Prologis (PLD) Q3 2024 Earnings Call Transcript

Prologis (PLD 4.60%)
Q3 2024 Earnings Call
Oct 16, 2024, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Prologis Q3 2024 earnings conference call. [Operator instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Justin Meng, SVP, head of investor relations. Thank you.

Justin, you may begin.

Justin Meng — Senior Vice President, Head of Investor Relations

Thanks, John, and good morning, everyone. Welcome to our third-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 third-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; Dan Letter, president; and Chris Caton, managing director, are also with us today. With that, I’ll hand the call over to Tim.

Timothy D. Arndt — Chief Financial Officer

Thank you, Justin, and welcome to everybody joining our call. Before diving in, I’d like to share our concern for those affected by the recent hurricanes in the U.S. and Europe that impacted our employees, customers, and communities. Thankfully, our teams are safe and their proactive customer outreach and assistance has been outstanding.

Our property sustained limited damage for such strong storms. Overall, we are pleased with our operating and financial results as the third quarter played out to our expectations. While occupancy and rent softened against the backdrop of positive yet subdued demand, we continue to deliver impressive net effective rent change due to the still powerful lease mark-to-market embedded in our portfolio, which bridges us through this soft patch to the next cycle of rent growth. Turning to the quarter, core FFO, excluding net promote expense, was $1.45 per share, and included in net promotes was $1.43 per share.

These results were slightly ahead of our forecast and the quarter included approximately $0.03 of income from the Prologis Ventures’ exit. Period-ending occupancy was 96.2% at our share, nearly 300 basis points above the market as the flight to quality continues. Net effective rent change was 68% and cash rent change was 44%. We captured over $90 million of NOI by rolling leases up to market.

The portfolio produced net effective and cash same-store growth of 6.2% and 7.2%, respectively. Revenues were impacted by approximately 35 basis points of bad debt, which is elevated from our normal 15 to 20 basis points. While bankruptcy filings are on the rise broadly, the good news is that the space we’ve taken back as a result has had embedded rental upside of over 60%. Our overall portfolio lease mark-to-market finished the quarter at 34%, representing $1.6 billion of potential NOI.

Finally, on the balance sheet, we raised $4.6 billion of new debt across Prologis and our funds at a weighted average rate of 4.6% and the maturity of approximately nine years. In terms of deployment, we had a very active quarter. We started over $0.5 billion in development projects, including incremental capital to an existing data center development now pre-leased to a hyperscale customer with a turnkey buildout. We expanded our land bank, driving our potential development opportunity over $40 billion, which now includes our first two projects in India that support over 5 million square feet of new development.

We deployed over $1.4 billion in third-party acquisitions. Year to date, we have acquired over 14 million square feet of strategic assets at an estimated 20% discount to replacement cost. We started development on 54 megawatts of new energy systems. Our momentum here is building, and we continue to have and we expect to have generation capacity well over 600 megawatts at the end of this year, with good line of sight to our 1-gigawatt goal by the end of 2025.

As mentioned, Prologis Ventures had a successful exit of an early round investment in the Japanese workforce solution, timing this produced a nine-times multiple on our investment, realizing a 65% IRR. Beyond the economics, our strategy and supply chain venture investing has delivered valuable insights for Prologis and our customers. Finally, FIBRA Prologis, our strategic capital vehicle in Mexico, successfully closed a tender for the shares of Terrafina, of which it now owns nearly 80%, enhancing its leadership position in one of our best-performing and highest-growth global markets. Turning to the operating environment, conditions remain soft in many of our markets, and as we’ve described over the last few quarters, this is despite healthy GDP and consumption growth.

We ascribe the weaker relationship between economic output and industrial absorption to the availability built into the supply chain through COVID, originally earmarked for resiliency, but now available to operators as a source for cost containment. But ultimately, the ability to rely on this excess is diminishing as utilization reaches a level that will force decision-making and expansion, the pace of which will vary by market. Many customers are making progress in reducing this capacity through growth, while others are gaining efficiencies through consolidation. In the end, it’s all serving to hold net absorption below pre-COVID levels, impacting rents.

Globally, we estimate that market rents decreased approximately 3% this quarter and roughly half this amount when excluding Southern California. As we noted before, Southern California will take the longest to reach equilibrium. While activity has improved, the remaining amounts of excess capacity will simply take time to work through. That said, it’s important to keep this context, our SoCal portfolio generated 84% rent change on commencements this quarter even as it led the globe in market rent decline, a great example of the interplay between the spot reduction in rents against our lease mark-to-market.

This has us well-positioned to navigate the cyclical downturn and taking it a step further, we see the structural investment case for SoCal as strengthening with new supply barriers that come into effect from recently enacted legislation and continued focus on carbon emissions. As always, the rent picture is mixed and there remain many markets that are either flat on rents or positive, such as Houston, Atlanta, Nashville, Northern Europe, and of course, LatAm remains very strong. Overall, bottoming process is underway, and we expect demand to remain soft in the near term. Looking ahead, market vacancy is at or near its peak and will hover there as utilization improves, and global rents will bottom sometime mid next year.

