Greetings and welcome to the Prologis First Quarter 2024 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. And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natasha Law, Director of Investor Relations. Thank you, Natasha. You may begin.

Thanks, John. Good morning, everyone. Welcome to our first quarter 2024 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 first quarter earnings press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP. 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 will hand the call over to Tim.

Good morning and thank you for joining our call. We've had a good start to the year in terms of our operating and financial results in the first quarter. We delivered strong rent change, drove occupancy slightly ahead of our forecast, raised nearly $5 billion in capital, including $750 million in strategic capital, and made important headway in our Energy business. That said, as we evaluate the market, persistent inflation and high interest rates have kept more customers focused on controlling costs. The resulting delay in decision making, easily observed through the first quarter's below-average net absorption, will translate to lower leasing volume within the year. Accordingly, we've opted to adjust our guidance early, getting ahead of what looks like a period of occupancy below our forecast in the near term and its effect on same-store in a number of our higher rent markets. This is punctuated, of course, by a more pronounced period of correction still underway in Southern California. New starts, however, continue to be surprisingly disciplined, adding to the expectation for limited new supply in the back half of '24, but also extending deeper into '25. When considered alongside muted demand, we arrive at a view that the operating environment has only changed modestly in aggregate, and that demand is simply pushing out by a few quarters. The outcome of this may simply mean moving towards a long-term occupancy expectation more swiftly this year, which sets up for a better next year. Turning to our results for the quarter. Core FFO, excluding promotes, was $1.31 per share, and including net promote expense was $1.28 per share, essentially in line with our forecast. Occupancy in the portfolio ended the quarter at 97%. For context, the US market declined 310 basis points since its peak in the summer of '22, while our portfolio's occupancy has only declined 80 basis points, resulting in vacancy today for Prologis that is less than half of that in our markets and reflective of our portfolio quality. Net effective rent change was 68% based on commencements and 70% based on new signings. Following this in-place increase and changes in market rents, our net effective lease mark-to-market stands at 50%, representing over $2.2 billion of rent to harvest without any additional market rent growth from here. Rent growth captured just for the single quarter was approximately $110 million on an annualized basis and at our share. Our same-store growth on a cash basis was 5.7% and on a net effective basis was 4.1%. The same-store from rent change alone was strong at approximately 9%, but is impacted by a 130 basis point change in year-over-year vacancy, as well as 150 basis points from fair value lease adjustments with the Duke portfolio's inclusion in our same-store pool. Additionally, there were approximately 175 basis points of items specific to the quarter, including one-time reconciling items from 2023, as well as unfavorable comps from low expenses last year. We started over $270 million of new developments in the quarter, bringing our portfolio to approximately $7.5 billion at our share, with estimated value creation of over $1.7 billion, a number we feel increasingly confident in with value stabilizing. In our Energy business, we've made meaningful progress on this year's deployment, including the signing of 405 megawatts of long-term storage-related contracts with investment-grade utilities. We also delivered the largest EV fleet charging project in the United States, less than 15 miles from both the ports of LA and Long Beach. Finally, we raised $4.1 billion of debt across our balance sheet and funds at a weighted average rate of 4.7% and a term of 10 years. Our debt portfolio has an overall in-place rate of just 3.1%, with more than nine years of average remaining life and liquidity at the end of the quarter of over $5.8 billion. Turning to market conditions. Most broad economic data from unemployment to retail sales to the health of the consumer remain very strong. And while our tour proposal and other proprietary metrics are similarly positive, overall leasing activity and net absorption are running below expectations. Net absorption in the US, for example, was very low this quarter at just 27 million square feet. So while the macro landscape and supply chains continue to generate a need for space, we think it's prudent to expect continued headwinds on overall absorption over the next few quarters. The interest rate environment and its associated volatility have weighed on customer decision making, especially as the 10-year has increased 70 basis points from its level just 90 days ago and expectations for Fed rate cuts have moved from potentially six to now possibly zero. In parallel, sublease and space utilization rates highlight that some customers have available capacity, driven