Prologis Leased a Record 67 Million Square Feet. What a Small Industrial Owner Should Take From It.
The quarter
Prologis signed 67 million square feet of leases in the second quarter, a company record. Core funds from operations came in at $1.56 billion, up from $1.4 billion a year earlier. Net earnings per share nearly doubled to $1.13. Occupancy rose 20 basis points to 95.5%. The company bought $1.8 billion of property, started $1.6 billion of development, raised full-year guidance for the second time, and noted that its data center starts had already passed the full-year plan.
How record leasing fits a slow rent market
Industrial rent growth nationally is running near 1.3%. Prologis is leasing more space than ever. The reconciliation is that tenants are signing because rents stopped rising. For two years occupiers deferred decisions while asking rents climbed 10% a year. Now that the market has flattened, they are locking in long terms at rents they can budget. Volume went up because price stopped going up.
That is the lesson for a small owner. The instinct in a flat market is to hold out for the rent you got in 2022. The market is telling you that tenants will sign long leases today at today's rent, and that the alternative is vacancy while you wait for growth that the largest operator in the sector is not counting on either. Take the ten-year deal at market with 3% bumps. Prologis is.
The occupancy number is the one to copy
Ninety-five and a half percent occupancy across a portfolio of more than a billion square feet is a management achievement, not a market one. It comes from renewing tenants early, often 12 to 18 months before expiration, with a modest rent adjustment and no downtime. A small owner who waits for the tenant's renewal notice is negotiating from the weakest position, six months out with a broker already in the building. Start the renewal conversation at 18 months. Offer something for the early commitment. A month of downtime on a 100,000 square foot building at $8 per foot is $67,000, which is more than the concession.
Where the big landlord has an edge you cannot copy
Data centers. Prologis is converting industrial land with power into data halls and has already started more than it planned for the year. That requires utility relationships, capital at a scale most owners do not have, and a tolerance for a five-year entitlement path. Do not try to compete. Do check whether your building sits on a site a data center developer would want, because if it does, the land is worth more than the warehouse and you should know that before you sign the ten-year lease.
Guidance raised twice
A company that raises guidance in April and again in July is a company whose January forecast was too cautious. That has been the pattern across the sector this year. The "measured confidence" of the midyear reports may itself be conservative. Industrial is a good place to be, at ordinary rent growth, with an occupancy strategy that treats every tenant as one you cannot afford to lose.
The 18-month renewal conversation only happens if something reminds you
Prologis renews early because its systems tell the leasing team which leases expire in 18 months, every month, without anyone remembering to check. A small owner with 15 buildings has the same expirations and no system. The renewal conversation starts when the tenant's broker calls, six months out, with a competing proposal in hand.
A critical dates tool that reads the leases, pulls every expiration and option notice date, and puts them on a calendar with the notice-by dates calculated is the whole gap. It costs almost nothing against the $67,000 of downtime in the example above, and it catches the renewal option the tenant is about to exercise at a 2019 rent, which is the mistake that costs the most and gets noticed the latest. Occupancy at 95.5% is a habit. The habit is a reminder that arrives on time.