It stands to reason then that the near-term growth will be affected by the path market rents and occupancy have already taken. We remain very positive on the outlook for our business, as vacancies are still low in the context of history, starts are down significantly, and supply deliveries are falling below their pre-COVID levels. Additionally, with replacement cost rents approximately 15% above today’s market, even with land values marked down by a third from their peak, the long-term growth trajectory remains highly favorable. Moving on to capital markets, we’ve seen improved pricing and activity in the transaction market and values continue to grow.

U.S. and European values, again, increased approximately 1% in the quarter, and Mexico saw an impressive 2.2%. With the bottom seemingly in, our strategic capital business had its most productive quarter in the last two years, raising a net $460 million. Overall, it appears private market sentiment is stronger than the public markets.

During the quarter, transaction volumes increased and unlevered IRRs compressed another 25 basis points. In terms of guidance, which I’ll review at our share, we are tightening our forecast for average occupancy to a range of 96% to 96.5%, and also tightening our forecast for cash same-store growth to a range of 6.5% to 7%. Our net effective same-store growth is for a range of 5.5% to 6%, which has been tightened and reduced modestly at the midpoint for the increased non-cash write-offs we expect from higher bankruptcies in the balance of the year. We are tightening and slightly reducing our G&A guidance to a range of $415 million to $425 million, and tightening our range for strategic capital revenue to $525 million to $535 million.

We are reducing our overall development starts guidance to a range of $1.75 billion to $2.25 billion, which reflects both slow decision-making in build-to-suits and discipline on our part in deferring new spec development amid stubborn demand. Of course, we are in the best position to react quickly as conditions warrant with approximately $8 billion of pad-ready development opportunities. We see attractive acquisition opportunities in the market and are increasing our guidance here, taking our range up to $1.75 billion to $2.25 billion. And finally, the forecast for our contribution and disposition activity is increasing to a new range of $3 billion to $4 billion, reflecting the improving transaction market and stronger fundraising and strategic capital.

The positive spread between our buying and selling IRRs year to date has been approximately 100 basis points. Putting it all together, we are increasing our GAAP earnings to a range of $3.35 to $3.45 per share, core FFO, including net promote expense, will range between $5.42 and $5.46 per share, while core FFO, excluding net promote expense, will range between $5.49 and $5.53 per share, a $0.01 increase from our prior guidance. Core FFO, obviously, excludes our development gain guidance, but it’s noteworthy to highlight our increase to a new range of $375 million to $425 million. In closing, we had a very productive quarter in which we delivered strong operating results, high occupancy, high rent change, and meaningful same-store growth in a challenging market environment.

Alongside that performance, it’s clear that we are focused on the future as evidenced in our very active deployment, spanning our global reach and product offerings. The company is well-positioned to capitalize on the structural demand for logistics real estate and our focus on operational excellence, customer centricity, and value creation will continue to drive strong performance across all market cycles. Consistent with this drive for excellence, I’d be remiss to not highlight our annual Groundbreakers forum, which we just held in London. It featured some of the most innovative companies of our day, and we heard from the likes of the legendary Fred Smith of FedEx and Sir Tony Blair among many others.

Groundbreakers deepens our customer relationships and builds upon our thought leadership across the supply chain and its emerging foundation for clean energy and digital infrastructure. It’s great to see so many of you there, and a replay of the event is available on our website. With that, I’ll hand the call back to the operator for your questions. Unfortunately, Hamid is feeling under the weather today, and while he’s on the call, he may be limited in his responses.

Operator?

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] And the first question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.

Tom Catherwood — Analyst

Thank you, and good morning, everybody. So, Tim, you noted mixed signals in the industrial markets, vacancies are up, obviously, customers are taking longer to make decisions. And on the macro side, obviously, we see if the consumer continues to be stretched. But you also noted there was strong leasing activity in Q3.

You’ve raised acquisition guidance now for the second straight quarter. So kind of how do we square these two kind of seemingly divergent topics together? And what do you think it takes for customers — what kind of catalyst you think it takes for customers to move from hesitant when it comes taking space to more active as we move into ’25?

Timothy D. Arndt — Chief Financial Officer

Thanks, Tom. Thanks for the question. Look, if I just start with the acquisitions guidance, I would probably read that as our confidence in the long term for starters. We’re very engaged in the business.

We are very much looking at markets that we see to build additional scale and deepen our presence and our teams are scouring the market in that regard looking for opportunities. One thing implicit in my remarks that I’d like you to really hear is, we’re not really a buyer at market IRRs. We are typically looking for unusual constructs, upmarket deals, deals that we source where we’re looking for a premium to prevailing IRRs such as those we see in our appraisals. So take that as you’re looking at our activity in the acquisitions market.