in part by the high rate of absorption through the pandemic. This dynamic of available space intersecting with the desire for cost containment is what leads to lower absorption and is playing out at different rates across submarkets and customers. For example, while slow leasing has persisted so far this year for less capitalized customers and 3PLs, we see a handful of large e-commerce and retail customers further along in this process, such as Amazon, who voiced caution two years ago, but is now active in several global markets and has openly discussed plans to commit to significant amounts of new space. The overall leasing slowdown is most felt in only a handful of markets, Southern California and the Inland Empire being the most acute. In fact, rents in most of our US markets are generally flat, several are up, and it is mainly elongated downtime affecting near-term occupancy and NOI. While Southern California leasing has been challenging, it has not slowed the tremendous uplift we realize every single quarter from rent change on rollover, which was 120% for the market in the first quarter, with the Inland Empire at 156%, nearly the highest in our portfolio. In Europe, rents grew overall during the quarter, which we believe will remain the case over the balance of the year. And of course, LATAM continues to impress with very high occupancy and market rent growth that has led the globe in recent quarters. Overall, global market rents declined slightly over 1% in the quarter, driven mostly by Southern California, and would have been slightly positive if excluded. I'd like to spend a moment on Baltimore, where we own over 18 million square feet and has been a dynamic market of ours for decades. Our employees, customers and properties are all safe following the bridge collapse last month and our customers expect to be able to withstand the disruption with little impact to their businesses. Shifting to capital markets. Valuations increased in all of our geographies, except for China, which saw a very small decline. Over the last 1.5 years, global values have decreased despite increases in cash flow due to cap rate expansion. As cap rates have stabilized, cash flow growth now has the ability to translate to value growth. Even though modest, the value uplift in the US and Europe are important as strategic capital investors have been looking for values to not only bottom, but actually turn upwards before committing new capital. With Europe a bit ahead of the US in this regard, it is indeed where we've seen stronger fundraising interest in recent quarters. We also had a successful equity raise in FIBRA Prologis, raising over $500 million for deployment into both assets to be contributed from our balance sheet, as well as pursuits of third-party acquisitions. Transaction volumes and activity have ticked up in recent weeks and pricing has certainly improved. As always, we are actively looking at acquisition opportunities across all of our markets, but our focus remains on the development of our land bank, which provides an opportunity for over $38 billion of build out with a return on incremental capital of approximately 8.5%. In terms of guidance, in light of our views on demand and leasing pace in the coming quarters, we are reducing our average occupancy guidance to a range between 95.75% and 96.75%, a 75-basis point adjustment from the midpoint. It's important to understand that approximately two-thirds of this change stems from our higher rent markets, meaning they create a disproportionate impact on same-store in 2024. Same-store growth on a net effective basis will range between 5.5% and 6.5%, a reduction of 150 basis points, which accounts for the average occupancy decline, slightly lower rent change for the year as well as 30 basis points of annualized impact from the one-time items in the first quarter mentioned earlier. Our revised range on a cash basis is now 6.25% to 7.25%. We are maintaining our guidance for strategic capital revenue, excluding promotes, to a range of $530 million to $550 million and reducing our G&A guidance to a range of $415 million to $430 million. We are adjusting development start guidance for the year to a revised range of $2.5 billion to $3 billion at our share, reflecting our discipline in speculative starts and the timing impact this has in the calendar year. As we've always said, we don't consider our guidance to be a target internally and each deal ultimately needs to be rational and accretive on its own. In the end, we are forecasting GAAP earnings to range between $3.15 per share and $3.35 per share. Core FFO, including net promote expense, will range between $5.37 per share and $5.47 per share, while core FFO, excluding promotes, will range from $5.45 per share to $5.55 per share. Our updated guidance calls for core earnings growth of nearly 8% at the midpoint. As we close out, I'd like to underscore the message of the call, which is that while we have only a modest change of view in the intermediate term, our confidence in the long term is intact. And putting timing aside, we are encouraged by the outlook for supply in the back half of this year and '25, have tremendous lease mark-to-market to harvest in the interim, and are pleased to see valuations, fundraising and transaction activity all picking up. With that, I'll turn the call over to the operator for your questions.

