Prologis - Earnings Call - Q1 2025
April 16, 2025
Transcript
Operator (participant)
Greetings and welcome to the Prologis First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce to you Justin Meng, Senior Vice President and Head of Investor Relations. Thank you, Justin. You may begin.
Justin Meng (SVP and Head of Investor Relations)
Thanks, John, and good morning, everyone. Welcome to our First Quarter 2025 Earnings Conference Call. A 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. 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.
Tim Arndt (CFO)
Thanks, Justin. Good morning to everybody, and thank you for joining the call. Prologis delivered a very strong quarter. We leased 58 million sq ft, a near record, broke ground on several build-to-suit developments with key customers, and expanded our power capacity by 400 MW to support growing demand for data centers, a 13% increase. We outperformed our expectations on earnings, occupancy, and rents. Prior to April 2nd, industrial fundamentals were improving, and had it not been for the recent uncertainty from global tariffs and their downstream impacts, we would have raised our expectations for 2025. Instead, we are electing to maintain earnings guidance as there are no policy conclusions right now to plan differently, and our severe stress test to core FFO supports the existing range. While the instability created in the last two weeks may disrupt logistics and supply chains, it will certainly slow decision-making.
Many companies now question where to source, manufacture, or even sell their goods. In speaking with customers, they echo this sentiment while at the same time revealing a need for flexible inventory positioning in the evolving landscape. Let's be clear, the range of outcomes is wide. We see potential for a recession, inflation, or possibly both. Let's also not dismiss the potential for a quick resolution. It's important to remember that Prologis was designed to weather any environment. We have a global footprint with a highly diversified rent roll. Our revenues are contractual with fixed or inflation-linked escalations. Our fortress balance sheet has unrivaled access to global capital, and we are a trusted partner to many of the largest institutional investors in our strategic capital business. All of this positions Prologis to be a partner of choice for our customers, especially in turbulent times.
Before I review the quarter, let me share three high-level thoughts. First, a disconnected world will require more warehouse space, not less. Second, the current environment is an endorsement of our long-standing strategy to invest in markets where goods are consumed, not where they're produced. Third, we've built our company with the intention to not only withstand market disruptions, but to take advantage of opportunities as they arise. Turning to the quarter, core FFO, including Net Promotes, was $1.42 per share, and excluding Net Promotes was $1.43 per share, each ahead of our forecast. Occupancy ended the quarter at 95.2%, down 70 basis points from year-end, which was better than expected due principally to strong retention. Net effective rent change during the quarter was 54%, and on a cash basis was 32%. As a result, net effective and cash same-store growth during the quarter were 5.9% and 6.2%, respectively.
Our net effective lease mark-to-market ended the quarter at 25%, with most of the sequential decline driven by the increase of in-place rents. This 25% represents a further $1.1 billion of incremental NOI after capturing another $105 million during the quarter. On capital deployment, we started approximately $650 million in new developments, outperforming our forecast with nearly 80% of the activity in build-to-suits, with lease terms that average 16 years. We have been describing the build-to-suit pipeline as robust for some time, and in the last several months, decision-making finally thawed, which we believe highlights the need for space is real, but what has kept volumes low is confidence. We have over a dozen deals still in active dialogue today, and in fact, have signed an additional two transactions for 1.1 million sq ft post-April 2nd. The pace so far this year has been well ahead of normal.
In our data center business, 400 MW of power has moved to our Advanced Stage category upon agreement with utilities for projects in a Tier 1 market. We now total 2 GW in this category alongside our 1.4 GW of power, which is already fully secured. Our conversations with utilities and hyperscalers alike have been very productive, and we will have start activity to report for the second quarter. Finally, at quarter end, we have over 900 MW of solar and storage capacity either in operation or under development, advancing us closer to our 1 GW goal for the year. With the U.S. and globe both in great need for additional energy production and solar as the least expensive format, we feel great about the long-term prospects of this growing business.