In the near term, we just recognized that utilization has really been the culprit of keeping a lid on demand. And the message we’re trying to send here is that that has an end to it. Ultimately, customers will work through what’s available to them, and it’s going to be sort of a spillover out of utilization into growth in occupancy.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Tom. Operator, next question?

Operator

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

Vikram Malhotra — Analyst

Good morning. Thanks so much for taking the question. I guess just, Tim, maybe another one to perhaps square. You talked about the bottoming process on the call and the press release.

I guess, bottoming, not bottom. But do you mind sort of scurrying that with two things? One, just your updated view on market rent growth over the next 12 months? And two, just reducing development starts, I thought the plan originally was to keep starts high, so that when the market inflects in ’25, you’d sort of have the product ready. Can you just square the bottoming in those two things? Thanks so much.

Dan Letter — President

Yeah. Thanks, Vikram. Let me start with your first question, which was squaring the rent growth in the near term here. And let me highlight that we are near or in an inflection period right now.

This is a time when forecast have very high variability. So the quick answer to the near-term view on rents is pretty much in line with where we were 90 days ago. Customers are very engaged, but they are just not making decisions. So we expect this softness in rents to continue throughout this period.

But the way we actually think about this is for the long term. 90% of our leases roll after the next 12 months. So even if rents fluctuate minus 3%, plus 3%, it doesn’t really matter. It won’t have significant impact on our long-term earnings nor the value of the business.

And the real driver for rent growth is replacement cost rents, which Tim said in his script, replacement cost rents are 15% higher than today’s market rents. So the gap between the market rents and the replacement cost rents will ultimately lead to this rent growth. And so, if you think about us being at a peak vacancy or close to peak vacancy, which we expect to endure for a certain segment — portion maybe throughout 2025 with a recovery in that vacancy emerging late next year and then accelerating thereafter. So we know the trend and we’ll capture that rent growth in the longer term.

We just don’t necessarily know the slope of that recovery and it’s really hard to peg that. And honestly, when it comes down to it, guessing on the short term has never been one of our strong suits. We’re running Prologis for the long term. And the second part of your question had to do with our development starts.

Development starts, so we push those off. Tim talked about discipline in the script here. Build-to-suits, while the pipeline remains pretty strong, it’s just flat. Feel like for the last four quarters, we’ve been talking about customers kicking the can down the road.

That’s continuing and those build-to-suits are just moving into next year. And then, from a spec perspective, we are going to maintain that discipline that we’ve always maintained. We don’t want to be building into the market fundamentals in many of these markets today, but that’s not categorical. So for example, this quarter, we actually started two buildings in Atlanta.

Atlanta’s headline vacancy is 9%. But then, we look at the infill site that we have with no competition, we’re only 150 basis points vacant. We don’t have any spec risk. So we decided to move forward to that.

So we move forward with that building or those two buildings, so we could be building into those dearths of completions a year out, like we’ve been talking about doing. So it is happening here and there. We just see that accelerating more in the coming quarters. And then, let me finish with the fact that we have a very large development book right now, $5.5 billion underway on Prologis share, and that’s 33 million square feet of development underway.

And then, we also have $40 billion worth of opportunities right now in our land bank. And so — and actually 30% of that land is entitled ready-to-go and then two-thirds of that is actually pad-ready, which means we really truncated the timeframes to go vertical with those sites. So we’re going to be able to execute the strategy just like we talked about over the last several quarters, we’re just — you’re going to see that happen a little bit later.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Vikram. Operator, next question?

Operator

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

John Kim — BMO Capital Markets — Analyst

Thank you, and good morning. So it looks like you had a $0.06 beat on a core FFO this quarter. I think, Tim, you mentioned part of that was the Prologis Ventures exit that you had. And also, on our numbers, you had better-than-expected currency gains and income taxes.

I wanted to make sure that was the case. But also, why only raise full-year guidance by $0.01, given the beat you had during this quarter?

Timothy D. Arndt — Chief Financial Officer

Hey, John. Thanks for the question. I would say, you see it as a beat, we don’t see it as a beat. These were events that we were forecasting for the year and for the quarter.

And I would also highlight that the FX gains I think you’re seeing in the P&L might be better offline, but there’s complication between unrealized and on realized. You’re probably seeing a lot of unrealized there and you have to flow through to the FFO statement to understand what’s actually realized. Suffice it to say, very probably say you’re never going to hear FX as variance item in our FFO as we hedge all of our FFO earnings as I think you know. There was an item in tax where we had some sale of investment tax credits in the quarter.

We’ll have fewer of those in the following quarter. But, once again, that together with the ventures gain were all previously contemplated in our guidance.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, John. Operator, next question?

Operator

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

Steve Sakwa — Analyst

Yeah. Thanks. Good morning. I guess, on Page 12, you guys break out your ending occupancy by unit size.

