Greetings and welcome to the Prologis First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jill Sawyer, Vice President of Investor Relations. Thank you, Jill. You may begin.

Thanks, Sean. Good morning, everyone. Welcome to our first quarter 2023 earnings conference call. The supplemental document is available on our website at prologis.com under Investor Relations. I'd like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or other SEC filings. Additionally, our fourth-quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures, and in accordance with Reg G, we have provided a reconciliation to those measures. I'd like to welcome Tim Arndt, our CFO, who will cover results, real-time market conditions, and guidance. Hamid Moghadam, our CEO and our entire executive team are also with us today. With that, I hand the call over to Tim.

Thanks, Jill. Good morning, everybody, and welcome to our first-quarter earnings call. We began the year with results and conditions that remain strong. Market rents have continued to grow; demand has been consistent, and we're seeing sharp declines in new construction limiting future supply. While logistics real estate is very healthy, the macroeconomic picture continues to be a concern, and we anticipate it could weigh on customer sentiment over the balance of the year, translating into some demand that could be delayed into 2024. However, this will overlap with a slowdown of new deliveries, creating a sustained dynamic for high occupancy and continued rent growth into next year. Beginning with our results, our core FFO excluding promotes was $1.23 per share and including promotes was $1.22 per share. Our results benefited from higher NOI in the quarter but were offset by approximately $0.02 of higher insurance expense from an unusually active storm season experiencing a year's worth of claims activity in just the first quarter. In terms of our operating results, both ending and average occupancy for the quarter were 98%, holding average occupancy flat for the fourth quarter. Rent change was 69% on a net effective basis and 42% on a cash basis — each a record. The unusually wide spread between the two is reflective of lower free rent and higher escalations in our new leasing. Despite the step-up of in-place rents, our lease mark-to-market expanded to 68% during the quarter as market rent growth remained strong and slightly ahead of expectations. With the remaining lease term of roughly four years, this lease mark-to-market represents over $2.85 per share of incremental earnings as our leases roll to the market, providing visibility to future income and dividend growth. These results drove record same-store growth of 9.9% on a net effective basis and 11.4% on a cash basis. During the quarter, our efforts on the balance sheet were focused on liquidity, raising over $3.6 billion in new financings for Prologis and our ventures at an interest rate of 4.6% and a term of nearly 14 years. This fundraising total does not include $1 billion of additional capacity from a recast of our global line of credit, which closed in April, bringing our total borrowing potential under our lines to $6.5 billion. As mentioned, fundamentals in our markets remain strong, but we expect that a more cautious outlook will weigh on the pace of demand. This is not a new perspective; our forecast 90 days ago prepared for a weakening sentiment and how the top-down view for some occupancy loss over the year. We haven't changed that outlook, but we also haven't upgraded it despite the quarter's outperformance. As an update on proprietary metrics, our proposal activity ticked up in absolute terms and is in line with strong market conditions as a percent of available space. Approximately 99% of the units across our 1.2 billion square feet are either leased or in negotiation. Utilization ticked down to 85%, which is normalizing to a level that our customers view as optimal. E-commerce leasing increased during the quarter to 19% of all new leasing. We avoid drawing conclusions from a single quarter of activity on most metrics, but it’s notable here that e-commerce leasing picked up meaningfully back towards its five-year average. As we've said before, we ultimately look at retention, pre-leasing, and rent achievement as the best real-time metrics of portfolio health, and on that basis, our results are certainly very strong. We expect that the current 3.5% vacancy rate in our US markets will build to the low 4s toward the end of the year before turning back to the mid-3s by late 2024 due to the lack of incoming supply and accounting for moderating demand. We anticipate a similar path in our European markets, and, of course, even a 5% vacancy rate is historically excellent and supportive of strong rental growth. We expect this pattern to play out in our true months of supply metric, which was a healthy 30 months in the US and should decline into the 20s next year. We are launching markets that have large development pipelines such as a few in the Sunbelt in the US, but so far that supply also seems manageable. In Europe, most of our focus is on the UK, where development starts have continued even as demand has moderated, which will lift market