On the balance sheet, we raised approximately $400 million in new capital for our flagship open-ended funds, yet had similar amount of redemptions, leaving the capital raised near neutral in total. We had a relatively light quarter of debt issuance with $550 million raised at a weighted average rate of 4.1%, including a Canadian bond transaction further insulating that currency exposure. Our balance sheet remains in great shape, as evidenced by the upgrade we received from Moody's this quarter to an A2 rating, Prologis now being one of only two public REITs with an A flat rating from both agencies. Turning to the operating environment, which I'll cover by describing conditions before and after April 2nd. The post-election uptick in leasing held steady throughout the quarter, with improving proposal volumes and conversions.
We saw increased touchpoints with our global customers and higher activity levels, specifically within transport, food and beverage, consumer products, and electronics. Week by week, we were on the lookout for any slowdown in the level of interest or pace of leasing following the strong fourth quarter. While it did not manifest in our pipeline numbers, as early tariff threats came on and off and uncertainty grew mid-quarter, we did speculate that we would see a slowdown in decision-making. With all of that being old news, let's turn to an update on the last two weeks. What was ultimately announced on April 2nd clearly went beyond our early predictions, making the environment less certain. Even with the pause in some tariffs or resolution of others, customers simply lack a steady backdrop upon which to plan their businesses.
We've now dialogued with more than 300 customers, including two impromptu customer advisory boards representing over 20% of our rent roll. This is what we've heard. Our customers are moving quickly to manage tariff volatility with many accelerating shipments where possible. They're also rerouting volumes and have urgent demand for overflow space. Accordingly, they are looking for short-term flexibility, and 3PLs are typically where they turn. Indeed, 3PLs' flex space is getting more utilized, with one prominent name describing that they've increased their utilization from 83% to over 90%. Additionally, alternatives such as free trade zones and bonded warehouses are being evaluated. Our customers who are focused on food and beverage, industrial manufacturing, and essential consumer products like health and household goods are more insulated and are operating with confidence. Of course, customers selling goods with China-based production face the most uncertainty.
Price increases to consumers will be passed through where they can, but margins will still come under pressure. Therefore, planning horizons are shortening and flexibility remains key. Customers, like everybody, are concerned about a recession where consumption and demand will be negatively affected, further shaping their response. The diversity of feedback was a good reminder that many of our customers source domestically and are relatively unaffected, while others have the capability to adapt or even stand to benefit. Whatever the scenario, our team is moving decisively to partner with our customers and meet their needs. In the last two weeks alone, we've signed approximately 80 leases for more than 6 million sq ft. That's a roughly 20% dip from our usual pace, and we expect things may slow further, but it does reflect a market that's still active. Looking ahead, here are some things we expect.
Inventory levels will increase as businesses stockpile and build resiliency. E-commerce is likely to take more share in an environment where product availability becomes an important factor to consumers in choosing how to shop. Global markets will become more important, with Canada, India, and Brazil among those in our portfolio that we expect to benefit. Mexico will be another, and it has stood out in terms of a growing level of interest pre and post-April 2nd. Port markets may benefit from an immediate buildup of inventories. From there, we will need time to know how or if trade flows ultimately adjust. Nevertheless, we still believe in the long-term outlook for such markets with large population centers and significant supply constraints, a topic we will be sharing further research on in the coming days.
Finally, we believe that the inflationary effects of tariffs will only serve to increase the value of hard assets, replacement costs, and rents. Turning to our guidance, as mentioned, our first quarter results and outlook would have called for a tightening and increase of guidance, including earnings. Given the circumstances, however, we've opted to hold most areas unchanged, with the main exception in capital deployment. We are reducing our development start guidance at our share to $1.5 billion-$2 billion, which reflects a reduction in our expectations for spec development until visibility improves. Our combined contribution and disposition guidance is also decreasing to a range of $400 million-$1 billion, again reflecting uncertainty in both the capital markets and the fundraising environment. In turn, we are reducing our development gain guidance to a range of $100 million-$250 million.
We're also increasing our G&A guidance to a new range of $450-$470 million, in part due to the impact on capitalization from the lower development activity. Outside of this, all other areas of our prior guidance are unchanged, with core FFO, including Net Promote Expense, to still range between $565 and $581 per share, and core FFO, excluding Net Promote Expense, to range between $570 and $586 per share. As I mentioned, we looked carefully at our guidance in a severe stress test by examining the fallout from past crises, including the dot-com era, the GFC, Brexit, and the early days of COVID. GFC had the most extreme outcomes in terms of occupancy loss, rent declines, and defaults, which we mirrored and made worse by layering on additional levels of bad debt.