And I noticed, sequentially, there was a much bigger drop on the spaces that were kind of below 250. So I’m just wondering if you can sort of speak to the strength of the bigger boxes, maybe the softness in the weaker. And then, just on the Southern California, I noticed that your lease percentage in SoCal went up about 120 basis points sequentially. So any comments just around Southern California demand either by product type or LA versus Inland Empire would be helpful.

Thanks.

Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics

Hey, Steve. It’s Chris Caton. Thank you for the question. I’ll start with Southern California and then I think a couple of us will jump in on different trends by size category.

So — and I think I’ll answer your short-term question, but it’s worthwhile to step back and look at the broader trends in Southern California and take a medium-term view. We think Southern California has a really bright outlook. Couple of legs to that stool. The first is, look, Southern California is a major consumption center.

It’s a $2 trillion economy, it’s got 23 million people, and the region is growing. Employment is up in the last year, and jobs are up 3% since 2019. Second leg of the stool, Southern California is growing as a gateway for international goods. Container imports into the ports of LA and Long Beach are up 12% since 2019.

Now, global manufacturing patterns are shifting, as I think you’re aware, but they remain positive for Southern California. Asian imports in the United States are up 21% since 2019 on an inflation-adjusted basis. Now, yes, I think you’re aware China should be down and it is, but only 6% since 2019. And so, this is a testament to the China Plus One strategy that we and others have been talking about.

There is significant growth in all other Asia. It’s up 40% since 2019. Third leg of the stool on the outlook for Southern California, barriers to supply, they are high and rising. Southern California has had scarce land availability, onerous municipal requirements, and now there are state restrictions with the adoption of State Bill AB 98.

These together restrict future new development. Now, Steve, as you’re asking, I think it’s important to recognize headwinds remain for Southern California, as Tim alluded to in his script. Customers are still working through spare capacity, having taken more than they needed when vacancies were zero, but these long-term trends will be more important over time. As it relates to the very short-term cyclical contours, as you’re asking about, a couple of things have emerged in the last 90 days.

One is demand remains soft in LA and there is a clear sort of upgrade cycle emerging there, where Class A is outperforming Class B. Generally demand is better in the Inland Empire, given the growth of the ports that I described earlier. And Orange County has a low market vacancy with — and that position is better to recover earlier. Now, you asked after the first size — the first question as it relates to size, I’m going to turn that over to Dan.

Dan Letter — President

Yeah. Just quickly on the sizes, certainly, we’ve had some impacts on the smaller size spaces in China that you see there, but when I look at this number quarter over quarter, the smaller size space is typically underperforming on an occupancy basis to the other three buckets. As a matter of fact, quarter over quarter, three of the four buckets were down slightly. So nothing really specific as it relates to historical trends.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Steve. Operator, next question?

Operator

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

Michael Goldsmith — UBS — Analyst

Good morning. Thanks a lot for taking my question. You talked a little bit about how the customer has remained engaged, but then, also, there remains a lot of sources of uncertainty and presumably that’s related to the macro and interest rates and the election. So I guess, the question is, within the context of maybe past cycles or other periods of uncertainty, how quickly, given that demand get pick up as that uncertainty has been released? So said another way, like, when some of these factors stop weighing on the customer, does that translate to an almost immediate translation to demand or does it take a couple of quarters to ramp up from there? Thanks.

Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics

Hi, Michael. Yeah, I heard your question as how quickly can demand recover as uncertainty ebbs. So a couple of thoughts on that. First, I think we should have a measured outlook on demand.

Customers are engaged, but taking their time in terms of making decisions. And we really are focused on spare capacity in the supply chain getting used up, as Tim described earlier, and we’re seeing that happening. So utilization, early this year, at the beginning of this year, was below 84%, and it’s mid-80%s — 84%s now. So it is indeed building, which will be a catalyst for our customers to take space.

And indeed, there are these tailwinds of economic growth, of trade growth, of consumption growth, and the acceleration of e-commerce continues. So I think it we should, just over the near term, have a measured level of optimism here. We just need to watch the market advance.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Michael. Operator, next question?

Operator

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

Craig Mailman — Analyst

Hey. Good afternoon. Maybe just circling back to capital deployment here on the development and acquisition front. I guess, on the development side, very helpful where you think replacement cost rents are relative to new starts.

But from a land basis perspective, could you give us a sense of kind of what’s in that ready-to-go bucket that actually kind of works from a basis perspective given where rents are today? I guess, that’s one part of the question. And then the other part, just on acquisitions, you guys are talking seems like more bullish. You raised guidance here. Just curious kind of globally where you think the best uses of that or best targets are today? And how do you fund that, given, on a stabilized basis, your equity is probably up around 6% at least on my numbers? Are these more debt financed? Are these through the fund business? Can you just give us a sense of where and how you kind of want to put that capital out and whether you’re interested in more bigger private portfolios or the historic bigger platform deals you guys have done in the past?