vacancies and may pressure rents. Japan is also a market expected to see larger increases in vacancy over the year but similarly expects a slowdown in new supply due to surges in land and construction costs. Taking all of these movements into account, we are holding our market rent growth forecast for the year at 10% in the US and 9% globally. In capital markets, transactions continue to be few and far between, but the pickup in activity suggests we will see a busier second quarter. Appraised values in our funds declined 1% in the US and 2% in Europe during the quarter and 8% and 18% respectively from the peak. It's worth noting that our view of public market prices and NAVs has adjusted much more than is warranted for these levels of write-down. Redemption requests in our open-ended funds have slowed significantly, with the redemption queue nearly unchanged around 5% of net asset value. This is reflective of both a slower pace of new redemptions as well as rescissions of prior requests. Combined with over $150 million of new commitments made, our net queue is essentially unchanged from last year. Last quarter, we described our approach to fulfilling redemption requests, which is based on an overarching objective to be consistent and fair to all investors, requiring a few quarters for valuers to catch up. In that regard, as appraisals seem to be nearing fair value, we plan to redeem units in this quarter given the swift response to value changes in Europe and expect to do the same in USLF next quarter. In turn, we view this as an excellent time to invest more of our capital into the vehicles, which we'll be doing over the coming quarters and some meaningful numbers. Turning to guidance, we are tightening and increasing average occupancy to range between 97.25% and 97.75%, a 25 basis point increase at the midpoint. Our same-store will benefit from this increase driving our net effective guidance to a range of 8.5% to 9.25% and cash same-store of 9% to 9.75%. We are forecasting our lease mark-to-market to end the year close to 70%. Extracting the 2024 component of this suggests rent change should exceed 85% next year, even without continued market rent growth, which is a clear illustration of how our exceptional rent change will not only endure but continue to grow. We expect G&A to range between $380 million and $390 million and strategic capital revenues excluding promotes to range between $515 million and $530 million. We are maintaining our forecast for net promote income of $380 million, and given the size of USLF and the potential for small changes in value to have a meaningful impact, there is potential for upside here and we believe we have the downside covered. We had few development starts in the quarter, a reflection of our discipline, but our pipeline is deep, and we are maintaining our guidance of $2.5 billion to $3 billion for the year. We expect the pace to remain slow in the second quarter, putting the bulk of the activity into the second half. It's noteworthy that following the belief that construction costs may decline in the coming quarters, we now see them as likely to increase mostly in line with inflation. As new fundraising has become visible, we forecast contributions to be concentrated in the second half totaling $2 billion to $3 billion when combined with forecasted dispositions. So in total, we expect GAAP earnings to range between $3.10 per share and $3.25 per share. We are increasing our core FFO including promotes guidance to a range of $5.42 per share to $5.50 per share, and further, we are guiding core FFO excluding promotes to range between $5.02 per share and $5.10 per share, with the midpoint representing 10% growth over 2022. I'd like to close with a few observations that we've made about our standing in the equity markets, which we found interesting and wanted to share. Today, we sit as the 68th largest company in the S&P 500 ahead of names like GE, American Express, Cigna, Citigroup, as well as Ford and GM combined. Also of note is that with our planned $3.3 billion of dividends this year, we ranked 42nd in terms of total cash return to investors. Of these top 42 dividend payers, Prologis has outgrown the group by 500 basis points per year over the last three years. In fact, since our IPO, we have paid over $15 billion in dividends at a 15% CAGR, ranking 13th on growth in the entire S&P 100. While getting bigger has never been our objective, we thought the context would be eye-opening. So in closing, we feel great about the health of our business, even in the face of a slowing economy. Most importantly, nothing we have seen alters the path of its underlying secular drivers for the long-term potential of our platform. In that regard, we're excited to tell you much more about that outlook and our platform later in the year. Last week, we announced our upcoming Investor Day to be held at the New York Stock Exchange this December. We hope to see many of you there in person and tuned into the live webcast, where we will showcase our deep bench of talents and the strong differentiators that define our company. More details on that to come. But with that, I'll hand it back to the operator for your questions.

