Prologis Inc

NYSE:PLD

Earnings Call Analysis

Earnings Reveal Growth and Strong Guidance

In a robust quarter, the company delivered a notable core FFO at $1.29 per share, capping the year at the upper end of its guidance. Occupancy slightly outpaced market contraction, standing at an impressive 97.6%. More remarkably, net effective rent surged by 74% this quarter, reflecting a record annual growth of 77%. The year was marked by a solid $2 billion in new developments, and advancements in renewable energy, boasting 515 megawatts operational and 70 underway. Despite a temperate market, the firm is prepared for a large stabilization activity, and anticipates GAAP earnings between $3.20 and $3.45 per share, with a core FFO projection of $5.50 to $5.64 per share.

Earnings Growth and Investment Strategy

Despite the challenges presented in 2023, the company managed to demonstrate resilience with an 11% earnings growth and a 10.3% earnings compound annual growth rate (CAGR) since the merger 12 years ago. Their strategic moves included deploying over $7 billion in new investments, raising nearly $2 billion of strategic capital during tough market conditions, and maintaining strong operating results and customer relationships. The team's vision for the future promises an alignment with or betterment of current expectations, particularly as development starts continue to decline significantly from their peak.

Operating Landscape and Growth Prospects

Though some submarkets face challenges with new deliveries meeting a recovering demand, the company anticipates a convergence of reduced supply with normalized demand, potentially leading to strong market rent growth later in the year. This scenario aligns with the company's longstanding thesis and strategic anticipation of market trends.

Financial Performance and Portfolio Strength

The company reported quarterly core funds from operations (FFO) at the top end of the guidance and a net effective rent change of 74% for the quarter, contributing to a record full-year growth of 77%. Additionally, the portfolio outperformed market occupancy trends, ending the year with a vacancy rate significantly below the market average, illustrating the robustness of the company's portfolio amidst a broader decline in market occupancy.

Market Conditions and Strategic Focus

The increase in market vacancy, matched company expectations, was attributed to moderate demand and all-time high completions. However, a decrease in development starts across the U.S. and Europe indicate a future supply shortfall. Reflecting on global rent dynamics, despite a quarterly decline, there was overall market rent growth, with Southern California highlighted as both the strongest and most volatile market. Looking ahead, the company is keeping an eye on shifting trade dynamics that could impact regional markets differently.

Forward-Looking Guidance

For the upcoming year, the company forecasts occupancy rates to fluctuate around a high average, with expected ranges for cash and net effective same-store growth. Management suggests a significant number of properties stabilizing and plans for new development starts, with projected sales and contributions to strategic capital vehicles. GAAP earnings per share are estimated to range as highlighted, offering investors a perspective on the potential financial trajectory.

High-Level Rent Growth Expectations

The company introduced a rolling 12-month review for rent growth expectations following the admission that creating precise short-term market rent forecasts is challenging. This approach will provide investors with a directional view that aligns rent growth with inflation over the next year.

Regional Market Insights

The executive team acknowledged a pronounced performance difference between the Prologis share and the overall portfolio, suggesting stronger performance in the U.S. Despite questions about whether this gap will tighten, the company expects the disparity to persist, driven by the long-term effects of lease mark-to-market adjustments. Furthermore, while the Sunbelt markets showed better rent growth compared to the coasts, this trend is expected to continue in the future.

Positive Signs Heading into 2024

Market conditions are set to improve in '25 and '26 as supply continues to diminish, aligning with the company's expectations for acceleration in rent growth during those years. Additionally, the climb in property improvements in the CapEx section, particularly in the fourth quarter, is regarded as a timing issue rather than a trend, relevant for investors tracking capital expenditures against revenue.

Customer Engagement and Development Dynamics

The company reported healthy proposal volumes and strong customer dialogues, suggesting an improvement in build-to-suit activity and positive developments regarding port activity. Showing a strong appetite for speculative (spec) development, the company began the last quarter with significant starts and eyes a robust year ahead with more substantial developments. This reflects confidence in their business model and the vast opportunities within their land bank.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings, and welcome to the Prologis Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you, [indiscernible], SVP of Investor Relations. Thank you, Joe. You may begin.