Thank you. We will now be conducting a question-and-answer session. And the first question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Hi. Good morning, everyone. It seems like occupancy and maybe pricing are coming in a little lower than you had previously expected. So I was wondering, could you go through how much or what pieces might be more macro-driven and how much is certain markets weighing on the outlook? Tim, you did mention how some of the high rent markets are having an outsize impact. So wondering if you could just go through what might be more macro versus market-specific. Thanks.

Hey, Caitlin. It's Chris Caton. I'll start by saying I think it's a combination of factors. For sure, as Tim described, Southern California and a handful of other high rent markets, the leasing velocity has been subdued and rent growth has been a little bit below expectations. So there is that softness. But we also want to point to a couple of quarters of deferred decision making leading aggregate customer demand across the United States to be a little bit below what we previously expected. The other thing I might add, Caitlin, would be just nominally in the sense of dollars and the impact on same store. We do see about half of our adjustments as coming from SoCal.

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

Yeah. Thanks. Good morning out there. I guess, for Tim or Hamid, can you maybe just help kind of flush out sort of maybe the timing of when some of these things became a little bit more evident? I guess I'm thinking back to some of the conferences and the like in March, and my sense was the tone and concern about the business maybe wasn't as acute as it is right now. And I know you have confidence in the long term, but it sort of feels like there's a sea change in your outlook in maybe the last 30, maybe 45 days. So I guess, what is prompting that other than maybe saying hard data? But maybe just help flush out kind of the timing of this. And are there other factors at work here?

Steve, let me take a stab at that. If you are sensing any acute change in our outlook, you're not reading our call correctly. We have picked a three-year window, I think, in our Analyst Day to give you our expectations. And the first year of that window has moved around. So 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. So, 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.

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

Good morning. Thanks a lot for taking my question. It sounds like demand has been pushed out or the rebound in demand has been pushed out of a few quarters. So I was wondering what evidence do you have that would support that? And then how do we compare that to some of the proprietary metrics that you put together, which seem to indicate that things are actually pretty positive or accelerating? Thank you.

Hi, Michael. Chris Caton. Thanks for the question. As we've kind of covered in the script, and I think we are pointing out here, whether it's consumer resilience as revealed by economic indicators like the labor metrics or retail sales, whether you look at our own customers and supply chain momentum as revealed by our RBI volumes through the ports and our proposal volumes. The broader economy is generating a normal amount of demand. A couple of things to consider though. One is as you can see in utilization data and in sublease space, some customers have spare capacity that they are utilizing to accommodate some of this growth. We also have these leading indicators. We needed to simply see customers convert space requirements into signed leases. So just the simple conversion of investigation into signed leasing. And indeed, we already are seeing the front edge of some leading global e-commerce companies and other retailers begin to make space. It's just not broadly yet occurring across the whole marketplace.

The only thing I would add is that the effect varies across different markets. This is a theory based on 40 years of experience rather than a fact. Southern California has over 30% market share for third-party logistics providers, while the rest of the US market holds just under 20%. Third-party logistics serve two main functions: they offer outsourcing for logistics activities and create flexible surge space. Consequently, markets more exposed to third-party logistics are likely to experience the effects of sentiment shifts more quickly, both during declines and recoveries. Additionally, certain customers have immediate access to sales data and activity. I would say that the larger e-commerce companies have the best insight since they monitor trends continuously. These companies were proactive in reducing their demand, and I assure you they are very active. Rather than just relying on our statements, it’s better to refer to their own annual reports and interviews, where you will observe that they are quite confident in their business and somewhat ahead of the curve. However, all of this depends on various external factors, such as stability in the Middle East and the Federal Reserve's actions. As far as we can see, the signs are very encouraging, and this situation does not resemble any prior downturns I have experienced. Thus, referring to it as huge seems like an overreaction to me.

And the next question comes from the line of Craig Mailman with Citi. Please proceed with your question.