Thank you. We will now start the question-and-answer session. Our first question comes from Caitlin Burrows with Goldman Sachs. Please go ahead with your question.

Hi. Good morning, everyone. Maybe on development. Tim, you touched on it briefly, but the earnings release mentions how the build-out of your land bank is a driver of growth. This quarter, like you mentioned, starts were only $50 million versus recent quarters over a billion. It sounds like that is expected to ramp up significantly to over a billion again in the second half. So I'm just wondering what metrics or other things you're looking at to drive the starts activity. What makes you confident that increasing starts so significantly later this year is possible and the right thing to do?

Hi, Caitlin. This is Dan. I'll take a stab at that. Maybe Tim can pile on then. But first of all, let me just say, our teams are very much on the offense out there. Every day our teams around the globe are looking at new opportunities. We have over $38 billion of potential TEI embedded in our land bank, and we could flip the switch tomorrow and start $10 billion if we wanted to. We're going to continue to look at these deals on a case-by-case basis, but when you see the overall volatility in the market, you see the 10-year moving 50 basis points, 60 basis points weekly like we have, we're maintaining the discipline, and we're disciplined because we can be. We're ramping up our starts towards the end of the year while we expect to see the overall marketplace ramp down.

And our next question comes from the line of Ki Bin Kim with Truist. Please proceed with your question.

Thank you. Good morning. So net absorption across the US in the first quarter was a little bit lighter than what we've seen in recent memory. So I was just curious what kind of risk do you see to occupancy or rent growth as the sector tries to absorb the new supply coming through?

Hi, Ki Bin. This is Hamid. There's always a risk in this environment. I mean, there are many unknowns, but we've gotten spoiled with 350 million square feet of demand in the last couple of years. Let's just put this in context. In the past, we would have been very happy with these lower levels of absorption, particularly when you consider that starts are way down, and deliveries are going to really slow as we go into 2024. So it's normalizing; that's the best way I can describe it. I wouldn't be surprised if it falls further, given all the things we read about in the papers. The CEOs making big CapEx decisions are basically pushing their teams to see if they can start a quarter or two later. But that's all borrowed demand, if you will, that is future demand that is getting deferred. So we're not overly excited either way. Just to finish the previous question that Dan started, we don't have a forecast for development starts. We only have one because you guys asked us for one. We don't internally have one. We have a plan. We have entitlements on much of that land — about 80% of that land. We can start anytime. We don't just look at our data at the end of the quarter; we see it every day as we lease a million square feet a day. So, we can meter that development into the marketplace as we see fit and make those adjustments. We're ready to go if we need to do more or less either way. At the end of the day, our company's story is about organic growth, and that's the high-value form of growth. It's the one we pay the most attention to, and actually, it's easier to figure out in this environment, given the very large mark-to-market that I've never seen in this business before. In a way, our job is easier regarding predictability of earnings and growth.

And our next question comes from the line of Steve Sakwa with Evercore. Please proceed with your question.

Yeah. Thanks. Good morning. I just wanted to focus a little bit on the acquisitions which is not a very large number in there, Hamid. I'm just wondering what you're seeing from distressed opportunities. Can you tie this into the comments Tim made about the funds? You know, you tend to like to put more money into the funds as you redeem some of the partners. So just trying to tie those two capital uses together.

Sure. I think there is very little distress in the marketplace. Industrial real estate has done really well. I assume other people have significant mark-to-market, although I doubt if it's quite the same level as ours. There is protection in terms of that mark-to-market in other portfolios, and there are no forced sellers because leverage in the industry is pretty low. So we're not looking for distressed opportunities, but we are looking for opportunities that reflect the increasing cost of capital compared to, call it, a year, year and a half ago. You should know we look at every deal that anybody does and reads in the papers. It’s not hard to figure out that if you want to sell something, you call Prologis. Our feeling is people are still stuck on the old values and buyers are expecting a substantial discount for those values. I suspect that most of those numbers will move closer together in the next couple of quarters, and the market will start transacting. The funds have always been a place where we either take capital out or put capital in depending on the cycle of the marketplace. Back in the global financial crisis when AMB was much smaller and the balance sheet was weaker, we stepped in and put a couple hundred million dollars in our funds when we thought the time was right. So we continue to do the same thing. I don't think it's a big deal one way or another, but it's a great place to buy high-quality real estate that we know and like. So that's the way we think about it.

And our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Great. Thanks. Good morning out there. Can you talk about demand related to near-shoring or on-shoring? Which markets are seeing an outsized impact related to the trend and maybe how Prologis is positioned to benefit from it?

Sure. Let me start, and then I'll pitch it over to Chris. The biggest impact is on Northern Mexico. Those markets along the border are literally on fire. There is no vacancy, and we're seeing a lot of near-shoring happening there as a sort of diversification move. We're also seeing some of the China manufacturing bleed out to the rest of Southeast Asia, but we're not really active in those smaller markets, but we do see that. It’s moving west in China and to other areas in Southeast Asia. But Mexico is the big story here. On-shoring part, I mean, honestly, other than what I read, and the chip business, which is real, the rest of it is mostly wishful thinking. So they're very isolated examples, but you look at the numbers, and they are not that significant. Chris, do you want to add to that?

Sure. I think that's really well described. Blaine, I'd say there isn't great data on this, but that which we see is that it is a building trend in Northern Mexico. It takes time for those supply chains to relocate, and those ecosystems need to function properly and resiliently. That is happening and will continue to happen, so I expect it to grow in the coming years as well.

