An Adjustment of Expectations – April 22, 2024
When you’re the largest organization of your kind, market dynamics can have different implications. You may see success earlier than your peers and experience the effects of a downturn later than others.
As a case in point, consider Prologis, the world’s largest owner of industrial real estate. The REIT reported its first-quarter earnings last week, and you could say it had a good start to 2024. Revenue was better than analysts expected at $1.96 billion. Net earnings per diluted share and core funds from operations saw year-over-year increases. Average occupancy across Prologis’ enormous portfolio was 96.8%, a level matched on a submarket basis by only a handful of the tightest local leasing markets.
Nonetheless, the company cut back its annual earnings outlook, with projections for net earnings, core FFO and occupancy all lower than before. It also trimmed its sails on development plans for the year.
CEO Hamid Moghadam told the Wall Street Journal that would-be tenants are taking a cautious approach to leasing due to high interest rates, an uncertain retail economy and geopolitical turmoil. Meanwhile, he said, other businesses are still expanding in buildings they leased during the pandemic amid red-hot demand for new warehouses.
“It’s a very perplexing environment and one that I haven’t seen before,” Moghadam told the WSJ. “You have all the indicators of demand, whether it’s top-line GDP or retail sales or e-commerce sales, which are on fire, all pointing in the right direction. But people are not converting that into as much actual leased space.”
The WSJ bundled Prologis’ near-term outlook with other reports that, collectively, suggest that “corporate America’s focus on cost controls is reaching across all logistics operations.” J.B. Hunt Transport Services reported a Y-O-Y decline in quarterly earnings. Truckload carrier Knight-Swift slashed Q1 earnings guidance on an oversupply of trucking capacity.
Moving from highways to rails, CSX’s earnings and revenue declined in Q1 even as intermodal and coal volumes increased. On the global front, the WSJ cited a Bloomberg News report that China Vanke Co. is seeking to sell its 21% stake in GLP Pte., another large operator of logistics real estate.
The WSJ also referenced the latest industrial real estate reports from Savills and Cushman & Wakefield. Those reports found that pricing for logistics properties has flattened out in the past two quarters after a surge in demand and tight capacity sent leasing rates sharply higher between 2020 and 2023.
All that being said, Prologis sees the slowdown as temporary, rather than a long-term correction. “We have picked a three-year window” to present the company’s market expectations, Moghadam told analysts on the company’s April 17 earnings call. “And the first year of that window has moved around.”
Conversely, he said, “our outlook for the back period of second and third year [is] essentially the same and could be even better given how much deferred demand is building up. If our proposals were down, if our tours were down, I would be more concerned. But companies are out looking at this space. And if you think nothing has changed in the last 45 or 90 days with respect to the Fed outlook, you must be reading different newspapers than I am.
“So I would tell you that people are just scared of pulling the trigger until the Fed gives the all-clear sign with the first rate cut,” Moghadam continued. “Yes, we are not instantaneous in our data transmission to us and to you, but I can assure you that you will always hear our views immediately as we form them and as we get them from the marketplace.”