Hey everyone. If I could approach this from a different angle, Hamid, I know you aren't fond of the term acute, but perhaps it feels more proactive. If you're observing many of the metrics aligning with your budget and retention is consistent with what you've experienced over the past few quarters, it appears to indicate a forecast of potentially slower takedowns. Is there anything else regarding the expiration aspect that may involve notable larger move-outs which could affect the numbers? I'm trying to understand how much of this reflects what you're seeing in real-time versus preparing a buffer to avoid needing adjustments later in the year. Additionally, regarding development, how much of the occupancy decline can be attributed to developments being leased at lower rates than expected? A couple of months ago, we observed that your development margins were in the single digits this quarter, which I can't recall seeing before. Is this tied to the occupancy issue, or are there other factors at play?

Okay. Let me start that, and then I'll turn it over to Chris and then to Dan to talk about development margins specifically. We like to be early and thoughtful in outlooks that we share with you, and we've always prided ourselves in doing that. And in some cases in the past, as you know, you've been following us for a long time, we've taken pretty bold statements on the way up and on the way down and actually been proven pretty right about it. So for us to be late on this stuff is not something that we look forward to. So we always try to be on the lookout for trends that may be interesting to our investors and to you, who are looking at our company on a real-time basis. So I'm not smart enough to assign percentages of how much of this is preemptive and how much of it is. But I can tell you there's nothing going on in the portfolio. There's not some news embedded deep in our customer behavior or some market that we're not sharing with you. This is just looking at the tone of the marketplace and sharing with you what we see playing out in the next two to three quarters, nothing beyond that. And the outlook for the long term is very much the same as it was before. Dan, do you want to talk about the margins?

Yeah. The margins this quarter, it's actually an isolated event here. We had about 15, 17 projects stabilized. We had one project that just had a confluence of events take place, whether it be weather, some infrastructure, municipal requirements. And it just came in at a pretty negative margin, weighing down the overall average margin for the quarter. If you pull that out, our margin for the quarter would actually be more reasonable 15%, 16%.

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

Hi. Hamid, you mentioned how the company likes to be early on calling things, but I noticed that you only updated your outlook on operations and guidance. So can you help us understand how conservative guidance levels are? Or could we see more downward revisions, for example, if you start to pull back on the capital deployment front? Thank you.

On capital deployment, it's important to note that we provide guidance only because you request it. We don't have a specific budget or plan for capital deployment; instead, we evaluate each investment opportunity individually. This approach applies to all periods, not just the current one, so it's wise to interpret our guidance with some caution. We're willing to adjust our capital deployment significantly based on market conditions. Regarding our level of conservatism, we aim to be as accurate as possible while incorporating a slight degree of conservatism. Typically, we feel confident in what we state, but we can’t guarantee 100% accuracy, as there may be downside risks. We strive to present an honest assessment without disappointing expectations too frequently, but we acknowledge that we don’t always hit the mark.

And Camille, it's Tim. I might build on your first question as well, which is that at current cap rates and the cost of debt, there’s very little you could actually do in deployment this year to impact earnings in the first or second year. I find that changes in deployment tend to have a delayed effect on earnings. So you should probably keep that in mind as you consider our guidance.

And the next question comes from the line of Nikita Bely with JPMorgan. Please proceed with your question.

Good morning, guys. The $150 million of other real estate investments. Curious, what exactly was that on the sales? And maybe also, if you could talk about the reduction in development starts. So any color on that, geographic focus or spec or something else?

The $150 million consists of some non-core assets. We could not hear the second part of your question. Could you repeat that?

Reduction in development starts for this year. Any additional information you could provide on what drove that, whether it was geographic based or asset-specific or built-to-suit pullback?

Thanks for the question. This is Dan. I have some thoughts regarding the reduction in development starts. We adjusted our guidance for development in line with changes in occupancy and our operating pool. Given the shift in demand, we anticipate starting fewer buildings, which we've reduced by about $0.5 billion, roughly split between build-to-suit and speculative projects. We are raising our standards for speculative development. As Hamid mentioned earlier, we provided this guidance because you requested it. It's important to note that we don't need to initiate these projects right now since we own the land, which holds $38 billion worth of potential. We have the necessary entitlements and ready teams for development. We could easily begin $10 billion to $12 billion of that tomorrow. We're aiming to remain consistent with our overall demand outlook, and there isn't a specific location contributing to the reduction.