Thank you. And the next question is from the line of Craig Mailman with Citi. Please proceed with your question.

Thank you. Maybe just a clarification and a follow-up question. Tim, I think in your prepared remarks, you said that the mark-to-market could end this year at 70% and be 85% by the end of next year in the absence of rent growth. Could you clarify that if I misheard it? Then just, as you guys are seeing conditions on the ground, clearly, we saw some of the numbers you guys discussed normalize here in the first quarter, but could you just talk about maybe how we should think about the cadence or anything incremental, what tenants are saying so we don't get surprised the next quarter or two with some of the fundamental numbers here coming through as supply does deliver in some of the markets that have had more in the pipeline, like LA, Inland Empire, Dallas, sort of market? Also, you maintained your 10% market rent growth; has that shifted dramatically within markets where some may have weakened significantly while others have grown, or is it pretty consistent across the board? I apologize; I know that was a lot at once.

Nice try unpacking all that in one question.

I guess I will address all three of those. So I'll start, Craig, and I'm glad you asked if there was confusion on the point. You're right that we said we believe we will see a 70% lease mark-to-market of the entire portfolio at the end of this year after we roll leases over the year and we have some continued rent growth build. What I was trying to highlight there was that if you just take out the component of that that is rolling in 2024 to have a sense of how this rent change is going to endure, that slice of the 70% on its own is 85% without any more market rent growth in the next nine months. So that just gives you very clear visibility on how the rent change is going to stay high and how it's going to translate to the same-store growth. So that was the intention there.

Yeah. Let me take the second part, and I'll pitch it to Chris for the third part of the question. Look, you'll be surprised if we're surprised. We really worked hard at not being surprised. The best indicator of what's happening is the ongoing leasing and proposals and all that stuff that we're involved in, and you guys don't see directly other than at the end of the quarter. I would describe market conditions as very good to excellent. They are not exceptional like they were a year and a half or two years ago, but they are very good to excellent. The markets you mentioned — LA and Inland Empire, not worried about those at all. Those markets are in the one percentage to two percentage vacancy rate. When you get to Dallas, particularly South Dallas and some other markets like Atlanta down in the south, those markets through all the cycles have been prone to overdevelopment and softening of demand when a business was down. So we're watching those very carefully, but I wouldn't characterize any of them as watchlist markets now; otherwise, we would have classified them as such. The 10% rental growth is an overall number, but there is a very wide dispersion around that 10%.

Yeah, indeed, there is a wide dispersion. We've been a customer over the years talking about outperformance on the coast and lower growth in lower barrier markets. Historically, that outperformance has averaged 250 basis points to 500 basis points in any given year. This year, that 10% sees more at the lower end of that range, more like 200 basis points, 250 basis points outperformance on the coast versus the lower barrier markets. We've also been seeing resilience in other global markets outside the United States. We talked about Mexico on an earlier call. It's probably one of the hotter parts of the world from a logistics real estate perspective. We're also seeing resiliency in Toronto and Northern Europe, Germany and the Netherlands.

And our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.

Hi, everybody, and good morning. The dislocation between public and private market logistic asset values obviously is weighing on possible M&A. But as Fed policy nears peak rates and currently projects a pause, do you see valuations converging between public and private assets, and secondly, thus a pickup in capital recycling?

Yeah. I definitely do see a convergence over time, and private markets are always slow to adjust on the way up and on the way down because it's all backward-looking appraisals, and people look for comps. But we don't really view the market that way, and we view that disconnect as an opportunity because we have a clear view of what the capital markets tell us in terms of the new cost of capital. We're interested in deploying capital at above that new higher number. Private values are not yet there; that’s why we see some continued erosion on private values in the next quarter, particularly in the United States. On the other hand, I think the public values are over-discounted, and we see those actually picking up as there is more evidence in the private market that the world is not falling off the cliff. You'll get a convergence from both sides, and this is not unusual compared to past cycles. I would say every cycle gets a little better, but there is a significant disconnect. Of course, private values can be whatever you want them to be if you're trying to prove a point or make a statement. Our moat with appraisers is to continue to point them to the cost of capital as opposed to comps that don't exist. We are on the other side of that argument. We're trying to get this market to unlock and transacting and trying to get appraisers to be realistic about their valuations. But I can tell you based on conversations with them, they're getting a lot of pressure the other way from a lot of other people. So they find it somewhat unusual that we want to see a more aligned set of values that will unlock market and liquidity.