Timothy D. Arndt — Chief Financial Officer

Hey, Craig. It’s Tim. Let me congratulate you on getting three questions in there at once. Let me just start on the funding and the balance sheet and pass it back to Dan on the capital deployment pieces.

I would still view us as having a lot of capacity in our own balance sheet, which has been incredible, I’ll say. We’ve raised a lot of debt proceeds over the last few years, while our normal capital recycling has been a little bit slow. But if you look at our supplemental, look at our credit ratios over the last few years, including this morning, they’re very healthy and consistent and even quite strong for our rating. So we’ve been able to tap into that.

And the reason that’s been occurring is that, EBITDA growth, as what really guides that capacity, remains very strong alongside the earnings growth. Alongside that, I would also say that, as mentioned in my remarks, strategic capital fundraising is improving, not just what we raised in the quarter, but I feel like the body language and call notes that we’re getting suggest that it will continue to be strong. So I think a resumption of more normalized levels of capital recycling via contributions is very close and that has been, as you know, our principal source of funding in any event.

Dan Letter — President

Yeah. Then, Craig, on the deployment front, we own land in about 50 — over 50 markets globally. The average vintage year is about four and a half, five years old. And the mark on that book is about 120% of book.

So we have plenty of opportunities that pencil today. And then, keep in mind, a lot of that land, the other 60% or so is in its way through entitlement where we create a lot of lift ourselves as well over time. So we don’t have a shortage of opportunities. And keep in mind, as we underwrite these deals, we put them in at market value.

So we just have such a wide dispersion of where this land bank exists. And then, we also have a land bank that consists of covered land plays and options that you actually don’t see in that land bank. So again, not a shortage of opportunities. And it’s tough to point to any place globally where we want to allocate more than others.

It’s not the way we’ve ever operated. We’re at scale in virtually every market in which we operate. So it really comes down to looking at every deal on a deal-by-deal basis and doing the highest quality deals.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Craig. Operator, next question?

Operator

And the next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Caitlin Burrows — Goldman Sachs — Analyst

Hi. Good morning, everyone. The earnings release commentary mentioned how Prologis is a partner of choice to meet supply chain, digital, and energy infrastructure needs. So could you give an update on the digital and energy side? I know it’s a pretty open-ended question, but with those business lines newer, what has been the focus year to date for them? Kind of what are the next near-term steps? And also, can you clarify what portion of the starts — development starts in the quarter might have been data centers? Thanks.

Timothy D. Arndt — Chief Financial Officer

Hey, Caitlin, I’ll just pick up the energy piece and maybe pass it to Dan for data centers. As we mentioned, we have a good run rate of new energy starts in the quarter, we’re talking about the solar business, both generation and storage, over 50 megawatts in the quarter, which puts us at a really good pace run rate that has been accelerating in our solar program, which two years ago was broadly focused really just in the United States, has now expanded around the globe and is active in Europe, LatAm, and Asia. So we feel, as I mentioned, really good about the escalating pace of that activity and where it’s ultimately going to get us over 2025 marching toward that 1-gigawatt goal.

Dan Letter — President

Yeah. Then, on the data center front, overall 2024 has been, call it, a bit of a plan — exceeding the plan. We have focused on two things, building our pipeline and building the internal capabilities. Both are going extremely well.

We have 1.6 gigawatts of secured power of which 490 megawatts is currently under construction. We have an additional 1.4 gigawatts in advanced stages where we have high visibility to that procurement. And then, another over 1.5 gigawatts of applications submitted in dozens of different locations around the world. So very pleased with the pipeline we’re building and the team we’re establishing there.

You asked about the third quarter start that you see there, that is a powered shell building that we started a couple of years ago with a few different customers we’re working with that ended up turning into a turnkey deal. So what you see there is a conversion from a powered shell to a turnkey.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Caitlin. Operator, next question?

Operator

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

Vince Tibone — Green Street Advisors — Analyst

Hi. Good morning. Could you share net absorption and supply completions in the quarter for U.S. portfolio? And then, also provide any update to your full-year outlook for supply and demand? It sounds like nothing big change or surprised too much during the quarter, but just want to confirm your outlook and get the recent actuals there.

Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics

Hi, Vince. It’s Chris Caton. Thank you for the question, and your read on the quarter is correct. So we saw 40 million square feet of net absorption in the quarter, 63 million square feet of completions.

So let’s just zoom out and talk about the year and talk about how it’s — the direction it’s heading, because we are progressing through this bottoming phase. So net absorption, this year, will amount to 160 million square feet, and that’s against deliveries that are 300 million square feet. So naturally, market vacancies are rising. They’re rising up to 6.8%.

And it sounds like you’re very familiar with historical data, so you’ll know that 6.8% is a low number in the totality of history. But there’s something that’s happening in the background that’s really — that doesn’t always get attention we’re talking about, which is the emptying of supply chains. So deliveries peaked a year ago at 135 million square feet per quarter, and they fall into that number I gave you 63 million here this quarter, so less than half in terms of the decline, and they’ll continue to decline into next year. At work here, in the backdrop, also is starts are very low.