[Jill Sawyer, executive]

Thanks, John. Good morning, everyone. Welcome to our fourth quarter 2023 earnings 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. 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 fourth 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 Hamid Moghadam, our CEO and our entire executive team are also with us today. With that, I'll hand the call over to Tim.

[Timothy Arndt, executive]

Thanks, Joe.

I'd like to start our call by recognizing and thanking our team for the incredible effort given over 2023. While it was a turbulent year in many ways, we ended it by delivering nearly 11% earnings growth and driving our 12-year earnings CAGR since merger to 10.3%. We deployed over $7 billion into new investments, raised nearly $2 billion of strategic capital in the very [indiscernible] time and delivered excellent operating results while serving and growing customer relationships. We're also appreciative of the opportunity we had at our Investor Forum last month to share our vision and outlook for the company over the coming years. The environment is setting up in line or better than our expectations with development starts across the market continuing to decline by 2/3 from peak and an improvement in customer sentiment that appears more constructive than just 90 days ago.

That said, we still see challenges in some submarkets as near-term outsized deliveries are met with still recovering demand. But our thesis remains the same as we've been describing for over a year and detailed last month in New York, which is that the supply cliff will converge with normalized demand later this year, delivering an environment conducive to strong market rent growth. We believe that annual market rent growth will average between 4% and 6% over the next 3 years, with 2024 being modestly positive and ramping thereafter.

Turning to our results. We finished the year strong with quarterly core FFO, excluding promotes, of $1.29 per share, bringing the full year to the top end of our guidance of $5.10 per share. While market occupancy declined by approximately 100 basis points, our portfolio gained 10 basis points to end the year at 97.6%. The Net effective rent change over the quarter was 74%, bringing the full year to a record of 77%, with another impressive results out of Southern California at over 150% and a reminder that it remains the strongest market for cash flow growth despite near-term choppiness given the large quantum of its lease mark-to-market.

In the end, same-store addictive basis was 7.8%, while cash was 8.5%. We started over $2 billion of new developments in the quarter across 46 projects in 27 markets with nearly 50% of the activity in build-to-suits. In energy, and as seen in our new supplement disclosure, we stand at year-end with approximately 515 megawatts of solar and storage in operation with an additional 70 currently under construction. We had a quiet quarter on the financing front, raising approximately $300 million, but our full year of activity closed out at over $12 billion at a weighted average rate of 4.5% in term of 10 years. Our total debt portfolio remains at an overall in-place rate of just 3% with more than 9 years of average remaining life.

Turning to market conditions. The increase in fourth quarter market vacancy was in line with our expectations and driven by demand that remain moderate as customers exercise caution in their spending, while completions hit an all-time high. Development starts, however, have continued to fall across the U.S. and Europe, extending and deepening the future supply shortfall. On the ground, our teams are seeing revised customer interest with healthy showing activity to start the year. This includes build-to-suit inquiries which we expect to remain active for Prologis following a strong year in 2023.

Our proprietary metrics point to normal levels of activity with proposals and gestation timing in line or a bit better than historical norms. Utilization declined in the quarter to approximately 83% in keeping with this morning's reported decrease in the inventory to sales ratio. We view this positively because utilization ought to increase from here as stronger-than-expected retail sales over the fourth quarter and holiday season drove lower inventories, which will need to be replenished.

Turning to market rents. Our global view is that rents declined this quarter by 90 basis points, but predominantly impacted by an estimated 7% decline in Southern California. Our full year view is that global market rents grew by 6%, just below our expectations, ultimately driving our lease mark-to-market to end the quarter at 57% after capturing approximately $100 million in realized NOI growth from leases rolling up to market. The outlier on rent growth is clearly Southern California. While our portfolio was only 2.6% vacant at year-end, growing availability has made leasing very competitive.

Combined with a 110% increase in rent since 2020, the rent retracement is understandable. Historically, there has never been a market where the delta between expiring and market rents has been so large that it provides ample room for property owners to deviate for market in order to attract customers.

So looking ahead, the positive news is that we are watching 2 trends reverse. The first is that the supply pipeline is clearly emptying with little in the way of new starts. And the second is that the escalating issues in both the Suez and Panama Canals together with the resolution of the West Coast labor negotiations are moving shipment volumes back to the West.