And the next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.

Thanks for taking the questions. Just going back to your comments about more unevenness or maybe just some upward pressure on vacancy across the US. Can you sort of give us your latest view on — you said not worried about SoCal, but how would you rank SoCal across your other coastal markets today? If there is some additional or some softening that you may see, does the Duke acquisition change the overall prospects for the PLD US portfolio?

Well, I don't know for sure how to predict the direction of markets, but I can tell you I don't lose any sleep over SoCal at all. I think that market is extremely tight, and some of the shift in demand or softening of demand is to adjacent markets because the space just doesn't exist in Southern California. So if we had more space, I think we would have more absorption in Southern California as well. The Duke acquisition, as we've described many times, is very aligned with our portfolio, so fundamentally doesn't change in any way our view on markets or desired allocation of our capital to those markets. It's very much aligned with the pre-merger Prologis portfolio. The only thing I would tell you about Duke is that generally speaking, based on the leases we've done since we acquired the portfolio, we are kind of on the order of 4% to 5% higher than we thought we would be in terms of the performance of that portfolio.

And the next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Good morning. Tim, you mentioned the fund redemption requests were unchanged at 5% of NAV. Do you still expect the redemptions to go basically down to zero in the back half of the year in light of I think you mentioned weakening sentiment on tenant demand?

Hey, John, we didn't hear any of that. Are you on a cell phone? If you are, can you get closer to it or something because you were cutting in there?

Is that better?

It's better. Yeah.

Okay. Sorry about that. You mentioned the fund redemption requests were unchanged, but I was wondering if you expect those redemptions to go down to zero in the back half of the year as previously stated in light of weakening demand that you're seeing on the tenant side.

I don't know. I can't really predict the portfolio decisions of well over a couple of hundred different investors making those decisions differently. To the extent that there are redemptions, they are generally not because of the performance of the real estate assets that are invested with us. They are either due to denominator issues on their other asset classes, private equity, stock bonds, etc., because everything has gotten hit with increased interest rates. Bonds have not been a safe place to be either. It's because they’re getting overallocated to real estate because of the decline in the value of the other asset classes more than real estate. Among real estate, if you want liquidity, where are you going to go? You're going to go to industrial; you're going to go to apartments, etc. You're not going to go to office buildings because you're not able to get any liquidity out of those. That's what's driving all this. I wouldn't look there for learning anything about what's going on with the industrial market because that's a reaction to a lot of different things that have nothing to do with industrial demand supply.

And the next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.

Hi. Good morning. Have you seen any material changes in tenant demand or industry-wide development starts activity since the banking crisis? Has the availability of construction loans changed significantly in the last few months?

I'm sorry, the last part was the availability of loan.

Construction loan.

Yes, the answer to that one is absolutely, yes. I think there's been a significant pullback in the availability of construction loans. On the rest, I mean, what do you think?

Yes, you were talking about customer demand. We're seeing broad-based customer demand really even looking at our e-commerce; we had 40 unique e-commerce users last quarter alone, with Amazon actually being a small size of that — very, very small. Overall, broad-based demand, no particular pockets of softness.

I would say housing is probably the only aspect that's a little below normal. But again, if you look at the overall numbers, if you sort of forget about 2021 and early '22, and you saw these numbers that we're seeing now, you would feel great about them. It’s just that in the context of those exceptional years, they are a little bit softer, but they're still considered to be really good markets. Chris?

Hey, Vince, I think I heard in the middle of your question; what is the trend in development starts in the wake of SVB? So it's worth noting the numbers which is in the first quarter in the United States development starts were off 40% from their peak across our markets and 45% in Europe. Based on the comment I made earlier around construction debt availability, these numbers are going to continue to see starts curtail in the marketplace.

I’ve never seen such a fast slowdown, such a sudden slowdown in construction volume in our business. I’m not sure it's only related to the Silicon Valley Bank; it was already happening before that, and SVB just made it worse.

And our next question comes from the line of Nicholas Yulico in Scotiabank. Please proceed with your question.

Thanks. I just want to go back to some of the commentary about demand maybe spilling into 2024 as companies take longer time and make financial decisions. How much is that an outlook or just broader corporations taking longer to make financial decisions versus some of the larger categories of leasing like 3PL, general retail, that may be expecting consumer slowdown and perhaps not fully utilizing their space, causing some delay in taking space this year?

