Prologis expects to reduce spending on new warehouse projects in the coming months as executives managing the company's massive portfolio adjust to a weakening economy.
Executives at San Francisco-based Prologis reduced its guidance for total spending on development starts in 2022 by nearly 7.5% to between $4.2 billion and $4.6 billion as it pulls back on starting new projects in the closing months of the year.
The reduction in construction starts in the final months of the year could result in a decrease in completed projects in late 2023 and early 2024, CFO Tim Arndt said during the company’s investor presentation on Wednesday.
The construction pullback and cautious outlook by the world’s biggest industrial real estate landlord is the latest sign that a boom in warehouse construction and leasing is finally starting to taper back to pre-pandemic levels.
“We’re seeing initial signs of a deceleration in development activity across our markets as construction and capital costs continue to increase,” Arndt said.
Prologis projects that its supply of available warehouse space will outpace leasing demand across its global portfolio by around 100 million square feet in 2023, Chris Caton, managing director for global strategy and analytics, told investors.
That gap between supply and demand, which amounts to a fraction of the Prologis portfolio of more than 1 billion square feet, would push its vacancy rate to about 4% from just over 2%, which Caton noted is below the low that prevailed during the past decade.
Record Results
Despite its cautious outlook, Prologis — watched by analysts and investors as a bellwether for the health of the industrial real estate market because of its size and global footprint — reported financial results for the third quarter that included record increases in rent growth and net operating income.
Revenue of nearly $1.8 billion in the third quarter exceeded the nearly $1.2 billion reported in the year-earlier period. Prologis posted third-quarter net earnings of just over $1 billion, ahead of the $722 million posted a year earlier.
Occupancy tightened by a full percentage point to 97.7% in the third quarter from the same time last year. Leasing totaled 51 million square feet for the quarter, up 3% year over year.
Executives said they’re exercising caution despite having confidence in the resilience of their business and in the strength of the broader industrial real estate market.
“Given the impact of aggressive Fed tightening and the rapid change in market sentiment, we will run our company assuming an economic slowdown," Prologis CEO Hamid Moghadam said in the company’s earnings statement.