Prologis Says Warehousing ‘Near Peak Vacancy’
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Logistics real estate investment trust Prologis raised its earnings forecast despite total revenue tumbling 18 percent to $2 billion and peak vacancy rates, as the company remains optimistic about demand, due to port volumes on both the East and West Coasts, as well as stronger lease proposal activity.
And despite who ends up winning the 2024 presidential election, Prologis doesn’t expect any potential changes to tariff policies to impact the business directly.
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“We don’t see a radical demand shift between markets or in terms of overall need for our kind of product. So, that’s the main driver,” said Hamid Moghadam, co-founder, chairman and CEO of Prologis.
Moghadam acknowledged that potential second-order effects from the tariffs could influence the wider economy.
“Economics 101, you’re going to have higher inflation, and that could cause the Fed to relax slower. That will have, obviously, a headwind effect on the overall economy,” Moghadam said. “This, in turn, will affect demand for industrial real estate and everything else. I am not worried at all about the primary effect, the direct effect of China, the way people think about this China-L.A. connection and the fact that that’s somehow going to be under pressure because the containers are going to land in L.A.”
The warehousing market has slowed down since the Covid-19 pandemic, when retailers and brands had to store more goods to fulfill peak e-commerce demand. But overall demand for freight slowed down in the years since, leading to less of a need for space.
As customers optimize their existing real estate footprints before committing to new space, Prologis expects many property owners to continue to prioritize occupancy in select markets with higher availability, keeping pressure on rents.
Globally, Prologis estimates that effective market rents declined 2 percent during the quarter, with 75 percent of the decline attributed to Southern California.
“The bright spot continues to be the depletion of the supply pipeline and successive quarters of very low development starts,” said Timothy Arndt, chief financial officer of Prologis, during a second quarter earnings call. “We believe we are near peak vacancy, and this dearth of new supply is setting the stage for more favorable conditions in 2025.”
Prologis Research expects the U.S. vacancy rate to peak in the mid-6 percent range during 2024 and gradually fall to the mid-5 percent range in 2025. The company reiterated occupancy guidance of 95.75 percent to 96.75 percent.