In this scenario, we see an earnings outcome that lands at the bottom of, but within our range. Anything can happen, and we will reassess in the second quarter, but we feel good about the resiliency it reflects. In closing, we run the company in a disciplined way with the simple tenets to stay close to customers and invest capital accretively. Times like this do not call for dramatic shifts to our strategy. We will be attentive to our customers, and we will use our balance sheet wisely. We will leverage our strengths in securing build-to-suits in both logistics and data centers. We will continue to harvest all that the platform provides in the way of profitable, adjacent businesses that support our customers. Above all, we'll empower and rely on our people whose expertise and dedication are the foundation of our success.
With that, I will turn the call over to the operator for your questions.
Operator (participant)
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. The first question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.
Tom Catherwood (Managing Director of REITs Equity Research)
Thank you so much, and good afternoon, everybody. Tim, I appreciated your commentary on interactions with customers over the past two weeks, and we appreciate how much it's changing on a day-to-day basis. The other side to the industrial equation isn't just customers and their supply chains; it's demand, which is ultimately driven by consumption. Are there lessons from prior disruptions? You obviously mentioned the dot-com and the GFC, but also from kind of the first round of tariffs during the first Trump administration that can serve as a guide for the current environment, maybe inform, A, what you're looking for to kind of judge consumption and demand, and also, what are the risks to consumers going forward?
Hamid Moghadam (CEO)
Let me take a stab at that. Hamid here. Clearly, if we get into a recession environment, consumption will take a hit. I don't think you're looking to our call for predictions about whether we're going to have a recession or not. There are better sources you can go for that. Certainly, our business and any other business in a recessionary environment will suffer. You handicap that probability. We're not really qualified to do that. With respect to the relationship between consumption and GDP growth, that relationship has remained constant for decades now. It's about 70% in the U.S., and it's lower than that in other emerging countries and coming up, increasing. I'm pretty confident that consumption in the long term will trend up, and during a recession, it will take a hit.
Now, as to the 2017 tariffs, I think we've shared this with you before. Can't tell you what happened to consumption. Basically, nothing happened to consumption. That I can tell you. I don't remember the exact numbers. What I can tell you is that since that date, U.S. production of things that are consumed in the U.S. went up 2% in real terms. What was made in China went up by 2%. Overall, consumption went up in the mid-20s. Where did that increase come from? It came from China Plus One and Mexico, and to a lesser extent, Europe. Certainly, we've seen some of these trends change the picture and the origins of manufactured goods. Again, as we've said many, many times, where they're consumed is what we care about, and they didn't really do anything to where they're consumed or how much they're consumed.
Justin Meng (SVP and Head of Investor Relations)
Operator, next question.
Operator (participant)
The next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.
Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)
Yeah, thanks. Good morning. I guess, Tim, just wanted to maybe focus a little bit on the leasing, the commencements. I know that you had talked about occupancy dropping kind of in the early part of the year and then rebuilding in the back half of the year. The occupancy drop, at least versus our estimates, was a bit wider than what we were looking for. I know you do not provide a quarterly lease expiration schedule. You kind of just provide the annual. Maybe just help us bridge the gap on the kind of spot occupancy decline in the quarter. Maybe how do you think about occupancy cadence over the course of the rest of this year versus maybe where you were a couple of months ago?
Tim Arndt (CFO)
Thanks, Steve. Yeah. Look, we had the other side of the equation that you need to consider in looking at an occupancy drop in any time period is what's the roll that's coming up. We had a disproportionate amount of leases rolling in the first quarter. While I would describe our retention as pretty good at 73%, just a lot rolling there, and that caused the drop. I'd characterize the drop as not dissimilar from history and very much in line with our expectations. As for the second part of your question, in the stress test that we looked at, or let me go back a quarter, our prior guidance imagined that we were going to lose some occupancy over the course of the year and build back up by the end of the year.
