After a year of slowing in the industrial market, Prologis is starting to feel the pinch, forecasting lower occupancy at its properties and a dip in core funds from operations during its Q4 earnings call on Wednesday.
The industrial giant indicated that headwinds, such as softening in large markets like Southern California and disruptions in key shipping lanes and ports, impacted the industrial sector in the latter half of 2023. The effects of those challenges won't be fully realized until mid-2024, executives said.
A Prologis warehouse in Steinwerder, Germany
The company's portfolio ended the year at 97.6% occupied, according to remarks by Chief Financial Officer Tim Arndt. But Prologis also expects occupancy to "step down" in the first quarter, then "rebuild over the course of the year," Arndt said.
Similarly, the company expects its core FFO for 2024 to range between $5.42 and $5.56 per share, down slightly from $5.61 in 2023.
The industrial market as a whole spent 2023 slowing from a breakneck pace maintained for roughly three years following the beginning of the pandemic.
High interest rates and construction delivery totals, plus consumers shying away from shopping, precipitated slowing demand in the sector.
Net absorption rates retreated significantly from last year, coming in at 41M SF, down from 500M SF in Q4 2022, according to Cushman & Wakefield.
For the first time in three years, the vacancy rate rose above 5%, hitting 5.2%. Supply remains tight nationwide but varies slightly by market.
While 75% of the U.S. brought in positive absorption for the year, coastal markets such as SoCal and the East Coast recorded heavy occupancy losses in the second half of the year, C&W reported. Net absorption for the West was over 1M SF at the end of last year, well below Q4 2022's 20M SF.
In a sign of the times, net absorption turned negative in the Inland Empire for the first time in 20 years. But Prologis executives said industrial demand in these markets will normalize later in the year.
Labor disputes at the Ports of Los Angeles and Long Beach were a pain point in California last year, causing a slowdown in cargo as shippers rerouted to other ports. A deal reached last summer should help alleviate that problem.
And while disruptions to key shipping routes in the Red Sea and the Suez Canal pose a threat to the industry, Arndt said those issues have boosted traffic to West Coast ports.
Prologis found in November that West Coast port activity was up 24% year-over-year. Inbound shipments experienced growth as well, and they will soon be reflected in leasing decisions, Managing Director of Global Strategy and Analytics Chris Caton said during the call.
"We are really just now seeing the diversions, as it relates to disruptions in both Panama and the Red Sea and Suez," Caton said, adding that the effects on the East Coast are still being monitored.
In general, the industrial market's slowdown isn't over.
"We think you'll see the vacancy rate rise by another 50 to 75 basis points here in the first half of the year, peaking at 6%, maybe 6.1%, and then making a meaningful move through the subsequent rest of the year and into 2025 and 2026 based on the trend and starts," Caton said.
Still, Prologis performed well to end 2023. The REIT's net earnings per diluted share came out to 68 cents in Q4, down from 80 cents in Q3 but up from 63 cents during the fourth quarter of 2022.
Net effective rent change for the REIT came in at 74.1% year-over-year. While not the remarkable 78.5% or 80% from the second and third quarters, respectively, the figure represents a considerable increase from Q4 2022's 50%.
Investors reacted to the forecast with some caution. Prologis stock ended the day down 2.4% at $126 per share.
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January 18, 2024 at 05:03AM
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Prologis Predicts Lower Occupancy, Slower Cash Flow On Softening Industrial Market - Bisnow
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