P
rologis, a leading logistics real estate landlord, expects the current downturn in warehouse leasing demand to persist into mid-2024, with vacancies likely to peak before improving. On its third-quarter earnings call, management expressed "a measured level of optimism" but noted that customers are engaged but hesitant to make decisions.

    The company reported core funds from operations (FFO) of $1.43 per share, beating the consensus estimate by 5 cents and increasing year-over-year by 13 cents. Prologis raised its 2024 FFO guidance range by 3 cents to $5.42-$5.46 per share.

    Consolidated revenue grew 6% year-over-year to over $2 billion, while total leases commenced increased 10% year-over-year to more than 50 million square feet. Occupancy fell 120 basis points year-over-year to 95.9%, outperforming the broader market by 300 basis points.

    Global market rents declined 3% overall in the quarter, but Prologis' Southern California portfolio saw average rent increases of 84% on multiyear lease commencements. Net effective rent change over the entire lease term fell more than 16 percentage points year-over-year to 67.8%, representing over $90 million in incremental net operating income.

    Prologis' lease mark-to-market was 34% in the quarter, equating to $1.6 billion in future net operating income. The company expects vacancies to continue rising, with rents not inflecting positively until mid-2024. However, President Dan Letter noted that only 10% of Prologis' leases roll over within the next year, minimizing the impact on long-term earnings and business value.

    Letter also highlighted recent California legislation restricting new warehouse capacity, which will drive up rents across the state, including in Southern California. He believes the broader market is poised to improve in 2026 and beyond as new warehouse deliveries are post-peak, warehouse starts are at a low since 2017, and utilization is improving at existing locations.

    Prologis' development starts were valued at over $500 million in the quarter, but the company lowered its full-year starts guidance by $750 million to $1.75-$2.25 billion. It has acquired 14 million square feet of space so far this year and raised its full-year portfolio acquisitions guidance to $1.75-$2.25 billion.

    Shares of Prologis were up 4.4% on Wednesday, outperforming the S&P 500's 0.5% gain.