One of the main changes in the stress test is that we are going to lose that occupancy as planned and even more, and it is going to basically stay at that level till the end of the year. That is what we have reflected when we looked at the stressed scenario.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Steve. Operator, next question.
Operator (participant)
The next question comes from the line of Ronald Kamden with Morgan Stanley. Please proceed with your question.
Ronald Kamdem (Managing Direcor and Head of US REITs and CRE Research)
Hey, just going back to sort of the stress test and thinking about sort of the specific tenant groups, particularly 3PLs and sort of their impact in the Inland Empire West. Just sort of curious, just real-time, how you guys are thinking about that group and what sort of the assumptions that are being baked in. Thanks.
Chris Caton (Managing Director)
Hey, it's Chris. I'll jump in. What I think you're talking about and is worth covering here is simply this category of Asian 3PLs. This is a category that faces new risks. To keep it in perspective, the U.S. businesses of these Asian 3PLs are just a little over 1.5% of our rent. Policy is still evolving, and let's not speculate here. As you come to your own views, a few things to keep in mind. One, these customers are growing in response to just general e-commerce growth as well as stateside inventory fulfillment models. These companies have found a product-market fit, and the product will still need to flow. These companies have also taken steps to mitigate risk. They're pulling forward inventories. They are diversifying their sources, their production sources, and they're also growing their domestic customer footprints.
Now, ultimately, their performance is going to be subject to how policies evolve from here, and we will keep you informed as the situation changes.
Hamid Moghadam (CEO)
Yeah, the other thing I would add to that is that if you just try this on your own, go on some of the big e-commerce sites and try to buy some phone chargers for your iPhone or iPad or pretty much anything of that ilk, and you'll see that it says, "Sold out and don't know when we're going to get some more." The demand is clearly there, but the challenge is getting the inventory in to fulfill that demand. I think the underlying demand is pretty good.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Ron. Operator, next question.
Operator (participant)
The next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Michael Goldsmith (US REITs Analyst)
Good afternoon. Thanks a lot for taking my question. Just to say, I guess there's been some recent news about Amazon being back in the market. Can you talk a little bit about what that means for overall demand, how that can impact the overall industry, and if that, how that has influenced pricing power in the past and if that can have an impact this time? Thanks.
Dan Letter (President)
Yeah, thanks. Thanks, Michael. This is Dan. We have definitely seen Amazon in the market. As a matter of fact, we've signed some pretty good deals with them this year. We're seeing the overall e-commerce segment of our customer base very strong right now, back to high teens, 20% of our overall leasing. Really pleased with what we're seeing from them.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Michael. Operator, next question.
Operator (participant)
The next question comes from the line of Craig Mailman with Citi. Please proceed with your question.
Nick Joseph (Head of US Real Estate and Lodging Research Team)
Thanks. It's Nick Joseph here with Craig. In the opening remarks, you talked about the company looking to take advantage of opportunities. I was hoping you could discuss that in more detail of either opportunities you're starting to see emerge or kind of trying to keep an eye on where you would look to lean into if possible.
Hamid Moghadam (CEO)
Too soon for anybody thinking about putting something on the market or selling something. Certainly, the last two weeks have not been the time to execute that strategy. I think these things will take a while to play out. Things depend on how bad things get. There are two things going on. One, there's pressure on rents, obviously. Second, I don't know where the 10-year is going to go, and cap rates are kind of correlated with that. I think most people in this environment are going, "Wait and see for some clarity." Depending on how bad this thing gets, it could be six months, maybe nine months before you start seeing some opportunities. Let's not speculate about how bad it's going to get or whether this is going to be a blip. I don't know. I mean, it changes every day.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Nick. Operator, next question.
Operator (participant)
The next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Caitlin Burrows (VP)
Hi, good morning. Maybe just on lease gestation. I know it was above average in 4Q, and then it was up again in 1Q, which makes sense. Can you go through some more of what you're hearing from customers and potential customers with respect to kind of who is making decisions today, what's driving them versus who's dragging out that decision-making timeline, and what could make them ultimately make a decision, and then the group that might just say, "For now, we're standing on the sidelines"?
