The world’s biggest industrial developer lowered its profit outlook as earnings and occupancy fell along with global warehouse demand following years of record leasing, occupancy and rent growth.
Prologis executives told investors during a conference call Tuesday to discuss its most recent earnings that concerns about the economy, rooted in rising interest rates and geopolitical upheaval, are causing some companies to delay leasing and development decisions. The company slightly pulled back its outlook for per-share profit this year to between $3.30 and $3.35 from the earlier $3.30 to $3.40.
“Coming fresh off one of our customer advisory board sessions, it’s clear that our customers plan to continue to expand their footprints and increase capacity and resiliency,” Chief Financial Officer Tim Arndt told investors. “However, what’s also clear is that they are slowing such investments until there is more clarity in the economic environment.”
Arndt expects Prologis project completions in the United States to outpace the amount of net space absorbed by tenants by 150 million to 250 million square feet over the next nine months. At that point, the trend is expected to reverse in the following three quarters as new project starts stay low, with industrial demand outstripping supply by as much as 125 million square feet over a three-quarter period extending into 2025, Arndt added.
“Demand is definitely softer,” Prologis co-founder and CEO Hamid Moghadam said during the call. “It’s closer to normal, maybe even a little bit below normal at this instance.”
The company started development projects valued at nearly $1 billion in the third quarter and increased its expected total for the full year to between $3 billion and $3.5 billion, an increase of $500 million over its previous forecast. Many of the new projects are build-to-suit developments from large companies such as data center operators, Moghadam said.
“There is a lot of latent demand that large companies having large requirements are continuing to talk to us about build to suits, but they’re reluctant to pull the trigger" to start projects, Moghadam added.
Profit Declines
San Francisco-based Prologis, which recently bought the Airpark Logistics Center near Phoenix from development firm Creation for $184 million in one of the biggest industrial sales in Arizona history, reported a profit of $747.6 million in the third quarter. That's down from just over $1 billion, or $1.36 a share, in the same quarter a year earlier.
Total revenue rose to $1.92 billion in the quarter from $1.75 billion for the same time last year.
Average occupancy in Prologis's portfolio declined to 97.1% in the third quarter, down from 97.5% in the prior quarter. However, occupancy picked up by the end of the quarter, prompting the company to slightly increase its estimated occupancy for the full year.
Prologis said it now expects occupancy for the year to be 97.3% to 97.5%, slightly higher than the previous range of 97% to 97.5% forecast earlier this year.