Yeah. And the only thing I would add to that is that even though we made the adjustment on both the built-to-suit and the spec part, the bias is greater on the spec part. We actually feel pretty good about our built-to-suit volume going forward. So it's really the spec which is discretionary, and we can, as Dan said, write that at any time.

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

Great. Thanks. So you've called out Southern California as being soft again. Can you just talk about any specific segments of the market that are particularly weak whether that's by submarket or size? And what makes you confident in the recovery even as it seems it might be delayed relative to your original expectations? And secondly, just curious if you can expand on which other high-rent markets might be weighing on the outlook. Thanks.

Hey, Blaine, it's Chris Caton. Thanks for the question. So Southern California is a market that continues to soften, vacancy rates are continuing to rise, yes, after different submarkets. The softest area of Southern California is midsized and smaller units in the Inland Empire. The strongest area is probably Orange County. And Los Angeles, while subdued, has a 4% market vacancy rate, so as demand comes into that marketplace, bear in mind, demand has been negative over the last year, a very rare occurrence, as demand comes back in that marketplace, you're likely to see the vacancy rate make a difference in Los Angeles as well. In terms of other markets where we're watchful, the soft markets in the US include New Jersey, Seattle and Savannah.

Yes. Regarding Southern California, it's important to consider the impact of the resolved port labor issue, which took longer than expected. This situation affects many users in the South Bay near the ports, and the market could become tight quickly if port volume increases. The small to medium spaces in the Inland Empire are somewhat mismatched; they mostly consist of older buildings that were built when the market wasn't focused on large-scale facilities of 500,000 to a million square feet. Those needing ample space must look to the Inland Empire, while those seeking 100,000 to 200,000 square feet have more options, resulting in the softness observed in that area.

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

Hi. Good morning. Could you discuss the markets of relative strength in your portfolio in terms of demand and market rents? And also, are you seeing any different levels of demand by building size, more broadly? We noticed that occupancy fell the most on a sequential basis, for buildings less than 100,000 square feet, but actually grew for buildings 250,000 to 500,000. So just curious if those trends on occupancy are kind of a fair representation of the demand profile today.

Hi, Vince. It's Chris Caton here. First, when discussing market strength, there is quite a range to consider. The strongest markets globally include Mexico, Texas, certain regions in the Southeast US, and Pennsylvania, as well as international markets like the Netherlands, Germany, Brazil, and Toronto, which also show strength. We have stable markets like Chicago, Southern Florida, and Baltimore, and Washington, D.C. However, Southern California stands out as the primary weak market. This covers the range of market performance. Regarding size categories, there is noticeable activity in the marketplace, particularly among self-performing e-commerce and larger retailers, especially in terms of tours and some leases that are being finalized. This reflects the main developments we’ve observed over the last 90 days.

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

Thanks and good morning. I would like to ask about any changes in capital expenditures or concessions that may not be immediately obvious in the reported face rents, considering the softer environment. Additionally, regarding strategic capital, what are your thoughts on the current cap rates for quality assets in desirable markets? Does this influence your perspective on the level of contributions you plan to make moving forward? Thank you.

Hey, Ki Bin, it's Tim. I'll take the front half of your question just on free rent. We have seen an increase in free rent. I think what's important to remember there is we've had exceedingly low amounts of free rent granted in the last few years. And I would say the current rates that we've seen in this last quarter, and what we're bracing forward this year, would still not really be on par with long-term averages. I would say that concession is not fully back to normal. But it is turning up logically in this environment.

Yes. Regarding the pricing of deals, about nine months to a year ago, there was minimal activity, and we were pricing deals in strong US markets with low nine IRRs, although not much was occurring at those return expectations. Currently, I would say those IRRs are down by 100 basis points, and we are seeing significantly more transactions happening in the low 8s. In Europe, those figures would be in the mid-7 IRRs. I'm providing these figures in IRR rather than cap rate because the mark-to-market can differ greatly across locations. For instance, the same IRR would correspond to a much lower cap rate in Southern California compared to a market with leases at market rents.