Chris Caton (Managing Director)
Hi, it's Chris. I'll take a stab at that. First, you're reading the statistics correctly. Gestation was elevated in the quarter. Some of that's really happenstance and mix in the first quarter. There is going to be some seasonality as it relates to December and November deals that just take a bit longer with the holidays. Also, the trend we discussed as it relates to pre-election opportunities landing, that continued into January, lifting the number. We think it'll continue to remain elevated. There is a range of customers that are talking to us that have growth requirements. They have need for space, and they just need a clearer economic backdrop, tariff backdrop to make decisions. There are a handful of customers making decisions. Some are responding to supply chain volatility and bringing in goods urgently for their own tactics.
Hamid Moghadam (CEO)
Yeah, I think you see that in the 3PL utilization rates because that's the first place you're going to go. And remember, a lot of these people have been in delaying decision mode for a number of years. And if their underlying businesses are solid, they can't do that anymore. Perhaps the most surprising thing that I've seen is that even in the last two weeks, we signed a lot of leases, and we've signed build-to-suits. These customers could have just said, "Okay, let's punt on those until we have clarity." I'm actually very encouraged. You can't take two weeks and extrapolate too much. Actually, in those two weeks, the number of build-to-suits that we have signed are significantly larger in terms of square footage and rent than what we normally sign for a two-week period going back a couple of years and comparing.
It is two weeks, so who knows? There are definitely people out there making decisions, and I would not be surprised if the vast majority are going to try to delay it as much as possible. Water is building behind the dam. It is going to break at some point.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Caitlin. Operator, next question.
Operator (participant)
The next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.
Vikram Malhotra (Managing Director of Real Estate Equities)
Morning. Thank you for taking the question. I just wanted to clarify kind of the stress test scenarios. Maybe if you can give a little more color. You talked about where you thought the occupancy was in the down case. Do you mind just giving us a sense of where did market rents shake out for the quarter? Where did sort of net absorption in your market shake out for the quarter? If you take those other components, where are they in the stress test in terms of low-end and high-end? Thanks.
Tim Arndt (CFO)
Okay. I'll take on the stress test description, and Chris can hit some of what happened during the quarter. Basically, in the GFC, what we had seen in the first 12-month period at least was a market occupancy decline of 170 basis points. We took that in, added it to the decline that we had already, and as I mentioned earlier, just had it sustained through the end of the year. We had seen market rents drop 18%. We brought that into the forecast, had it affected immediately. Instead of playing out over some months, just took it upfront. The last piece is bad debt. Our experience in the GFC was bad debt of 56 basis points. We actually have integrated a higher level there by picking apart parts of our portfolio, have something that's closer to 75 basis points on an annualized run rate.
We think we hit it pretty hard.
Chris Caton (Managing Director)
On conditions in the first quarter, we saw net absorption 21 million sq ft. We saw global rents decline 1.5%. Almost all of that, by the way, was Southern California. Globally, excluding Southern California, rents only dipped about 50 basis points, with many markets flat or rising.
Hamid Moghadam (CEO)
Yeah. The thing I want to make sure everybody understands here, we are not setting up a new range. This is not a prediction. We just wanted to know what's the worst thing that can happen. Of course, the worst thing that can happen is nuclear war, and this is all academic. Going back and looking at the last four or five major downturns and taking the worst on every parameter, on every independent variable, combining it together and then adding some, basically still gets us to the bottom of the range. Please, this is not a prediction. We are incapable of making a prediction in this environment. There is no data, and we have more of it than anybody, that can power us to confidently predict anything for you. We just wanted to know how bad it could get.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Vikram. Operator, next question.
Operator (participant)
The next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question.
Ki Bin Kim (Managing Director of US REIT Equity Research)
Thank you. Good morning. Do you have a sense of what the level of import tariffs your average customer could possibly bear? I know there's a wide range of customers, but just high-level question. I'm not sure if a 10% tariff is a win for your customers, or does it have to be like 5%? Just any kind of thoughts you can share. Thank you.