The utilization rate peaked all time at 87%. Today, it's at 85%. There are a couple of points margin of error on those numbers anyway. But I would say utilization is really high. If it were in the high 70s, I would tell you there's a lot of shadow space, and people are going to wait to grow into that space or put it on the market for subleasing, but we're not seeing that. I don't think there's a lot of excess slack in the system. Even if you look at the well-publicized Amazon stories that a lot of people waste time on — they basically haven't given anything space back, maybe 7 million or 8 million square feet. Yet it’s taken half the airtime on all these calls for the last year. It just has not been material. We're looking for something that just doesn't exist. Will it exist? I don’t know. I'm not clairvoyant. But so far, it doesn't appear that customers are giving back material amounts of space or anything like that. It's totally within the normal band of how our business works across the cycle.

And the next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Good afternoon. Thanks a lot for taking my question. My question is on your view for the balance of the year and what has changed, if anything, on a qualitative and quantitative basis? You provided some commentary on your cautious outlook on demand, and that wasn't new. At the same time, you took up the same-store NOI guidance, maintained your rent forecasts. Just trying to understand if there's been an evolution in your thinking on how the rest of the year plays out? Thanks.

Hey, Michael, it's Tim. Now, look, I think you heard our comments correctly, and I like that you pointed out their relatively unchanged. The same-store move is largely a function of an occupancy move. We just retained a decent amount of occupancy in the first quarter; we think that's going to extend throughout the year, so that's two-thirds of our increase in our same-store guide. The remainder of it is frankly some outperformance in the first quarter, that's more one-time in nature, dealing with seasonal expenses. We had very little bad debt in the quarter, but we don't forecast that to continue. So that’s some of the one-time items, but that combination is what impacts same-store from here.

And the next question comes from the line of Nick Thillman with Robert W. Baird. Please proceed with your question.

Hey, good morning. Retention remains pretty elevated here, but at 80%. But maybe on the tenants that don't re-sign, what’s their primary reason for not resigning? Is it them outgrowing their current footprint, or is it a case of them just getting priced out of the market? Trying to tie that really to your occupancy in the sub 100,000 square foot area; it's been a little bit lighter than the rest of the leasing categories.

The reasons for non-renewal are either good or bad reasons. The bad reasons involve the company going broke or the company — so the neutral reasons are the company decides to move somewhere else out of one market into another market. The good reasons are that we just don't have a space that fits the growing need of that customer to be accommodated, or the shrinking need of that customer to be accommodated, so they have to go somewhere else. We do track the reasons for non-renewal of every single lease that doesn't renew. One of the things we track closely is that we lose the space to a competitor because of pricing. That statistic is in the 2%, 3%, 4% range, and I think it's too low, because it means we’re not pushing rents hard enough. We're not losing tenants because of rent. We're losing tenants, because we just can't accommodate them or they go broke or they move somewhere else. Those have been the reasons for the last 40 years I've been doing this.

And the next question comes from the line of Camille Bonnel with Bank of America. Please proceed with your question.

Hello. Following up on an earlier comment about the vacancy in the Southern California region being below 2%. I think the growing concern is actually on the availability rate or how much sublease activity has picked up, which is something we really haven't seen in the past. I understand, at least within the Southern California region, the supply seems manageable, given how difficult it is to build in this market. But could you share your thoughts on how this might evolve in upcoming months? Whether or not this is a potential risk you're tracking closely?

Two ways to approach that. First, this is Chris, by the way, Camille. First is the sublease data, and the second is our true months of supply data. Sublease nationally in the United States is on an availability rate basis, 60 basis points in the first quarter. The 10-year average is 60 basis points. The recent low was indeed 40 basis points, so it has moved up 20 basis points. The pre-COVID average or pre-COVID low was 50 basis points, and the peak in the global financial crisis was 1.1%. If you summarize all that, first off, I'd offer that it's not a lot of availability. The second is we're at the low end or at a normal level in sublease. I’d also point you to our views on true months of supply that Tim described in our earnings transcript, which stated that at 30 months today, we have a very good market environment consistent with 10% market rent growth. As supply decelerates and slows, we think that will go back down into the 20s, improving the market landscape.

And the next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Hey, great. Just one quick one, and so on the expected vacancy rate, you talked about 3.5% currently rising throughout the year and then going back down by the end of '24. I was just wondering if you could provide a little bit more color on the supply and the demand assumptions that are going into that? How much is sort of demand normalizing, how much supply normalizing to get back to that 3.5? The corollary to that would be, if you're expecting 10% market rent growth this year, historically, if you find yourself at that vacancy level at the end of '24, what sort of market rent growth experience should we have? On the other quick one, sorry, on the 85% mark-to-market GAAP mark-to-market for '24, can you talk about what that number is for '23? Thanks.