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

Thank you and good morning, everybody. Hamid, I appreciate your comments on rates and the Fed's actions or inaction serving as the key governor of customer activity and leasing right now. But how are you seeing supply chain disruption, like in Baltimore, and geopolitical risks impacting customer behavior, if at all?

I don't believe that the situation in Baltimore has significantly affected our business. It has certainly been impactful for those directly involved in the incident and has influenced traffic patterns, but not for our customers. They have enough options to manage these types of disruptions. However, geopolitical concerns are causing more anxiety than last quarter. Additionally, interest rates have risen by about 70 to 80 basis points since our last meeting. This increase hasn't been consistent throughout the quarter, with notable changes in sentiment occurring in the last month. Both of these factors seem to be influencing decision-making, especially when choices are discretionary. In situations where options are limited, like in Southern California, people tend to lease more space than necessary to avoid being short. Conversely, when there are more options available, they tend to be more patient, hoping for better deals by waiting. This slight variation, even if it's just 5% in either direction, can lead to a 10% fluctuation, which reflects the kinds of numbers we're dealing with. In the short term, this is what occurs. In the long term, demand must align with supply, and this can't continue indefinitely. While I can't pinpoint exactly when that balance will occur, we believe it will happen within quarters rather than years.

And the next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question.

Great. Thank you. Maybe one more question on the port of Baltimore. I know it's not a big container traffic port, but have you seen any knock-on demand show up in other East Coast markets given the dislocation that's created? And then also, maybe a part two, but I know SoCal has been weak over the past year, you've talked about that a lot, and the resets already happened. I guess I'm curious if you could help us contextualize, from where we stand today, if you compare the strength of like SoCal versus the East Coast markets like New Jersey and Pennsylvania, like from where we stand today, which one looks the best over the next year?

Hey, Jon, it's Chris Caton. Regarding Baltimore, you're correct that the container traffic there is usually around 50,000 TEUs a month. The anticipated duration of necessary diversions should not exceed a couple of months. In contrast, New York and New Jersey handle about 300,000 to 350,000 TEUs. Many of these diversions have shifted to Norfolk, where you’ve observed some leasing activity. However, it’s not a market in which we operate, so there are no secondary effects. Concerning Southern California in relation to the East Coast, the SoCal market remains dynamic, and we believe it will likely underperform. This perspective spans a six to twelve-month timeframe. New Jersey, on the other hand, has experienced a different set of conditions regarding rent growth over the past few years, influenced by demand and sublease trends in that area. Now might not be the right time to be optimistic about New Jersey; we should wait for the resolution of the port agreement. However, in the long run, both regions are expected to perform strongly after navigating this period of instability and uncertainty.

Yes. The way I would answer that question is that if you limit it to the next 12 months, I would go PA, New Jersey, SoCal. And if you ask me for the longer term, I would go SoCal, New Jersey, PA. And I would put all three of them in the upper 1/3 of markets across cycles. Maybe the upper 20% of markets across cycles.

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

Hey, good morning. Just hoping we could put some numbers on the soft demand that you seem to be messaging. So previously you were forecasting 1.5% of stock of net absorption this year. I'm just wondering what that number has shifted to given what's happened over the past 30 to 45 days. And if you can tie in where you see sort of availability rates and next 12-month market rent growth. Thanks.

Yes. We have internally revised our demand forecast for this year from 250 million feet in the US to 175 million, while maintaining the same demand level going forward. We are considering whether to incorporate the 75 million we missed this year into the next two years, which is currently a topic of discussion for us. However, we cannot predict the future, so I am sharing the range of our thoughts on this matter. Now, let's address the second part of your question, Chris.

