Executives for Prologis, the world's largest industrial developer and landlord, warned investors that the company expects demand for its warehouses to slow in coming months as logistics and freight customers cut costs in the face of higher interest rates and other economic headwinds.

The San Francisco-based real estate investment trust cut its guidance for earnings, occupancy and planned development starts for the full year, even as it reported an 11 percent increase in revenue to $1.96 billion in the first quarter from $1.77 billion during the same time last year.

The outlook reflects anticipated downshift in industrial demand across the United States tied partly to recent 12-year lows in home sales that have dented sales of furniture, building materials and appliances, according to CoStar's National Industrial Report. The demand decline was found to have led to large distribution center closings by such tenants as Bed Bath & Beyond, Ashley Furniture and Home Depot.

"While operating conditions are healthy in the majority of our markets, customers remain focused on controlling costs, which is weighing on decision making and the pace of leasing," Prologis CEO Hamid Moghadam said in a statement. "A volatile and persistently high interest rate environment, together with mounting geopolitical concerns, contribute to this indecision and its short-term effect on" space demand.

Prologis is still optimistic about the fundamental stability of its business, "while being prepared for a slower environment in the next quarter or two," Moghadam added.

The declining outlook contributed to a 7.2% drop in Prologis' stock, closing Wednesday at $106.49 per share.

Prologis lowered its forecast for average occupancy of its warehouses to between 95.8% and 96.8%, from its previous estimate of 96.5% to 97.5% for the full year. The company also trimmed its full-year net earnings forecast to between $3.15 and $3.35 per share, from the previous estimate of $3.20 to $3.45 per share.

"We expect net absorption in the upcoming quarters to be lower than our prior expectations and leasing to stay competitive in a handful of our larger, higher-rent markets," CFO Tim Arndt told investors during a conference call on Wednesday. "With that, our current view calls for lower average occupancy in the year."

Prologis also tamped down its forecast of new development projects for 2023 as demand for warehouse space declines from record highs during the pandemic.

The industrial giant now expects to start roughly $2.5 billion to $3 billion of industrial construction projects this year, down from a previous estimate of $3 billion to $4 billion in projects late last year.

The U.S. industrial vacancy rate ticked up at the end of 2023 as 114.8 million square feet of new supply outpaced the 3.8 million square feet of space taken during the quarter, Tom Catherwood, a BTIG analyst who tracks Prologis and other large REITs, said in a note to investors, citing a recent market report by Cushman & Wakefield.

CoStar data pegs the national industrial vacancy rate at 6.3%, up from 4.3% last year. That vacancy rate isn't expected to rise well above its 20-year average of 7.1%, but the next six to 12 months "could still prove to be the market's most challenging period over the next five years," according to CoStar analytics.

Other national industrial developers have reacted to declining demand by cutting back on projected construction starts.

EastGroup Properties, a Jackson, Mississippi-based company with a warehouse portfolio of nearly 60 million square feet in such high-growth Sunbelt states as Florida, Texas, Arizona, California and North Carolina, said it planned to cut development spending in 2024 by about 17% from last year's $363 million across projects totaling just under 2.5 million million square feet.

“Based on [tenant] decision-making time frames we're seeing, I expect starts to be more heavily weighted to the second half of 2024,” EastGroup CEO Marshall Loeb told investors during an earnings call in February. “We'll ultimately follow demand on the ground to dictate the pace.”

Industrial development starts declined for five straight quarters through the end of 2023, a trend that could eventually cause vacancies to tighten, allowing owners to resume increasing rents and starting new projects, Loeb said.

Higher interest rates have caused construction starts on new industrial projects to plummet since last fall, according to CoStar, with volume expected to hit 10-year lows in late 2025.

"This could set the stage for vacancies to begin tightening again and for rent growth to accelerate thereafter," according to the CoStar U.S. industrial market report.