We have them at 40 million, 42 million square feet in the quarter. So when you put all this together, what you find is the under-construction pipeline, which is about 215 million square feet today, is at its lowest point since 2017. So we’re going to be going into 2025 with a relatively low level of supply and an opportunity for demand to improve as we progress through this uncertainty in the spare capacity.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Vince. Operator, next question?

Operator

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

Ronald Kamdem — Morgan Stanley — Analyst

Great. Hey. Just two quick ones, sort of following that last question in terms of asking in a different way. When are you thinking availability sort of peaks to the portfolio? I remember it was 4Q ’24.

Has that sort of changed at all, once that pushed out to? And then, the second part of the question, when you think about the same store cash NOI guidance for this year, are there any sort of one-timers, puts and takes or comps that we should be aware of as we start to think about 2025? Thanks.

Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics

Hey, Ron. It’s Chris Caton. So I think you said portfolio, but I think you might have meant market. So I’m going to answer for the market in terms of vacancies.

So we still have vacancies peaking in the later part of this year, but just taking a cautious stance on the direction of demand and that uncertainty and that spare capacity that we’ve described, we think you should anticipate a measured pace of basically elongation of the peak over the course of the first part of next year. You’ll see recovery emerge later next year and accelerate into 2026. I think that’s something Dan described earlier.

Timothy D. Arndt — Chief Financial Officer

Hey, Ron. It’s Tim. And then, just picking up the second part of your question, with regard to cash same store, the answer would be no. I can’t think of anything that would be one-time in nature.

As we report that metric, we exclude things like lease termination fees that might fall in that category. So that’s not there anyway. The only thing I could maybe think of is free rent is normalizing back-to-market norms. There could be a little more free rent next year than we want to see in the first half of this year, but that would be relatively small.

If I widen out a little bit though and take the question further on same store out in the future anyway, it’s probably a good opportunity to just level set people on. We’ve seen market rent declines thus far this year. We’ve been clear about them continuing a bit into next year. We’ve highlighted that occupancy is bottoming here and going to sit here for a handful of quarters.

So looking ahead to next year, it’s probably best to think about just the things that we know. And what I would — the way I would assemble a same-store view going into next year would be to look at, for starters, the rent change either on a cash or net effective basis that we’ve had thus far this year. We know that that’s got a half-year effect going into 2025. And then, also make some assumptions about what rent change might be in 2025 similarly following the half-year convention.

I think if you put that math together today and think about a roll level at 10% or 11%, on a net effective basis, you probably find yourselves as — at something like 5.5% to 6% component of — for that component of same store. Now, net effective basis, of course, we would have the impact of the [Inaudible] from the Duke portfolio that takes something like 100 off of that. So you’re squarely somewhere around five. And then, the last thing to think about is just occupancy trends.

And again, things really murky to forecast occupancy from here, but you could at least take into account the fact that occupancies have been declining over the course of this year. So with standard reason on at least an average basis this year to next, that would probably be an additional headwind on same store.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Ron. Operator, next question?

Operator

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

Blaine Heck — Analyst

Great. Thanks. Good morning out there. We’ve heard a lot recently about strong demand from Asian e-commerce and 3PL companies.

So I was hoping you could talk about whether you signed any deals with those tenants, and just your view on whether this is just a massive pull forward of demand ahead of potential tariff increases or whether you think those groups will continue to lease space into 2025 and beyond?

Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics

Hi, Blaine. It’s Chris Caton. Thanks for the question. I’ll give you a concise answer and then I’ll provide you some context, because this is a growing category.

And so, yes, we are leasing with these customers, and yes, we think they will continue to lease space into next year and beyond. And no, we don’t really think it’s much related to any sort of pull-forward as you asked. But let’s just zoom out and understand kind of the broader context here. So to understand really all these 3PL companies, it is productive to first start with the Chinese e-commerce platforms.

They’re enjoying rapid growth this year, last year. We’re talking about 25%, 50% annual growth and more depending on the concept. And so, the Chinese 3PLs, obviously, are performing the logistics here and they’re growing rapidly. I’d say they represent roughly 20% of net absorption this year.

And what it also offers their businesses are diversifying as now they compete for all contracts, not just Chinese e-commerce. And so, many of these customers are positioned for growth. They’re signing long-term leases and they’re investing in their space. You ask after this concept of a pull-forward, and so it is natural to think about how might tariffs and changes in tariffs affect these customers.

And a couple of ways to think about it. First, the growth of this ecosystem. This is one that connects Asian manufacturers with American consumers. And what they’re doing is they’re bypassing the traditional import distributors, and they’re doing this in response to the past tariffs, the margin pressure brought about by those tariffs.