Yes. As it relates to market vacancies, we look at vacancies, not availabilities. Availability is a range between 150 and 250 basis points above these figures, depending on the cycle. We have vacancies peaking in the mid-6s later this year. So that's up about 20, 30 basis points versus what we discussed last year. I think what's important to understand in the cycle is the recovery potential in 2025 related to each of the constituent pieces. Hamid walked you through the demand picture. But what's important to recognize is the supply picture. That was a big factor over the last year, 18 months. And the meaningful falloff in supply is marked. It's off 80% from peak. It's off about 1/3 from pre-COVID levels. So we're talking about 35 million square feet of starts in the first quarter. That annualizes to about 160 million, 170 million square feet. So you're going to actually see this snap later this year and into next year, and those vacancy rates moving noticeably down, likely to move noticeably down from mid-6s towards 5% over the course of next year.

One other thing I would like to mention is that vacancy rates do not directly impact pricing power. When vacancy rates are below 5%, there is significant pricing power. Whether the rate is 2% or 3% doesn’t change that. There may be two customers needing space, but four others are also interested because they want to avoid future shortages. This situation tends to reinforce itself. At around a 6% vacancy rate, the market is in equilibrium. If rates go significantly above that, the market tends to soften. This is a broad analysis that should be applied to specific markets. We do not believe we will experience the vacancy levels seen in previous cycles, even during favorable periods. The worst we anticipate now is comparable to the best we've experienced in the past. This is an important distinction. We have been accustomed to a market where vacancies have been the lowest ever for three years. I have mentioned before that if the normal range is between 1 and 10, we have been operating around 12 or 13, and more recently at around 8 or 9. Today, I would estimate we are at approximately 6.5 to 7.

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

Thank you. I just wanted to get some additional color on the weaker net absorption due to tenants becoming more cost-conscious. I'm wondering if this tests the thesis that industrial rent is somewhat inelastic given it's a small portion of the overall transport and logistics costs? And also, where are tenants going in your view? Are they simply not expanding, or are they downsizing or going to less expensive markets or submarkets?

We’ve tried to test the theory of whether the loss in Southern California has led to gains in nearby markets like Vegas and Phoenix. While absorption has indeed increased in those areas, it doesn’t completely explain the decline in Southern California. Some of that demand has simply been postponed. The key question is when this postponed demand will turn into actual demand. That’s the big question. Will it be in one quarter, two quarters, or three? We’re unsure, but we believe it will take a few quarters. However, it will happen, especially with the port coming back, as it represents over 30% of imports in the US and has been significantly down. We expect this will have a major impact. It’s possible we may have missed the boat for this Christmas season, but we’re confident that next year the market will recover unless there’s a recession or a significant geopolitical issue.

And John, I might just add, I guess, the way you're putting the equation together, it is what we see that, yes, the rate environment causes this consternation. But as Chris has been highlighting in a number of his answers, as we look at where utilization sits and some of the capacity that's available, it's just the first place that customers can look in terms of finding a way to continue to operate in the short term. That would ostensibly end, and we'll watch for that as utilization rises, and that's what would add to new demand.

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

Thank you for taking my question. I have two quick inquiries. First, regarding the three-year outlook, it appears that you are indicating 2024 may be somewhat lower than expected, while 2025 and 2026 are more consistent. Does this suggest that the three-year outlook has been adjusted downward? Secondly, could you provide some specific figures? It seems you mentioned that market rent growth is relatively flat overall, but that Southern California is experiencing a decline. Can you give more details on this, such as how much Southern California has decreased quarter-over-quarter or year-over-year compared to other markets in the U.S.? Thank you.

Hey, Vikram, it's Tim. We're not making any predictions for '25 and '26. In my prepared remarks, I believe our stance remains unchanged. I highlighted that if our average occupancy is slightly lower this year, understanding that our three-year forecast predicted a more normalized level of occupancy eventually, this might suggest that the adjustment to same-store occupancy changes could be more significant this year than next year. However, for now, we maintain our outlook for '25 and '26 regarding aggregate NOI and same-store. Currently, market rent growth is a bit below expectations, which will have some impact, but it will be relatively minimal on same-store over the period.