Thanks for the question, Ronald. I want to clarify our market statistics. So let's talk about net absorption in the 30 markets where Prologis operates in the United States. Last year, net absorption was 375 million square feet. We call that at 275 this year, and we expect a similar or perhaps higher numbers as the macro environment clarifies and some of the decisions that get delayed this year land into '24. Starting with 2022, 375 million square feet of supply; we expect 445 million square feet of deliveries this year as the supply pipeline empties, and that will fall sharply, perhaps by half or more into 2024. When you put these numbers together, you'll see the vacancy rising from low 3% last year to 4% or a bit higher later this year and then back into the mid-3% range.

The way to think about it is that demand is normalized from exceptionally high levels and the supply response has been in excess of that normalization of demand because of the banking crisis and macro constraints. The supply response has been much more dramatic than the effects on demand. That's why the market is going to tighten up again, of course, absent a calamity or something like that.

One important point to keep in mind is what is a normal vacancy rate because we have been years away from a normal vacancy rate. The historical range for our business is 5% to 10%, with pricing power occurring in the 6% to 7% market vacancy rate. So, we're talking about 3.5% to 4% market vacancies, half of what is typically seen as a way to see pricing power.

And I would just pile on your third question there on the '24 component of our lease mark-to-market. This year, the same metric is in the low 80s. I think I intimated that last quarter on the call, just as a measure of what we expected our rent change would be this year. Those are — I'm really talking about the same thing in that context, so roughly in the low 80s for '23.

And our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.

Hi, I dropped for a minute, so I apologize if this was asked. Can you talk about like the full-year development start yield expectation compared to the high 7% plus yield that you had in the first quarter?

Yes. Hi, Mike. This is Dan. The yield that you saw in the first quarter was from a couple of build-to-suits, really small volume. I would say just look to last year and expect to do better than last year's yield on our starts this year.

I think the vast majority of the starts are in the 6s. I'd say the cap rates are up 75 basis points. So margins have gone from 30%, 40% to 20%, 30% — something like that. Those are some rough numbers.

And the next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.

Thanks. Good morning, everyone. I want to touch on tenant health for a bit. Obviously, we talked about higher cost of capital and less availability of debt when it comes to real estate, but it's also impacting operating industries across the board. With your expectation of slower economic activity this year, are there any industries where you would be concerned about increasing your exposure at this point in time?

Let's talk about credit loss as a measure of customer stability. Bad debt ratio and all that. It's historically, in our business, has been in the tens of basis points. Even when you had the lapse in demand in the immediate aftermath of COVID, that number got to 60 basis points. What would you guess our number is going to get to in the cycle when it's all over in terms of bad debt?

I’d say 20; I’m jumping in here. I think 20 will be on average.

We don't see it in the numbers, and the number of bankruptcies we are monitoring and working on is really not unusual. In fact, I would say that’s somewhat unusual. I was expecting more of them than we're seeing at this point in the cycle. Honestly, we would like to see more of them because those kinds of tenant departures are actually an upside. If anybody has problems with their business or is looking to downsize, we look at that as an opportunity to do a buyout and extract higher rents in the marketplace. We’re not concerned. Those numbers I talked about are out there; you can look at them and plot the curve. They've been coming down substantially. They were very low levels, but they're still coming down.

I might add one final thought, which is I think the 20 that I’m throwing out is a reflection of some mix shift on credit. In the last five years, with the markets this tight, we've not only been able to push rents — keep the portfolio occupied, but we've been greatly enhancing the credit profile of our rent roll, and we think we've got a really strong customer base.

One final statistic that you guys don't have visibility to but I'm reading off my sheet of stats here. The historical average of credit watch tenants for us, long-term, has been 4.9%. We just watch them. By the way, the average actual default has been 0.15. We worry about a lot more things than we should. That credit watch number today is at 3.35, so it's down substantially. The actual bad debt ratio is also down. We worry about a lot of things, but most of them don't actually happen, and the numbers are quite healthy, not just adjusting for the cycle and the fact that it's a softening cycle, but just even in the best of markets, these statistics would show up as very good.

And the next question comes from the line of Todd Thomas with KeyBanc. Please proceed.