So in summary, of that point, some of the growth this year is simply a shift in business model in response to past tariffs. The second point, which I described earlier, is, look, Asian imports are up 21% versus 2019 on an inflation-adjusted basis, and this is really fueled by that China Plus One manufacturing model, and the growth of Asia ex China — imports from Asia ex China, which are up 40%, as I said. And then the third, in the details of tariffs is something called de minimis provision. You may be aware, this is a provision that allows goods to come in and avoid tariffs under a certain value.

These are likely to be wound down under a wide range of scenarios, but it’s worth knowing that these are only 3% goods coming in under the de minimis provision, only 3% of Asian imports. And so, look, as the category matures, this is a growth category for sure, there will be winners and losers. And please know that we employ the same rigorous credit evaluation process here as we do with any and all of our prospective customers.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Blaine. Operator, next question?

Operator

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

Nick Thillman — Robert W. Baird and Company — Analyst

Thanks. Good morning out there. We noticed, in the past few quarters, there’s been an uptick in lease commencements with term less than a year in the core portfolio, roughly like 50% of commencement. I guess, wanted to get some more color on those tenants specifically.

Are these tenants opting for shorter-term renewals? These new tenants kind of looking for swing space given an uncertain macro? Anything you could provide there would be pretty helpful. Thank you.

Timothy D. Arndt — Chief Financial Officer

Hey, Nick. It’s Tim. I think that’s an element of it, some uncertainly on the part of the customer. I think more so it’s recognition in certain cases we’re being very strategic about the level of rents in some of our markets and what’s being locked in now.

And there’s just bespoke certain situations where we see an opportunity to keep it on the shorter end, where we see some of the rent recovery happening sooner than the overall forecast. And so, there’s a strategy in that part as well.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Nick. Operator, next question?

Operator

And the next question comes from the line of Josh Dennerlein with Bank of America. Please proceed with your question.

Joshua Dennerlein — Analyst

Hey, guys. Thanks for this. I’m filling in for Jeff today. Just looking at the occupancy across the regions, it looks like Asia and LatAm kind of sort of stepped back.

Any kind of trends to flag in those two regions versus like maybe what you’re seeing in the U.S., where it looks like it’s more stabilizing at this point?

Dan Letter — President

Thanks for the question, Josh. Really this comes down to the impact from China. Japan certainly has some oversupply issues we’re dealing with as well, but our portfolio is in good shape there, but it’s really China is the impact.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Josh. Operator, next question?

Operator

And the next question comes from the line of Mike Mueller with J.P. Morgan. Please proceed with your question.

Mike Mueller — JPMorgan Chase and Company — Analyst

Yeah. Hi. Are there any specific pockets of the portfolio or regions that are driving higher development stabilization guidance?

Dan Letter — President

Thanks for the question there, Mike. No, this development book is spread all around the globe. So there’s no trend to point to.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Mike. Operator, next question?

Operator

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

Nicholas Yulico — Analyst

Thanks. I just wanted to clarify a couple of numbers. I think you said that the market rents globally were down 3% this quarter. And then, last quarter, the forecast was for the next 12 months down 2% to 5%.

So are those the same periods on measurement? I just want to — because it would seem then that forecast was already hit this quarter alone based on the sequential decline, unless I’m confusing something here. Thanks.

Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics

Hi, Nicholas. It’s Chris. Thanks for the question. So the time periods are going to be different.

You have the correct numbers. And as Dan described, we continue to see rents be soft in our view today is now a different rolling 12-month view, and we remain cautious on rents over that time period. And as Tim described in his script, rent softness should persist into the middle part of next year.

Timothy D. Arndt — Chief Financial Officer

Look, I might just add that it’s fair to interpret the way you’re looking at those two numbers that, yeah, we may be at the — depending how you count at the north or south end of that range, maybe that will be closer to 5% over that preceding 12-month period that we described last quarter than not, given what we saw so far in the third quarter.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Nick. Operator, next question?

Operator

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

Unknown speaker — — Analyst

Hi. This is Aditi on for Mike. I was just wondering what drove the jump in capex this quarter? Thanks.

Timothy D. Arndt — Chief Financial Officer

I’m sorry, I didn’t hear the end of that question. What drove what?

Unknown speaker — — Analyst

The jump in capex for this quarter?

Timothy D. Arndt — Chief Financial Officer

A lot of that is focused — and you can see the components of capex in the supplemental between property improvements and leasing commissions, tenant improvements. There is a lot of leasing in SoCal, in particular. It’s just a sort of a reminder that rents there are very high, the commissions wind up in turn being quite high. And then, as you — it’s quite clear from our supplemental as well where we have property improvements disclosure that can be pretty lumpy between quarters and it was a bit elevated here in Q3, but on a trailing 12-month basis, very normal.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Aditi. Operator, next question?

