Demand and Occupancy Outlook
Q: Why is demand softening, and how does it affect occupancy?
A: Management notes that demand has been subdued due to a combination of factors, including softness in Southern California and other high-rent markets where leasing velocity and rent growth are below expectations. Deferred decision-making by customers has led aggregate demand to be below prior expectations. About half of their adjustments are coming from Southern California. They expect occupancy to decline due to lower pre-leasing activity, resulting in a lower average occupancy this year. [0] [2]

Guidance Adjustments and Conservatism
Q: How conservative is guidance; risk of further revisions?
A: Management aims to provide guidance as close as possible to expectations, with a slight bit of conservatism. They acknowledge that conditions could change but strive not to regularly disappoint investors. Adjustments are based on market tone and anticipation of slower demand, not due to undisclosed issues in the portfolio. [4] [3]

Southern California Market Weakness
Q: Details on SoCal softness and recovery confidence?
A: Southern California continues to soften, with the weakest area being midsized and smaller units in the Inland Empire. Orange County remains strong, and Los Angeles has a 4% vacancy rate. Management is confident in recovery due to factors like the resolution of port labor issues and the expected return of port volume, which can tighten the market quickly. [7] [8]

Reduction in Development Starts
Q: What's behind the reduced development starts?
A: Due to shifting demand and occupancy, development starts are reduced by $0.5 billion, split roughly equally between build-to-suit and speculative projects. Management is raising the bar on speculative development but can initiate projects at any time since they own the land and have entitlements in place. [6]

Rent Growth Expectations
Q: How has rent growth outlook changed?
A: Over the next three years, rent growth is expected to be at the lower end of the prior 4% to 6% forecast, likely around 3% to 4%. In the first quarter, Southern California rents declined 6%, while overall U.S. rents were down about 1%. [14]

Supply and Vacancy Rates
Q: What's the updated view on demand and vacancy rates?
A: The demand forecast for 2024 has been revised down from 250 million square feet to 175 million in the U.S. Vacancy rates are expected to peak in the mid-6% range later this year but should decline towards 5% over the next year due to a significant falloff in supply. [12]

Merchant Developer Distress and Opportunities
Q: Are other landlords increasing concessions?
A: Management observes that some merchant developers are becoming distressed due to financing pressures, offering acquisition opportunities. Prologis is engaging with these developers to capitalize on the situation. [15]

Geopolitical Risks and Interest Rates Impact
Q: How are geopolitical risks affecting customers?
A: Geopolitical events and an increase in interest rates by 70 to 80 basis points are causing customers to delay decisions, especially discretionary ones, impacting leasing activity. [10]

Development Margins and Occupancy Decline
Q: Are low development margins reflecting occupancy decline?
A: The lower development margins this quarter are due to an isolated project affected by weather and infrastructure issues. Excluding this project, margins would be a more reasonable 15% to 16%. There is no connection to occupancy decline. [3]

Tenant Behavior and Rent Elasticity
Q: Are tenants becoming more cost-conscious?
A: Tenants are deferring expansion decisions due to cost considerations but are not significantly downsizing or relocating to less expensive markets. Management believes that deferred demand will convert to real demand in the coming quarters. [13]