Prologis, the world’s largest industrial real estate owner and developer, is taking bold steps to expand its portfolio amid signs of an impending recovery in the warehouse and logistics sector. Following a period of rising vacancies and sluggish rent growth, the company has increased its planned acquisition budget for 2024, anticipating a rebound in demand over the next year. With the U.S. market appearing to be bottoming out, Prologis is positioning itself to capitalize on emerging opportunities, banking on a shift in market conditions by mid-2025.
Expanding Acquisition Plans
In a show of confidence, Prologis has raised its projected acquisitions spending to between $1.75 billion and $2.25 billion for the year, up from the previously forecasted range of $1 billion to $1.5 billion. The move reflects optimism about the future trajectory of industrial real estate, despite recent challenges. The company’s CFO, Tim Arndt, indicated that teams are actively exploring potential acquisitions to seize favorable market conditions.
The increased allocation comes as Prologis posted a 6% rise in third-quarter revenue compared to the same period last year, reaching $2 billion. This growth was largely fueled by rental revenue gains, even though the company’s average global occupancy dipped to 95.9%, down from more than 97% a year earlier. The slight drop in occupancy reflects broader trends in the industrial sector, where vacancies have been on the rise due to increased supply and slower demand.
Market Conditions and Signs of Stabilization
The U.S. industrial vacancy rate edged up to 6.6% in the third quarter from 6.5% in the previous quarter, marking the smallest increase since late 2022. This slowdown in vacancy growth suggests that the wave of speculative warehouse development seen in recent years may be reaching its peak. As new warehouse construction projects begin to wind down, the market may start to rebalance, potentially driving down vacancies and supporting rent growth in the coming years.
Prologis CEO Hamid Moghadam noted that the "bottoming process is underway" as customers navigate the evolving market landscape. With economic uncertainties still looming, many tenants have been hesitant to commit to new leases, resulting in subdued demand. However, the company sees encouraging signs, such as increased warehouse utilization, which could signal a turnaround as businesses prepare to expand their logistics and distribution operations.
Strategic Portfolio Adjustments
In addition to expanding its acquisition plans, Prologis intends to sell more properties than previously expected. The company now anticipates raising between $1.25 billion and $1.75 billion through asset sales, up from an earlier estimate of $1 billion to $1.4 billion. The strategy aims to optimize Prologis’ portfolio by shedding non-core assets while reinvesting in markets with stronger growth prospects.
Recent transactions include the sale of two warehouses in the Chicago area for a combined $106.5 million, among the largest single-property deals in the region this year. Prologis also acquired over 14 million square feet of properties in 2024, including a $71 million purchase of office and research properties in Fremont, California. These moves reflect a balanced approach to managing its portfolio amid fluctuating market conditions.
Preparing for a Demand Surge by Mid-2025
While industrial real estate fundamentals have softened, Prologis believes that demand for warehouse space will pick up in mid-2025. Several factors support this outlook, including a decline in speculative construction, which could alleviate the pressure on vacancy rates, and an anticipated recovery in cargo volumes at key ports like Los Angeles and Long Beach. The ports, which serve as major entry points for goods entering the U.S., have seen recent signs of rebounding cargo activity, indicating that demand for logistics space could soon follow.
The broader economic landscape is also showing signs of improvement. The Federal Reserve’s recent rate cut, coupled with easing inflation and a gradual return to normalcy in supply chains, may help unlock pent-up demand for industrial space. However, Arndt cautioned that while occupancy and rents have been under pressure, Prologis has managed to sustain net effective rent growth, which should help bridge the company through this softer period.
Long-Term Demand Drivers Remain Strong
Prologis' strategy is underpinned by the belief that long-term demand drivers for logistics space will remain robust. E-commerce, which has transformed global supply chains, continues to drive the need for efficient, strategically located distribution centers. Additionally, businesses are placing a greater emphasis on supply chain resilience and inventory management, further fueling the demand for warehouse space.
Even as market conditions fluctuate, the structural trends that support industrial real estate growth, such as the shift toward online retail, urbanization, and increasing consumer expectations for rapid delivery, remain intact. Prologis is betting on these trends to sustain its growth over the long haul, leveraging its position as the leading industrial property owner to expand its footprint and capture new opportunities.
Strategic Positioning for the Next Cycle
Prologis' proactive approach to acquisitions and asset management indicates a company prepared to navigate the ups and downs of the market cycle. By increasing its acquisition budget, selling non-core assets, and capitalizing on emerging trends, the firm is positioning itself to benefit from a potential upswing in the industrial real estate market.
The combination of a stabilizing vacancy rate, a tapering off of speculative development, and signs of a rebound in trade activity suggest that the worst may be over for the industrial sector. For Prologis, the strategy is clear: position itself to grow as the market recovers, ensuring that it is well-placed to meet future demand and deliver value to investors.
With acquisition teams actively scouting for opportunities and a balanced approach to managing its assets, Prologis is not just navigating the current environment but is preparing to lead in the next phase of industrial market growth.
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