

Reports around the significance of Amazon’s scaling back are overblown, CEO Hamid Moghadam said, and the decision has yet to affect Prologis. The e-commerce giant has maintained its 160 leases at Prologis-owned warehouses and continues to take down space with the company, Moghadam said.

“I don’t know what all of this excitement is about, but we haven’t seen it in the marketplace,” he said.

Larger users with more mature supply chains may be letting their foot off the gas, but Moghadam said the need to bulk up inventory remains, as a slew of tenants who are moving ahead with expansion plans continue to emphasize resiliency after a few years of supply chain uncertainty.

“You’ll see virtually all customers building more resilience into their supply chain by taking up more space so they don’t get caught with the wrong inventory in the wrong place at the wrong time,” Moghadam said. “Demand is definitely broadening.”

Still, the uncertainty around where valuations are heading as interest rates rise and a potential recession looms is causing Prologis to be more conservative in how it allocates its capital and to lower its guidance for property dispositions, Arndt and Moghadam said.

Prologis is also reducing its development activity as construction and capital costs continue to tick up. This will likely lead to a slowdown in new builds that will ultimately translate to a gap in deliveries in late 2023 and early 2024, Arndt said. 

The company is predicting a supply-demand gap of 100M SF next year, which could lead vacancies to tick up to 4%, Global Head of Capital Deployment Dan Letter said.

Prologis traded at $102 per share on Wednesday, down by nearly 3.7% over last year. Despite tempered investor expectations, Arndt said earnings and the company’s equity base have yet to be impacted by volatility in the market, and Moghadam said his outlook for 2023 remains positive.

“Even if the Global Financial Crisis were to repeat itself, we will be at 94% occupancy, and that’s just fine,” Moghadam said. “There is no problem with that. We can get rent growth at those kinds of numbers.”