While this bodes well for SoCal and still early, we are watching East Coast port markets more closely. In any event, all of these disruptions are reiterating the underlying need for resiliency and the just-in-case approach to inventories. Summing this all up globally, we recognize the high volume of near-term deliveries that need to be absorbed into our markets over the next few quarters, but we are very pleased with our ability thus far to build occupancy, drive rents and illustrate more differentiation in our portfolio as market vacancy grows.

As for strategic capital and valuations, we saw U.S. values decline approximately 5.5% during the quarter, which was our expectation and the reason we paused our appraisal-based activity which includes calling and redeeming capital as well as asset contributions. We run an industry-leading franchise in which we aim to set the standard for governance, including timely, accurate and independent valuations. Calling out when pronounced the lags and valuations emerge has protected investors and demonstrated how we stand apart as a responsible partner.

With this quarter's value declines in a more stabilized rate environment, will resume activity in USLF, including the funding of our $250 million commitment announced in the second half of '23.

Turning to guidance and all of our share, in terms of operating metrics, we are guiding average occupancy to range between 96.5% and 97.5%, with occupancy likely to step down in the first quarter and rebuild over the course of the year. Cash same-store will range between 8% and 9% and net effective same-store growth will range from 7% to 8%. We're forecasting net G&A to range between $420 million and $440 million and strategic capital income to range from $530 million to $550 million. We have a very big year of stabilization activity ahead of us with a range of $3.6 billion to $4 billion and expected yield of approximately 6.25%.

On the new deployment front, we are guiding development starts to range between $3 billion and $3.5 billion with estimated build-to-suit mix of 40% and we plan to take sales portfolios to the market over the year with expected proceeds to range between $800 million and $1.2 billion and additionally, forecast $1.75 billion to $2.25 billion in contributions to our strategic capital vehicles.

In the end, we are forecasting GAAP earnings to range between $3.20 and $3.45 per share, core FFO, excluding promotes, will range from $5.50 to $5.64 per share, while core FFO, including net promote expense will range between $5.42 and $5.56 per share. Each a bit higher than our preliminary guidance at the investor forum. While we do not forecast any promote revenue at this time, there are some small opportunities that do exist in [indiscernible] Prologis in our new PJLF vehicle in Japan.

In closing, we know that the market is not yet out of the woods with regards to incoming supply but the combination of a stronger backdrop continued the level of starts and a calmer capital markets environment has us optimistic that 2024 will be another great year. As you know from our Investor Day, we have many initiatives in flight designed to add value beyond our real estate and because of our real estate.

We look forward to continuing to execute on our plan and providing new updates throughout the year. And before we move to Q&A, I'd like to get ahead of questions, which have grown a little more frequent in recent quarters surrounding market rent growth. Unintentionally, we set an expectation that we could forecast market rents to a single point of accuracy in increasingly short time periods. And honestly, we're just not that good. We've gotten away from a practice that was originally aimed at being high level and directional. So what we've elected to do in order to help investors without perpetuating the issue is to simply provide high-level rent growth expectations on a rolling 12 review.

As mentioned earlier, in terms of our 3-year CAGR of 4% to 6%, we believe we'll see modestly positive rent growth aligned with inflation over the next 12 months, and we'll continue to update this rolling view on our future calls.

With that, we will now take your questions. Operator?

[Operator]

We will now be conducting a question-and-answer session. [Operator Instructions] One moment, we'll be polled for questions. And the first question comes from the line of Tom Catherwood with BTIG.

[William Catherwood, analyst]

Excellent. Kind of maybe taking a look at your leasing spreads. Obviously, very strong performance during the quarter, but also a big spread between Prologis share and the kind of overall portfolio performance, which suggests stronger performance out of the U.S. Going forward into '24, are you expecting this gap in performance to tighten at all? Or should the U.S. continue to lead the way as far as spreads go this year? .

[Timothy Arndt, executive]

I'll take that. I think, Tom, that it will actually be relatively similar. There's a pretty long tail on how the lease mark-to-market is going to affect quarterly rent change, it will sustain for quite a while in other words. And since it's much more pronounced in the U.S. than anywhere else in the world, I would expect we do see that continue to stay wide.

