In a Monday call with analysts, management at logistics warehouse operator Prologis Inc. noted some moderation in demand for logistics space, but with the caveat that the change represents only a modest not below recent all-time highs.

“Let’s call the peak in terms of market strength on the demand side a 10, on a scale of 1 to 10,” said Hamid Moghadam, co-founder and CEO. “I think the last quarter and the front quarter were like 12 or 13 – they were just crazy. I think this quarter they are maybe 9.5 to 10. By historical standards, that would be exceptionally good.

Prologis (NYSE:PLD) announced base funds from operations of $1.11 per share for the second quarter before the market opened on Monday. The result was in line with the consensus estimate, but 10% higher year over year.

Although the number of active bidders competing for logistics space during the quarter was down slightly from record highs, the changes were not evident in the results. The portfolio’s occupancy rate was 97.6% in the quarter, 160 basis points higher year-on-year and 20 bps lower than in the first quarter. The net effective change in rent – the average change in the rate over the lease term – was 45.6%, up 1,410 basis points year-on-year. The metric averaged 54% in the US during the quarter.

Management said 71% of leases up for renewal over the next 12 months are pre-let or under negotiation, 15 percentage points higher than the pre-pandemic average. However, the length of the negotiation process was extended from 10 days to 60, as tenants slowed down their approach slightly to take up more space.

Essentially, the leveraged space tenant is squeezed out as interest rates rise. Also, some of the e-commerce foam is going out of the market. E-commerce represented 14% of new Prologis rentals over the period compared to 25% during the frenzy of 2021.

Table: Prologis key performance indicators

“Frankly, everyone reads the same newspapers,” Moghadam said. “If you’re the CEO of a company looking to expand your operations, you’re going to take a little extra time to make sure you’re not making a stupid mistake.”

Prologis raised its full-year 2022 net profit forecast to a range of $5.15 to $5.25 per share, a 5.6% increase from the guidance provided just three months ago. before and 16.2% more than the initial outlook given in January.

On the supply side, Prologis forecasts 375 million square feet of net absorption and completions in 2022 with vacancy rates of 3.2% in the top 30 markets where it competes. Rents are now expected to rise 25% in the US, higher in some coastal markets, over the year. This is 300 basis points higher than the forecast provided a quarter ago.

Management estimates that it has approximately $2 billion of net operating income embedded in its portfolio when comparing current market rates to current leases, which will be renewed in the months and years to come.

Looking to 2023, management expects supply to potentially exceed demand by 50 to 100 million square feet. However, he estimates that the additional capacity would not push the vacancy rate above 4%.

Prologis also sees little impact on supply, although it has been reported that Amazon (NASDAQ:AMZN) will potentially put between 10 and 30 million square feet of space back on the market. Management said any potential action appears unlikely to impact any of the company’s facilities. Prologis has a 95% retention rate with Amazon, 20 percentage points higher than the portfolio average, and its properties are 99% let in the markets it engages with them.

“Ultimately, we believe we are seeing a normalization in the volume and pace of demand, which is what we expected as the world reopens from COVID and consumers seek more in-person experiences,” said Prologis Chief Financial Officer Tim Arndt. “But given the exceptionally tight markets and availability, the fundamentals remain excellent.”

In June, Prologis reached an agreement to acquire Duke Realty (NYSE: DRE) for $26 billion. The all-stock transaction is expected to close by the end of the year. No update on the deal was provided during the call.

Prologis Ventures is an investor in FreightWaves.

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