Operator

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

Todd Thomas — Analyst

Hi. Thanks. First, can you just talk about leasing demand and absorption trends throughout the quarter a little bit, how the quarter played out a bit, July through September? And then, also in terms of the space utilization and comments that you’ve made around capacity in the portfolio, which seems to be an important input into your forecast, your portfolio skews toward consumption and I’m just curious if you have any thoughts around the utilization metrics from inventory levels or I guess inventory build, ahead of the election and potential tariffs and also the East Coast port strikes and whether you might expect to see some volatility on utilization in the near term.

Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics

Hey, Todd. It’s Chris Caton. Thank you for the questions. Answer on the first one is demand was steady through the quarter, so no meaningful acceleration or deceleration, which I think is what you’re asking.

As it relates to utilization, I think maybe we step back and cover some of the numbers that I alluded to earlier. So there is an upward trend this year. The year started below 84%, like I think I mentioned, it’s in the sup, I think you said 84.4%. And there is noise from quarter to quarter, which is a combination of goods coming in and coming out, as well as just the methodology, which is survey based.

I think if you step back and consider some of the context, one thing I want to add to your consideration is, look, import activity really shows there’s an effort to restock supply chains. But this is occurring amid perhaps more resilient consumer than was expected. And so, those consumers are pulling goods out of supply chains and kind of keeping utilization a little bit below what we consider to be a normal level.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Todd. Operator, next question?

Operator

Next question comes from the line of Brendan Lynch with Barclays. Please proceed with your question.

Brendan Lynch — Barclays — Analyst

Great. Thanks for taking my question. I’m hoping you can help us reconcile the guidance from the December Investor Day. It sounds like rent growth is around 0% through 2026 and vacancy is going to peak out a little bit higher than what you had been expecting.

So how should we think about your core FFO CAGR over the next three years?

Timothy D. Arndt — Chief Financial Officer

Hey, Brendan. It’s Tim. I would probably just put that aside. I think there’s been so much change right now in the markets that as I was doing earlier and describing the way to think about 2025 and just take a fresh look of where we are now with regard to the lease mark-to-market, a dip in rents over the next 12 months or whatever that period is before we start to see it accelerate again.

It’s really important to appreciate how much that 34% lease mark-to-market will sustain earnings. If you kind of map out that is where rents will start a bit of a decline for the next 12 months and then an increase thereafter, you’ll see on rent change alone five, six, seven years of very strong mid-single-digit same-store growth just out of the rent growth component by itself. So that’s the underpinning. Over the long term, you’re going to think about the adders to that as you march down to the bottom line between financial and operating leverage.

Admittedly, there’s some headwinds on the financial leverage piece in the near term as interest rates are rolling up, but over the long term, that will be productive to the bottom end again. And for Prologis, then you’re really going to think about all the other things that we do, which is really growth in capital deployment, our higher and better use activity in data center, strategic capital, ventures, the energy business, these are all adders to our growth that are complementary on their own, but I would say synergistic back to the core business as well. And that’s how you should think about long-term growth for us.

Justin Meng — Senior Vice President, Head of Investor Relations

Thank you, Brendan. Operator, next question?

Operator

Thank you. Our final question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Steve Sakwa — Analyst

Yeah. Thanks. Just wanted to clarify just two things. I think, Chris, you said something about 25% of, I think, the demand this year was from these Asian 3PL companies.

I just — was that your portfolio specifically or were you making a comment about the market or Southern California in particular? I just wanted to sort of clarify that.

Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics

Steve, thanks for the opportunity to clarify. That’s broadly across the marketplace.

Timothy D. Arndt — Chief Financial Officer

OK. Thank you. That was the last question here. I’d like to just wrap up by making a few points.

First, the quarterly results met our expectations. Secondly, we think we’re in a bottoming process that’s underway, with completions very clearly in a downtrend. Lastly, capital values are increasing, fundraising has improved and we’re actively investing in the future of our business and we’re in this for the long run. With that, we look forward to speaking to you at the upcoming conferences and again next quarter.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Justin Meng — Senior Vice President, Head of Investor Relations

Timothy D. Arndt — Chief Financial Officer

Tom Catherwood — Analyst

Tim Arndt — Chief Financial Officer

Vikram Malhotra — Analyst

Dan Letter — President

John Kim — BMO Capital Markets — Analyst

Steve Sakwa — Analyst

Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics

Michael Goldsmith — UBS — Analyst

Chris Caton — Managing Director, Global Head of Strategy and Analytics

Craig Mailman — Analyst

Caitlin Burrows — Goldman Sachs — Analyst

Vince Tibone — Green Street Advisors — Analyst

Ronald Kamdem — Morgan Stanley — Analyst

Blaine Heck — Analyst

Nick Thillman — Robert W. Baird and Company — Analyst

Joshua Dennerlein — Analyst

Mike Mueller — JPMorgan Chase and Company — Analyst

Nicholas Yulico — Analyst

Unknown speaker — — Analyst

Todd Thomas — Analyst

Brendan Lynch — Barclays — Analyst

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