Prologis Sees Leasing Surge, Data Centers Fuel Growth Outlook

Key Points

• Leasing activity is accelerating: Prologis expects third-quarter lease signings near recent records of 60 million–65 million square feet, supported by improving occupancy, faster customer decisions and a pipeline exceeding 100 million square feet.
• Data centers are becoming a major growth driver: About 10% of new leasing supports data-center infrastructure, while Prologis has advanced 5.8 gigawatts of power capacity and started roughly $4 billion in data-center build-to-suit projects.
• Rent-growth potential remains significant: Prologis has a 17% lease mark-to-market gap, representing about $700 million in potential incremental revenue, with further upside if market rents tighten toward replacement costs.

Prologis NYSE: PLD Chief Financial Officer Tim Arndt said the logistics real estate company continues to see improving leasing activity, rising occupancy and positive market rent growth as it moves through the third quarter.

Speaking at an investor event moderated by Sarah Cooper, Global Head of Real Estate Equity Sales, Arndt said the operational trends the company has discussed over recent quarters have continued. He pointed to strong leasing volumes, faster customer decision-making, improving occupancy and positive market rent growth as factors supporting development activity and broader value creation.

Arndt said Prologis expects third-quarter lease signings to be in the range of its recent record quarters, which have totaled roughly 60 million to 65 million square feet. While the quarter was not complete, he said the company had seen a strong start and that deals in the agreement stage were moving more quickly through the pipeline.

“We are seeing our lease pipeline stay well over 100 million square feet in new inquiries,” Arndt said.

Data Center Demand Adds to Leasing Activity

About 10% of Prologis’ new leasing is tied to some form of support for the data center build-out, according to Arndt. He said the opportunity should provide a longer-term source of logistics demand because data center infrastructure requires an ecosystem of hardware, chips, mechanical, electrical and plumbing equipment, as well as future repair, maintenance and replacement activity.

Prologis has also expanded its own data center development efforts. Arndt said the company has a team of about 75 people focused on the business and has secured or advanced approximately 5.8 gigawatts of power capacity. Of that total, 1.6 gigawatts are secured, while the remainder is in advanced stages.

The company has started approximately $4 billion of data center build-to-suit transactions since formally pursuing the opportunity, Arndt said. Prologis generally plans to minimize risk by securing power at attractive costs, beginning vertical construction only after signing leases with high-credit tenants, and selling projects after completion to recycle capital into its core logistics operations.

Arndt said Prologis has completed more than $2 billion of data center starts during the first half of the year, filling its guidance bucket for data center starts. The company may also use private equity partnerships for particularly large turnkey development opportunities, while continuing to fund other activity from its balance sheet and through capital recycling.

Market Fundamentals and Rent Growth

Arndt said U.S. logistics net absorption of 66 million square feet in the second quarter represented a return toward a more productive market pace. He estimated that a healthy annual absorption level would be around 225 million square feet.

Earlier weaker absorption reflected tenants working through excess space taken during the early stages of the COVID-19 period, he said. As customers right-size their portfolios, Prologis has seen demand increase, with its portfolio benefiting ahead of the broader market because of its location and quality.

The company’s lease mark-to-market, or the difference between in-place rents and market rents, stands at about 17%, which Arndt said represents roughly $700 million of potential incremental revenue as leases roll. He added that replacement-cost rents are approximately another 20% above current market rents, producing a combined rent gap of roughly 38% to 39% when compounded.

Arndt said that if markets tighten and replacement-cost rent gaps close as they have in prior real estate cycles, market rent growth could reach the mid-single digits annually for several years. He described that outlook as potentially conservative, depending on inflation, secular demand drivers and the pace of market tightening.

• Strong markets include Sun Belt and Southeast U.S. locations, Texas, Indianapolis, Columbus and Memphis, according to Arndt.
• Southern California is “definitely inflecting,” he said, with Prologis more than 96% occupied there and reporting strong rent growth.
• Seattle and central Pennsylvania remain behind other U.S. markets, while China continues to work through excess vacancy.

Europe has been a stabilizing part of the company’s portfolio, Arndt said, with high occupancy and positive market rent growth emerging sooner than in the U.S. He said Prologis expects its pending SEGRO transaction to close in the first half of next year, subject to regulatory processes and a shareholder vote expected at the end of the month. Arndt described the companies’ European portfolios and teams as highly complementary.

Development, Capital and E-Commerce

Prologis owns or controls 14,000 acres of land, much of which it prepared and entitled during slower post-COVID periods, Arndt said. The company has seen continued demand for build-to-suit projects, particularly for larger buildings that can be difficult for tenants to find in existing inventory.

Build-to-suit development has historically represented about 35% of Prologis’ development starts, and Arndt said the company expects a similar mix going forward.

The company’s strategic capital platform has nearly $70 billion in third-party assets under management. Arndt said Prologis has been developing new investment vehicles across regions and formats, including vehicles with more development exposure, as it seeks to attract capital beyond traditional open-ended funds.

On e-commerce, Arndt said online sales account for approximately 24% of U.S. retail sales and are expected to gain roughly 100 basis points of penetration annually through the end of the decade. Prologis expects e-commerce to account for about 28% to 30% of U.S. retail sales by 2030. The company sees a three-times multiplier in logistics demand for each retail dollar that shifts to e-commerce, he said.

Arndt added that e-commerce leasing has returned to the high-teens percentage of Prologis’ new leasing activity. While Amazon remains active, he said the company typically serves roughly 35 to 40 individual e-commerce tenants in a given quarter.

Arndt said customers have largely moved beyond uncertainty surrounding tariffs and trade-policy changes, adapting supply chains rather than abandoning logistics footprints. He said supply-chain disruption and a need for redundancy could directionally support logistics demand over time.

About Prologis (NYSE:PLD)

Prologis, Inc is a global real estate investment trust (REIT) that owns, develops, acquires and manages logistics and industrial properties. Its portfolio is designed to support supply-chain operations and includes distribution centers, warehouses, fulfillment facilities and other industrial buildings used by manufacturers, retailers, transportation companies and logistics providers.

The company also provides related property and business services, including facility management, leasing, development and customer-focused solutions through its Prologis Essentials platform.

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