Executives at the world's largest warehouse owner and developer expect to ramp up property acquisitions in coming months in a bet that industrial real estate demand will accelerate next year after a period of rising vacancies and subdued rent growth.
Prologis raised its projected spending on acquisitions to between $1.75 billion and $2.25 billion for the full year — up from its prior estimate of between $1 billion and $1.5 billion.
“Our teams are scouring the market for opportunities,” Chief Financial Officer Tim Arndt told investors during the company’s latest earnings call. "We see a very attractive market for acquisitions."
The move to buy more property comes as Prologis, based in San Francisco, posted a 6% increase in revenue in the third quarter to $2 billion from the prior-year period. The increase reflected year-over-year gains in rental revenue and leasing activity — even as the average occupancy rate across its 1.2 billion-square-foot global portfolio dipped to 95.9% from more than 97% during the same time in 2023.
"The bottoming process is [underway] as our customers navigate an uncertain environment," CEO Hamid Moghadam said in a statement. "Looking ahead, the supply picture is improving and the long-term demand drivers for our business remain strong."
The company's improving outcome comes amid signs that the surge in industrial vacancies in the United States over the past two years is nearing its peak and could start to fall next year, Adrian Ponsen, CoStar's national director for industrial market analytics, said in a recent commentary.
Ramping up for growth
Prologis has acquired over 14 million square feet of properties this year, Arndt said. The company recently paid $71 million to buy a collection of fully leased office and research properties in the San Francisco suburb of Fremont, CoStar News reported.
The company plans to snap up more properties before the end of 2024 to prepare for an expected rise in tenant demand next year amid a dwindling pipeline of new warehouses under construction.
The U.S. industrial vacancy rate ticked up slightly to 6.6% in the third quarter from 6.5% in the second quarter, the smallest quarterly increase recorded since late 2022, CoStar's Ponsen said. The slowing vacancy increase comes as a record wave of speculative warehouse development is finally winding down this year, he added.
Arndt said he doesn't expect demand to significantly pick up until around mid-2025.
“While occupancy and rents have softened against a backdrop of positive yet subdued demand, we continued to deliver impressive net effective rent [gains], which bridges us through this soft patch to the next cycle of rent growth," he said. "Customers are taking time to make decisions, but warehouse utilization is up this year, and that will be a catalyst for them" to eventually take more space.
The real estate investment trust also now expects to sell more properties than previously expected.
Prologis anticipates raising $1.25 billion to $1.75 billion from selling properties, up from its previous estimate of $1 billion to $1.4 billion. The company recently sold a pair of warehouses in the Chicago area for a combined $106.5 million in two of the area’s largest single-property sales this year.