Hi. Thanks. I wanted to follow up on the demand environment and your comments about a more challenging macro in relation to the development starts. How much visibility do you have on starts in the second half of the year as it pertains to the full-year target of $2.5 billion to $3 billion? How quickly can that ramp up? Development yields for what's under construction were higher by 20 basis points versus last quarter on the '23 and '24 under construction pipeline. Is that due to improved economics around rents or moderating construction costs, which I think you mentioned, or really a combination of the two? Do you expect to see further improvements in development yields as you look out in the future?

Most of our land is entitled, and entitlement is a pretty broad definition. Fully entitled means that you pulled the building permit on this specific building you can start, but you might have entitlements and you haven't pulled the specific building permit because you don't know exactly how big a building you're going to build or the configuration. But 80% of our land is entitled in terms of discretionary entitlements, and about 20% to 30% of our land is good to go with building permits pulled; that is not a limiter on our ability to start development. We can start whatever development we want to as we monitor the marketplace. The reason for development yields going up is that rent growth has been higher than we forecast. The costs are essentially the same because we’ve locked in some of those construction values on the buildings that are starting today. The comment about construction cost has nothing to do with what you're seeing on the starts today. It will affect yields on starts down the road. Our view has changed: we thought there would be softening of construction costs to the tune of 5% to 10%, but because of IRA and all this new fiscal stimulus going into the construction industry, it uses the same labor, same materials — contractors still have good pricing power. What we thought was going to be a 5% to 10% decline is now likely to be inflationary increase, so the swing is pretty material. Having said all of that, the rental growth more than makes up for it. I think our yields are trending up.

And the next question comes from the line of Anthony Powell with Barclays. Please proceed.

Hi. Good morning. Quick one for me, I guess, any change in the tenor of conversations with your lending partners or underwriters after the SIVB collapse? Or are you seeing just increased confidence from your partners that you seek to do financing in the future?

They're asking us for a lot of money. No, it's not really. I mean, our balance sheet is bulletproof. We have a better balance sheet than most of our banks. We're not really a bank borrower per se; we tap into the capital markets all the time.

And the next question comes from the line of Michael Carroll with RBC. Please proceed with your question.

Yeah, thanks. I just wanted to follow up on your potential willingness to invest into the property funds. Can you quantify how much you would like? Or are you willing to invest in those funds? Are there any particular ones that you would want to invest in, like USLF or PELF, or is that still a TBD right now?

We're going to invest in PELF sooner than USLF because we think the value adjustments in Europe have been quicker than in the U.S. But I suspect we're only a quarter or so away from even the U.S. adjusting to a normalized value — at least we hope. Look, it's a $140 billion balance sheet. Even if we just wanted to allocate 1% of it, I'm not saying we're going to allocate 1%. I'm just sizing the issue for you; that could be $1.5 billion. We're probably not going to invest $1.5 billion, but it has to be like a small portion of our overall balance sheet. We love that stuff because we know it; we like it. It's exactly the kind of property we want to have. Redemptions give us a really good opportunity to do that without affecting the strategy of the fund.

And the next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed.

Great. Thank you. I thought your commentary on credit was pretty interesting in terms of how low it is. Given your wide view of what's going on in the world, can you just talk through maybe across your regions, some of the data points you're seeing that either give you some confidence in where the economy is heading or give you some concern about where the economy is heading and how that factors into where you want to put capital to work?

I'll just take two things. This is more a global comment than a U.S. comment. Japan is having more supply than it normally has, but demand is still pretty strong. I'm a little worried about vacancy rates in Japan going up into the mid-teens. That's one place we're seeing it. The U.K. has been surprisingly good on the industrial side. If you look at the headlines for the U.K., you would expect more trouble than what we're seeing in the industrial market. In the U.S., it's — I can't think of a trend that is worth talking about; the markets are generally pretty good. Can you guys think of anything?

Hey, Jamie, it's Chris Caton. There's been a lot of economic news over the last few weeks, and I think there are probably three takeaways. First is consumers are stable notwithstanding all the noise in that; it seems to be treading towards perhaps GDP growth of 2%, if not a bit higher. Second, quite clearly, e-commerce is re-accelerating with online shopping now back on trend, taking 100 basis points of share from in-store. The third is indeed inventories are rising, but they have not yet risen to pre-COVID levels, let alone a higher level for resilience.

With Jamie's question, that’s the last one in the queue. I wanted to thank all of you for participating in our call. We're excited over here because it’s our 40th anniversary that we'll be celebrating in June. There are going to be lots of opportunities between the investor meeting later in the year and also GROUNDBREAKERS, where we will be speaking to you. So I look forward to seeing all of you, and take care.

And that concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.