Hamid Moghadam (CEO)
Yeah. Again, this is pure speculation because we haven't had any discussions for these kinds of tariffs, I think, since the turn of the century. My sense is that given the way this policy was rolled out, I think people were prepared for something around 10%. On April 2nd, the base guy would say, "If you polled our average customer, they would have said, 'A', we don't know, and 'B', it's going to be a lot higher.'" With the pause, I think they feel somewhat a sense of relief. I think that the economy can absorb a 10% tariff, but it will change how these inventories are routed to some extent and where they come from.
I think net-net, if you go beyond sort of what happens next month or next quarter, I think if I were going to predict anything, I would say Mexico would be a big beneficiary of all this. So would Brazil. And we would probably have less coming from China, for sure. And the countries surrounding or around China in Asia would have a higher share. Europe, I think, is going to probably tread water or maybe decline a bit because there is still Germany, the big exporter, is very focused on internal combustion cars. I think those are going to come under pressure. That is what I think is going to happen, but who knows?
Justin Meng (SVP and Head of Investor Relations)
Thank you, Ki Bin. Operator, next question.
Operator (participant)
The next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.
Vince Tibone (Managing Director and Head of US Industrial and Mall Research)
Hi, good morning. I wanted to follow up on the comment that a disconnected world requires more warehouse space. Can you just elaborate on that remark and how you arrived at that conclusion?
Hamid Moghadam (CEO)
Yeah, Vince. Let me tell you a story. I was in Brazil when Brexit was announced. By the time I got on the plane and landed in San Francisco, the market had discounted the value of our U.K. portfolio by more than its entire value. Okay? I was bombarded by questions of what's going to happen and what do you think is going to happen to your U.K. business. They had already written off more than 100% of the value of our U.K. business in the stock during that 10-hour flight. What did happen? For the ensuing three or four years, the need for inventory increased both in the U.K. and in the continent because those supply chains that were optimized across Europe had to be rebuilt for the continent and for the U.K. separately. That required net more space.
That is what happens when you go through these transitions. By the way, throughout that period, occupancy remained at 99% in the U.K. These things do not play out the way some of the newspaper articles talk about. We believe that duplication of what is a highly engineered supply chain during times of uncertainty will lead to more inventory and therefore more space to put it in.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Vince. Operator, next question.
Operator (participant)
The next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Great. Thanks. Can you talk a little bit more about any change you might be seeing in demand from your fund investors, how they're thinking about their allocation to the industrial sector overall and current pricing, and I guess whether you'd expect to see increasing redemption requests in the funds in the coming quarters?
Hamid Moghadam (CEO)
The answer is we were seeing a really strong positive trend leading up to April 2nd. Lots of discussions and lots of interest and inquiries and reverse inquiries and all that, more than any time, I would say, since 2022. After April 2nd, I think people are waiting to see what the denominator effect is going to be. I mean, it's not a real estate question. Real estate is a percentage of allocation of the overall portfolio. The stock market is down, I don't know, teens. By definition, even with increasing real estate allocations, it could be that the absolute dollars available for real estate are going to go down. Also, a lot of institutions have committed, maybe overcommitted to some private assets classes, venture, private equity, etc., etc. The liquidity coming out of those, coming back from those, is certainly going to be curtailed.
I mean, there are fewer IPOs that are going to happen in this uncertain environment, and liquidity events are fewer and farther between. I think it's the denominator effect that will determine how much money will come out, not so much interest in industrial real estate, which was really good and getting better.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Blaine. Operator, next question.
Operator (participant)
The next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.
Mike Mueller (Senior Equity Research Analyst)
Yeah. Hi. How do you see UPS's downsizing of its Amazon exposures impacting you over the next couple of years?
Justin Meng (SVP and Head of Investor Relations)
Hey, Mike, could you repeat that, please?
Mike Mueller (Senior Equity Research Analyst)
Yeah. Sorry about this. How do you see UPS's downsizing of its Amazon exposure impacting you over the next couple of years?
Hamid Moghadam (CEO)
Our business with UPS has continued, and we've done actually some pretty significant leases with them lately. I don't know. That's not something that's come up in our discussions. You should ask them.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Michael. Operator, next question.
Operator (participant)
The next question comes from the line of Samir Khanal with Bank of America. Please proceed with your question.