[Operator]

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

[Ronald Kamdem, analyst]

Just 2 quick ones for me. So one, we've been looking at a lot of the broker reports talking about rising availability rates. You guys have flagged it as well. So just curious what you guys seeing in sort of the Sun Belt markets versus sort of the coastal and if that's trending sort of in line or with your expectations and so forth would be the first.

[Christopher Caton, executive]

So the year is -- or the year closed out with market vacancy rates mid-5%, just like Tim described. And the vacancy rates remain lower on the coast -- excuse me, so both East Coast and West Coast and higher in the Sunbelt. What we are seeing as it relates to pricing is there was better pricing, better rent growth in the Sunbelt markets outperforming the coast in 2023.

[Ronald Kamdem, analyst]

Great. And if I could just follow up on the market rent growth comment. I think you said rolling 12 months sort of inflationary plus or minus. So clearly, that's implying sort of an acceleration in '25 and '26 as supply comes down. Is that sort of how you guys are thinking about it? .

[Timothy Arndt, executive]

That's exactly right.

[Operator]

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

[Craig Mailman, analyst]

Great. Two quick ones here. I guess first question would be, could you guys just go through what the uptick in property improvements in the CapEx section were there's a pretty big jump in 4Q versus prior quarters. And then just second, Tim, you had kind of touched on this that tenant sentiment is improving here and there may be better traffic going back to the West Coast with everything going in the Red Sea and the realization that just in case maybe a more prudent inventory method. But I'm just kind of curious because big tenant leasing has been kind of slower over the last 12 to 18 months. Are you seeing any early green shoots on that improving as you guys are talking with customers? .

[Timothy Arndt, executive]

Yes, I'll take the first part here, Craig, on the CapEx. If you take a look at the supplemental, I'd first start by widening out on overall CapEx before staring at property improvements. And there's just a good example here of the need to look at annual or trailing numbers as this can be a pretty volatile number quarterly. Here, you can see on the full year as a percentage of our NOI, we are about 14%, roughly 15% the prior year. And yes, focusing in on property improvements, I suggest the same that you have to look at a trailing basis. We do tend to see higher levels of property improvement activity in the fourth quarter just by nature but we're catching up on the full year. You can see we averaged $0.12 on the year versus the $0.21 that we had in the quarter. So that's really just a timing issue. One more thing that you can see here is the year-over-year average on that basis $0.12 versus the prior year 10. And I'd explain that differential as just some inflationary piece and then the second would be some deferred maintenance and work that we're executing on the Duke portfolio.

[Dan Letter, executive]

And maybe this is Dan, Craig. On the second part of your question related to tenant sentiment, I would say, at the Investor Day, we had talked about a marginally better tenant sentiment from the Q3 earnings call. And I would say it's even marginally better than that in the last 30 days. This is fueled by our healthy proposal volumes, customer dialogues have been strong, 45% of our available space is in discussion right now with active proposals. We've anecdotally had just a number of conversations with our customer-led solutions group. Our build-to-suit conversations are improving as well. Our overall build-to-suit pipeline has grown quarter-over-quarter. So whether that be some of the issues related to the Red Sea issues and the canal issues or not. I think Chris will have some comments on that.

[Christopher Caton, executive]

I'll just go further, Craig, as it relates to port activity. We went out on a limb in September with a published research report calling for recovery in market share, and that is really, really playing out in the port activities. In November, West Coast ports were up 24% year-on-year. Inbound shipments are up even more, and that will translate to lease time.

[Operator]

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

[Caitlin Burrows, analyst]

Tim, earlier, you mentioned how development starts are down, maybe 2/3 from the peak and that you're seeing little in terms of new starts broadly. When we look at your own build-to-suit split of development, it is up year-over-year and then that earlier question just on customer sentiment. So I guess, combining all of those pieces, how do you think that impacts your decision to do spec development versus build-to-suit over the course of this year? .

