Prologis Inc

NYSE:PLD

Earnings Call Analysis

Prologis Q3 2024 Highlights: Occupancy and Revenue Outlook Amid Market Challenges

In Q3 2024, Prologis reported core FFO of $1.45 per share and maintained high occupancy at 96.2%. While rent growth is currently soft—global market rents declined about 3%—the company notes a robust lease mark-to-market potential of 34%, supporting future earnings. Acquisition guidance was raised to $1.75-$2.25 billion, reflecting confidence amid a challenging market. However, development starts were reduced to $1.75-$2.25 billion due to cautious decision-making. Looking ahead, same-store net effective growth is forecasted between 5.5% and 6%, with expectations for market recovery in late 2025, driven by favorable long-term fundamentals.

A Strong Q3 Performance Despite Market Challenges

In the third quarter of 2024, Prologis reported a core FFO (Funds from Operations) of $1.45 per share, surpassing expectations. This includes notable contributions from the successful exit of Prologis Ventures, highlighting a strategic focus on high-value opportunities. Occupancy rates ended at 96.2%, significantly above the market average, showcasing the company's ability to maintain high-quality assets and demand.

Navigating Softening Demand and Rents

Amidst a backdrop of softening rents and rising vacancies, Prologis delivered a remarkable net effective rent change of 68% and cash rent change of 44%. This performance is particularly impressive considering a slight uptick in bad debt, now at approximately 35 basis points, higher than the norm of 15-20 basis points. The company attributes this resilience to the embedded rental upside within its existing leases, providing a buffer through this cycle of subdued demand.

Strategic Capital Deployment and Growth Prospects

Prologis remains strategically active, initiating over $0.5 billion in new development projects and expanding its land bank to support over $40 billion in potential developments, including its first projects in India. With acquisitions totaling over $1.4 billion in third-party assets, the company continues to capitalize on opportunities available at a discount to replacement costs—a crucial strategy as it navigates uncertain market conditions.

Guidance and Future Outlook

Looking ahead, Prologis adjusted its guidance for average occupancy to a range of 96% to 96.5%, while tightening projections for cash same-store growth to between 6.5% and 7%. Despite a projected net effective same-store growth of 5.5% to 6%, the company has prudently reduced overall development starts guidance to between $1.75 billion and $2.25 billion, reflecting anticipated slower decision-making from customers and disciplined management of new development under challenging demand conditions.

Market Dynamics and Long-Term Strategy

Globally, market rents have seen a decrease of approximately 3%, influenced by excess capacity and post-COVID adjustments in the supply chain. Nevertheless, Prologis remains optimistic about long-term growth, bolstered by replacement cost rents approximately 15% higher than current market rates. The management's focus on strategic capital ventures, energy systems, and digital infrastructure is set to drive sustained profitability as market conditions eventually stabilize.

Conclusion: Prepared for Future Challenges

In summary, Prologis demonstrated strong operational performance amidst softer market conditions. The company's active management of its portfolio, combined with proactive strategies in acquisitions and development, positions it well for future recovery in demand. With a keen eye on long-term growth potential and a solid balance sheet, Prologis remains a formidable player in the logistics real estate sector.

Earnings Call Transcript 2024-Q3

[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, executive]

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 risk 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 Arndt, executive]

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 properties 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 rents 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, including net promote 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 9 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 preleased to a hyperscale customer with a turnkey build-out. We expanded our land bank, driving our potential development opportunity over $40 billion, which now includes our first 2 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 costs. 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, Timee.

This produced a 9x 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 remained 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 [ asset ] 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 amount 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, a 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 1/3 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 2 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 noncash 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 amidst 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, amongst 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 was 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?

[Operator]

[Operator Instructions] The first question comes from the line of Tom Catherwood with BTIG.

[William Catherwood, analyst]

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 as 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 2 kind of seemingly divergent topics together? And what do you think it takes for customers, what kind of catalyst do you think takes for customers to move from hesitant when it comes to taking space to more active as we move into '25?

[Timothy Arndt, executive]

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 seek to build additional scale and deepen our presence in 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're 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've seen in our appraisals. So take that as you're looking at our activity in the acquisitions market.

In the near term, we just recognize 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.

[Operator]

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

[Vikram Malhotra, analyst]

I guess just 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 squaring that with 2 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 be -- have the product ready. Can you just square the bottoming in those 2 things?

[Unknown Executive]

Yes. 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 forecasts 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're 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 a peak vacancy or close to peak vacancy, which we expect to endure for a certain segment portion, maybe throughout '25, 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 pushed 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 4 quarters, we've been talking about customers kicking the can down the road. That's continuing in 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 2 buildings in Atlanta. Atlanta's headline vacancy is 9%. But then we look at the infill sites 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 2 buildings, so we could be building into those dearth 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 a 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 2/3 of that is actually pad ready, which means we really truncated the time frames 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.

[Operator]

The next question comes from the line of John Kim with BMO Capital Markets.

[John Kim, analyst]

So it looks like you had a $0.06 beat on 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 raised full year guidance by $0.01, given the beat you had during this quarter?

[Timothy Arndt, executive]

John, thanks for the question. I would say you see it as a beat. We don't see it as a beat. These are 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 off-line but there's complication between unrealized and unrealized 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 some 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.

[Operator]

The next question comes from the line of Steve Sakwa with Evercore ISI.

[Steve Sakwa, analyst]

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 [indiscernible]. 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 L.A. versus Inland Empire would be helpful.