Yes. Let's provide some numbers since you inquired about it. During the Analyst Day, we discussed a three-year forecast for rental growth in '24, '25, and '26 of 4% to 6%. I would say we are currently at the lower end of that range, and possibly even slightly below it when considering a three-year period. My estimate, which is not the official figure, would be over 3% and around 4%, likely just below 4%.

And then just on the detailed question on what's happening in market rent growth in the first quarter. Southern California, down 6%, and US down about 1%, 1.2%. So when you multiply it through, you can see all other markets are flat.

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

Yeah, hi. I was just hoping to get a feel for, again, going back to the occupancy guidance, if there's a way that you can give us a feel for how much decline in new leasing commencements you have been embedded in the number this year. Because it sounds like the retention ratios have been better, so leasing velocity on the new side seems subdued. You talked about that leasing demand forecast being down, I think it was 30% on the numbers you gave, the 250 million to 175 million in the US. How much is like new leasing in the portfolio going to be down this year for the guidance?

Well, this is Tim. I'll give it to you in this way. And this might help some of the folks who have struggled looking at the supplemental and some of the stats there, and our messaging. Because what you don't see in the supplemental would be things like, well, how much lease signing occurred in the first quarter. And that was down. Even though you see strong occupancy, that's on commencements, signings were off about 12% in the first quarter. So that's down. You can see that when you look through our pages in our leasing versus occupied statistic where there's only about a 10 basis point difference in those versus a more historical norm of 40 to 50 basis points. So those are the pieces a little bit underneath the surface that are guiding our view that the pre-leasing that we're normally looking for at this point, which is ranging four to six months ahead of commencements is shy and why we think the average occupancy is ultimately going to be lower.

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

Hi. Thanks for taking my questions. First, could you explain your expectations for rent changes over the full year and if there have been any updates regarding your outlook? I noticed that rent change on signings was around 70% through February, which seems higher than what we saw in the last quarter. Do you have any insights on rent change trends for this quarter and the year ahead? My second question relates to occupancy based on unit size. Given your earlier comments about larger and smaller spaces, do you anticipate a broad recovery later in the year across all sizes? Or do you think there will be a stronger performance or ongoing weakness in either larger or smaller units as market conditions tighten in the next few quarters?

Hey, Todd, it's Tim. Yes. On rent change, so as mentioned, we had 67% start in the quarter. The signings were 70. So you do get a sense that it can move up and down each quarter. You may also recall, we had very strong rent change on signings in Q4, which may leave you wondering why didn't that show up here in Q1 on the commencements? And that's speaking to just how long this pre-leasing period can be. It can be more than just three months. And for that reason, I expect we'll probably see rent change right now, my view would be it's going to be above Q1, in Q2, and then also higher on the full year, in the low to mid-70s, over 2024 is our current view.

As it relates to the contours, I think I'd first point you to the market color that was given earlier as illustrating the shape of the recovery going forward. As it pertains to different size categories, there is more vacancy and more availability in the over 500,000 category, but that's also where, in the last 90 days, we've seen a little bit of a pickup. So I think we'll see size categories advancing at a similar pace over the course of the year, and there'll be real differentiation across the different markets.

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

Hi. Thanks for the follow up. I was just curious, are you seeing any other landlords gain to offer more free rent or tenant allowances to try to attract tenants to their vacancies?

A really interesting question. So this is what has really surprised me from this cycle. We are getting calls from merchant developers that have had financing, have completed projects and are getting panicked. And for us to look at those opportunities. Boy, we're looking at those opportunities. Because that's where a good balance sheet and that's where being on your front foot is all about. I think there were a lot of people in this business that thought, we'll just get some financing at zero cost and throw up some buildings and it will lease. And I think that's what accounted for some of that over-exuberance on the development side. And I think we're going to end up being beneficiaries of that, and I'm seeing that real time. So, yes, I think people who are merchant developers and do not have the financial wherewithal are acting in a somewhat distressed way sooner than I would have guessed. And we're happy about that. So that was the last question, Vince. So with that, I want to thank you for your interest. And this is part of a long story and we'll be there next quarter to tell you about the following chapters of it. Take care. Bye-bye.

And ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.