[Dan Letter, executive]

Caitlin, this is Dan. I'll respond here. A few thoughts for you. First of all, we started just over $1 billion worth of spec in the fourth quarter. So we had talked over the last several quarters about the declining starts in the marketplace, and that's when we wanted to come out of the gate here with some starts, and that's what you're seeing us do right now. We have a pretty healthy guidance here for the 2024 starts at owned and managed of about $4 billion. And if you think about it, that's 25 million square feet or so of starts that we could be doing this year. And we have a development portfolio right now of about 50 million square feet. So we've got an appetite for spec. Our build-to-suit volume, we think, is going to shake out in that 40% range as we've projected. And then keep in mind, we talked about this plenty at the Investor Day. We have $40 billion worth of opportunities in our land bank and we have the ability to make decisions on a quarterly basis where we're going to build. We own this land in 50 markets around the globe, 300 different sites. So plenty of opportunities there.

[Operator]

And the next question comes from the line of Ki Bin Kim with Truist Securities.

[Ki Bin Kim, analyst]

I just wanted to touch on the development start guidance of $3 billion plus this year. Can you just help us break that down versus -- so traditional industrial versus like data centers or other property types? And does the pre-lease percentage that you're expecting differ a whole lot? And sorry, to add a third year. Typically, how long will the data center development is paid to cash flow? .

[Dan Letter, executive]

Sure, Ki Bin, this is Dan. I'll hit that. First of all, we gave some guidance on our data center business 30 days ago at Investor Day. We talked about over the next 5 years, 20-or-so opportunities, 3 gigawatts of data centers, $7 billion to $8 billion worth of investment. Those numbers have not changed. As a matter of fact, one thing we couldn't disclose at Investor Day was we started over 500 million worth of data centers in the fourth quarter alone. You won't see us guide to data centers. These are very lumpy deals. And if you think about our data center opportunities, we own over 5,500 buildings. We own or control over 12,000 acres globally. So we have one of the most important components of data centers. We control the land, right? We talked about power applications at Investor Day. We talked about a number below 50. That number is now approaching 60. Our team is very active growing that data center pipeline.

Then the third component of it would be customers, and we're talking to the big hyperscalers on a regular basis. And we think it's prudent for us to be careful on how we project out what our data center volume will be because there's a competitive nature to this as well. We're negotiating with these customers, and we think it's important for us we will absolutely share with you when these projects are on the horizon. But right now, our start volume is largely industrial. And then keep in mind, our data center business is a part of our long higher and better use business. We're going to build. We're going to merchant build these, and we're going to recycle that capital into the business we love so much, which is logistics.

[William Catherwood, analyst]

Yes. To your question about how long it will take them to cash flow, there's a wider range than traditional industrial. But I would say on kind of powered shelves, it's more in the 12- to 15-month range from start and on turnkey depending on who does it and whether the customer does it or we do it, it could be longer than that by about a year because since the installations are pretty complicated to get these going. But all of that is built into the budget and the economics of the transaction. And this point that then made on the negotiating posture is really important. I mean the last thing we want to do, there are 4 or 5 customers out there, and it's pretty obvious given the scale of the numbers, they can figure out which project is in our guidance for the next quarter if we wanted to go in that direction, and that basically reduces our leverage. So we're just not going to do that.

[Operator]

The next question comes from the line of [indiscernible] with Evercore ISI.

[Unknown Analyst]

I was wondering if you could just provide a little bit of commentary on the supply and demand trends over the next couple of quarters? You've previously said that you think deliveries will outpace demand for the next couple of quarters and then the inverse will happen after that. So just any update on that would be great.

[Christopher Caton, executive]

Jay, it's Chris Caton. So we project 250 million square feet of net absorption in the calendar year and 285 million square feet of completions. And yes, that's going to be front-end loaded, particularly on the supply side. And so we think you'll see the vacancy rate rise by another 50 to 75 basis points here in the first half of the year, peaking at 6%, maybe 6.1% and then making a meaningful move through the subsequent rest of the year and into 2025 and 2026 based on the trend in starts that we've profiled for you.

[William Catherwood, analyst]

Let me just punctuate that. Vacancy rates will go up through the second quarter. I'm surprised by that. But we're pretty confident that [indiscernible] back down after that.

[Operator]

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

[Nicholas Yulico, analyst]

I just wanted to go back to the space utilization comment you made, Tim, about feeling that at this point, retailers likely have to restock inventories is actually good sign where space utilization is. I guess I'm wondering if you could give us some -- remind us sort of seasonally how this may play out historically in terms of leasing demand picking up from 3PL or retailers because of that issue of restocking? And then as well in terms of the lease proposals picking up in the fourth quarter, if you had any benefit already from that industry or even anecdotally, you could talk a little bit about the discussions there.