[Christopher Caton, executive]

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 L.A. 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 into 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's 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 0 but these long-term trends will be more important over time. As it relates to the very short-term cyclical contours that you're asking about, a couple of things have emerged in the last 90 days. One, is demand remains soft in L.A. 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 positions us 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, executive]

Yes. Just quickly on the sizes, certainly, we've had some impacts on the smaller sized spaces in China that you see there. But when I look at this number quarter-over-quarter, the smaller sized space is typically underperforming on an occupancy basis to the other 3 buckets. As a matter of fact, quarter-over-quarter, 3 of the 4 buckets went down slightly. So nothing really specific as it relates to historical trends.

[Operator]

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

[Michael Goldsmith, analyst]

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 can 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?

[Unknown Executive]

All right. Michael, yes, I heard your question as how quickly can demand recover as uncertainty is -- 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-80s, 84s now. So it is indeed building, which will be a catalyst for our customers to take space. And indeed, there are 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.

[Operator]

The next question comes from the line of Craig Mailman with Citi.

[Craig Mailman, analyst]

Maybe just circling back to capital deployment here on the development and acquisition front. I guess on the development side, very helpful on 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 Arndt, executive]

Craig, it's Tim. Let me congratulate you on getting 3 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 ratings.

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 suggests 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, executive]

Yes. And then Craig, on the deployment front, we own land in about 50 -- over 50 markets globally. The average vintage year is about 4.5, 5 years old. And the mark on that book is about 120% of the 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're -- we just had 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.

[Operator]

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

[Caitlin Burrows, analyst]

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?

[Timothy Arndt, executive]

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 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. And our solar program, which 2 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 towards that 1 gigawatt goal.

[Dan Letter, executive]

Yes. Then on the data center front, overall 2024 has been, call it, a bit of a plan -- exceeding the plan. We have focused on 2 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. But 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 are 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.

[Operator]

The next question comes from the line of Vince Tibone with Green Street.

[Vince Tibone, analyst]

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

[Christopher Caton, executive]

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 when 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 square feet 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, 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.

[Operator]

The next question comes from the line of Ronald Kamdem with Morgan Stanley.

[Ronald Kamdem, analyst]

Just 2 quick ones, sort of following the last question in terms of -- asking in a different way. When are you thinking availability sort of peaks for the portfolio? I remember it was 4Q '24. Has that sort of changed at all? When is that pushed out to? And then the second part of the question, when we 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?

[Christopher Caton, executive]

Ron, 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 a 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 Arndt, executive]

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 onetime 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 wound up seeing 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 a 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 on net effective basis, of course, we would have the impact of the [indiscernible] from the Duke portfolio that takes something like [ 100 ] off of that. So you're squarely somewhere around [ 5 ]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.

[Operator]

The next question comes from the line of Blaine Heck with Wells Fargo.

[Blaine Heck, analyst]

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've 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 Caton, executive]

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 they also offer is 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 are investing in their space.

You asked also this concept of a pull forward. And so it is natural to think about how my 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 provisions. You may be aware, 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 are only 3% of Asian imports. And so look, as the category matures, this is a growth category for sure, they 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.

[Operator]

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

[Nicholas Thillman, analyst]

We noticed in the past few quarters, there's been an uptick in lease commencements with term less than 1 year in the core portfolio, roughly like [ 50% ]of commencements. 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.

[Timothy Arndt, executive]

Nick, it's Tim. I think that's an element of it, some uncertainty 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.

[Operator]

The next question comes from the line of Josh Dennerlein with Bank of America.

[Joshua Dennerlein, analyst]

I'm filling in for Jeff today. On 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 2 regions versus like maybe what you're seeing in the U.S. where it looks like it's more stabilizing at this point?

[Unknown Executive]

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 that you see impact.

[Operator]

The next question comes from the line of Mike Mueller with JPMorgan.

[Michael Mueller, analyst]

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

[Unknown Executive]

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

[Operator]

The next question comes from the line of Nicholas Yulico with Scotiabank.

[Nicholas Yulico, analyst]

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, that forecast was already hit this quarter alone based on the sequential decline, unless I'm confusing something here.

[Christopher Caton, executive]

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 and 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 Arndt, executive]

Look, I might just add that it's fair to interpret the way you're looking at those 2 numbers that, yes, we may be at the -- depending on 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.

[Operator]

The next question comes from the line of Michael Carroll with RBC Capital Markets.

[Unknown Analyst]

This is [indiscernible] on for Mike. I was just wondering what drove the jump in CapEx this quarter?

[Timothy Arndt, executive]

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

[Unknown Analyst]

The jump in CapEx for this quarter?

[Timothy Arndt, executive]

A lot of that is focused and you can see the components of CapEx in the supplemental between property improvements and leasing commissions and 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 lined 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.

[Operator]

The next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, analyst]

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 towards 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 Caton, executive]

Todd, it's Chris Caton. And thank you for the question -- 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 it's -- look, 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 [indiscernible] I think it's, maybe [indiscernible] and there is [indiscernible] 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 amidst perhaps more resilient consumer than what's 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.

[Operator]

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

[Brendan Lynch, analyst]

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 3 years?

[Timothy Arndt, executive]

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 at where we are now with regard to 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 as 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 5, 6, 7 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 are 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 centers, 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.

[Operator]

Our final question comes from the line of Steve Sakwa with Evercore ISI.

[Steve Sakwa, analyst]

Just wanted to clarify just 2 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 Caton, executive]

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

[Timothy Arndt, executive]

Okay. 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 down trend. 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]

And ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Have a great rest of the day.