Samir Khanal (Director of US REITs)
Good afternoon, everybody. Just looking at the smaller spaces, below 100,000 sq ft, that 92% occupancy seems a bit lower versus the other sizes, I guess. That was a bit surprising. Can you maybe provide color around that and maybe markets that are seeing that space, seeing more challenges than others? Just trying to understand. Usually, that type of space, I thought, has a bit less supply and would have been faring a little bit better. Just want a bit more color. Thanks.
Tim Arndt (CFO)
Thanks, Samir. That 100,000 square foot and less customer base is typically actually the lowest occupancy you see if you look quarter over quarter in our supplemental. There's nothing unusual this quarter or last quarter that would suggest there's any issue there. As it relates to markets where there may be issues.
Chris Caton (Managing Director)
Yeah. Chris, I'll jump in. The strongest markets, first off, are global. Being international is great in this environment, whether it's Europe, whether it's Latin America, whether it's Japan. As it relates to the American markets, we've seen a broadening of strength across categories. The Southeast has been and the Sunbelt has been resilient, whether it's Seattle, Nashville, Houston, and increasingly Dallas. We're also seeing an inflection and improvement in the Midwest. Pick a market like Indianapolis. That's one that's really moved a lot in the last year.
Tim Arndt (CFO)
Yeah. One more thing, Samir, is the smaller spaces actually have shorter lease terms. That's where you see a lot more churn. Certainly, if you look at that customer base, it's going to be the smaller businesses that may have more of an impact. We're paying very close attention to it, but we're just not seeing anything today.
Hamid Moghadam (CEO)
Yeah. They have lower credit, by and large. They're the small customers with lower credit. If you believe in a recession scenario, that sector is going to get hit more. You said something that's really important. I do agree that replacement costs for that product is significantly higher than values today. There is some protection on the supply of smaller spaces. They're very expensive to build. While I'm on that topic, let me answer a question that hasn't come up, which is that in this environment and its inflationary effect, we're seeing replacement costs go up significantly. With the 10-year backing up, the yield requirements on developments have gone up significantly. The combination of those two means that the replacement cost rents that will justify new construction are now much higher than they were a month ago.
I think that bodes well for the long-term supply picture here. Less supply.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Samir. Operator, next question.
Operator (participant)
The next question comes from the line of Brendan Lynch with Barclays. Please proceed with your question.
Brendan Lynch (Director)
Great. Thanks for taking my question. The 6.2% cash, same store NOI in the first quarter was quite strong compared to your annual guidance for 4.5%. Can you just walk us through what your expectations are for the cadence throughout the rest of the year?
Tim Arndt (CFO)
It's going to be influenced mostly by occupancy from here. That's a stat that's pretty volatile to the quarter. Year over year, I'll say, differences in free rent for leases that are commencing within these quarters. So it can be volatile for that reason. Its net effect of both are going to be largely a function from here of the year-over-year occupancy changes, which we've already made clear. We think in our base case, that was going to march down, and in our stress case, still the case and a little more so.
Hamid Moghadam (CEO)
Yeah. The main driver of that is the mark-to-market, basically. It's not, at this point, a change in near-term increases in market rent. Occupancies are tough to predict, but if we're going to bet, are probably going to come down a little bit if this thing continues.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Brendan. Operator, next question.
Operator (participant)
The next question comes from the line of Michael Carroll with RBC. Please proceed with your question.
Michael Carroll (Managing Director and Head of US Real Estate Research)
Yeah. I had a more basic leasing question. How long does it typically take from an industrial lease to be signed versus when it actually commences? If activity was pretty healthy in the first quarter and slowed down 20% in April, and I understand that's only two weeks so far, when could that actually start to impact lease commitments and your overall occupancy? I mean, are we talking about this being a 2Q type issue, or is it more of like a 3Q type issue?
Chris Caton (Managing Director)
I'll give you a couple of facts here, and others may jump in. This is Chris. Renewals can be signed well in advance, anywhere from three months to 12 months, depending on the size of the lease. New lease commencements can be really rapid. We've had a handful of customers want to move in in a couple of weeks, up to order of magnitude, maybe 45 days. It really depends on the mix in terms of new versus renew and also the size.
Hamid Moghadam (CEO)
Yeah. New buildings, it takes longer because they got to build it out.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Michael. Operator, next question.
Operator (participant)
The next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.
John Kim (Managing Director of US Real Estate)
Thank you. Going back about a month ago, Hamid, you discussed in a Bloomberg interview that the change in tone has slowed in the past couple of weeks prior to the interview. Not really reflected in the data, but that has happened. I guess my question is, if the tariff uncertainty is resolved, will demand completely recover to where it was earlier this year, or were there other reasons tenants were acting more cautious pre-April 2nd?
Hamid Moghadam (CEO)
No other reason that I can think of. By the way, if I knew the answer to your second question, I would ask you, where do you think the market's going to end up at the end of the year? I don't know. I mean, short-term, it's very hard to predict these things. That's why I don't even try. Long-term is what we're focused in around here, and the path to that long-term can take many different directions.
Justin Meng (SVP and Head of Investor Relations)
Thank you, John. Operator, next question.
Operator (participant)
The next question comes from the line of Nicholas Yulico with Scotiabank. Please proceed with your question.
Nicholas Yulico (Managing Director of US REIT Research)
Thanks. I want to go back to some of the net absorption data you talked about. I think, Chris, you said in the first quarter it was 21 million. A year ago, in the first quarter, it was 27 million, and you guys were saying that was not a great number, and you ended up reducing a net absorption forecast for the year. Just trying to understand, is it right to look at that number year-over-year? Because based on that, it feels like this first quarter for the overall market was not as good as it was a year ago, and I am not sure what we should be reading into that versus PLD having what you thought was sort of a better leasing quarter overall, but maybe the market is not also reflecting that?
Tim Arndt (CFO)
I think you answered the question for me. I completely agree with the way you position that, which is, yes, the first quarter is seasonal. It's a seasonally light quarter. The 21 annualizes to around $105 million-$110 million. There can absolutely be variability in the numbers, as I think you postulated in your question. I think more important to us is the conversation we're having with our customers and their growth requirements and their growth outlooks. That's how we made our assessment.
Hamid Moghadam (CEO)
Yeah. Last year, we didn't have an election. A lot of decisions on leasing that would have turned into actual leasing and occupancy in the first quarter would have been made in the fourth quarter, which was still an unknown from an election point of view. There was a big uncertainty that didn't exist in the prior year. We used to have a rule of thumb in here that absorption throughout the year was one, two, three, four. Now, I don't think it's leveled out a little bit from that. It's not quite that extreme. Actually, the normal seasonal pattern is that absorption and occupancy and leasing of space increases throughout the year.
Tim Arndt (CFO)
Let me add one more point here. Actually, something Prologis can control. We had about 12% of our rent roll rolling this year. We actually have put 7% of that in the bank already. We are about 60% of the way through that with only 5% of that left to go. We are in pretty good shape at this point in the year.
Justin Meng (SVP and Head of Investor Relations)
Thank you, Nick. Operator, next question.
Operator (participant)
The next question comes from the line of Steve Sakwa with Evercore ISI. This is the final question. Please proceed with your question.
Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)
Yeah. Thanks for squeezing in the follow-up. Tim, just to go back, I just want to make sure. I understand that there's kind of the base case and there's your kind of worst-case scenario. In your base case, and you did mention that in the last couple of weeks, leasing volumes were down 20%. I guess I'm just trying to figure out, I guess, what level of leasing activity are you assuming in sort of your base case or guidance in terms of either reduction or increases in leasing kind of from here through the end of the year?
Tim Arndt (CFO)
Look, it's hard to put a number on that because ultimately, we reflected in the occupancy drop that we think is going to be more severe and stay low, as I mentioned. That is a mix of both lower retention as well as a slower pace of new leasing. The way we tested all that was put it through some ranges. It is just one of those things that is unknowable, but I think the end result, which ultimately drives occupancy, same-store earnings, we've got covered in the stress test.
Justin Meng (SVP and Head of Investor Relations)
That was the last question. To close out, just want to make a couple of remarks around the fact that no doubt we're in a very fluid environment right now. The good news is we are built for this. I really want to thank our teams out there for their execution and focus. Thanks for joining the call, and we'll speak to you next quarter.
Operator (participant)
Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.