[Timothy Arndt, executive]

Yes. So the easy way of thinking about this is basically absorption and demand for our product follows 1, 2, 3, 4 scenario as you move through the quarters. It's back-end loaded towards the fourth quarter. And that's historically been the relationship. Because so much of the activity occurs in the fourth quarter and so much of that activity would have been based on anticipation earlier in terms of the Christmas season, so much of the sales are in the Christmas season. The volatility is the most in the fourth quarter. This year, retail sales and in particular, e-com sales were better than people's expectations and the retailers were caught short in '21. They were a little overstocked in '22. And now they were back to being very careful with inventories. So they got caught short of inventories again. That's why utilization is done. They're schizophrenic. They always have too much or too little. You can never get it right. And the good news is that this Christmas season was stronger than everybody anticipated. It's going to take for that to work its way back to normal.

[Operator]

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

[Blaine Heck, analyst]

Can you just talk broadly about valuation and cap rates? And given the continued movement in the 10-year, I guess, do you think that pricing is adjusted correctly? Or could we see continued volatility in -- I guess the potential volatility present you with any investment opportunities? .

[Unknown Executive]

Yes. We don't think the real pricing and real returns have really changed because return expectations should have been higher 6 months ago because of higher treasury rates. But nobody was trading based on those higher return requirements. So nothing really happened. So it was a theoretical decline in values. I think with the treasuries now having come down, I know they've gone up a little bit just most recently, but net-net, they're down. I think the reality is the expectations of the market participants and that theoretical pricing of assets is converging. Bottom line, we think we're seeing the near bottom of valuations, both in the U.S. and Europe. And I think with this level of stability and sort of bottom forming, you'll see more volume coming through in terms of real deals.

[Operator]

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

[Michael Goldsmith, analyst]

Another supply-demand question. But just as we think about the cliff of new deliveries coming online, it sounds like that drops off in the second quarter. Is there an extended period of time where we're going to need to lease these up. And so the inflection of when supply gets better and then combined with what you're seeing on the demand side? Does that mean -- does that happen through the third quarter and into the fourth quarter? Or is that kind of happen just as soon as the deliveries slow?

[Christopher Caton, executive]

It's Chris. So I'll start off by offering. Look, the vacancy rate is going to go up to 6% -- and I are very clear with the whole team player on that. Bear in mind, that's a very low level in the context of history. And so yes, it will take -- there'll be time for vacancy to decline to soak up that availability. But it's going from a low level to an even lower level. So it's a bit like they can see it's going to go from 6, it's going to move to 5.5% and likely to 5%, given the supply cliff that we see.

[Operator]

And the next question comes from the line of Camille Bonnel with Bank of America.

[Jing Xian Tan, analyst]

Your outlook for development stabilizations is quite positive despite the supply environment remaining elevated for the first half of this year. So could you just expand on what the expected timing is around for this? And then if you can just follow up a little bit more on your comments around tenant inventory. What are they telling you in terms of how they plan to adapt to any persisting disruption around East coast ports?

[Dan Letter, executive]

Camille, this is Dan. I'll start with your question on stabilization. It is a big year on stabilizations for us. We actually started the year out with some good news. Late December, we actually pulled in for stabilizations that we had expected to happen in the first quarter of 2024. But overall, the timing of those stabilizations, it spread out pretty well throughout the year. And one number I would just point to is that for stabilization, volume is 46% leased already, which is actually 300, 400 basis points above the average at this point over the last several years.

[Christopher Caton, executive]

Camille, it's Chris. I want to jump in on the disruption of the ports. We're really just now seeing the diversions as it relates to the disruptions in both Panama and the Red Sea and Suez and so it's a bit early for us to see real medium-term leasing decisions in response to these disruptions. But number one is the clarification or the ratification of the labor agreement on the West Coast is providing a clear landscape for decision-making and the engines of growth are beginning to kick in Southern California.

[William Catherwood, analyst]

Let me make that point a little stronger. I think all this concern about L.A. is over. And it hasn't shown up in the numbers yet, but it will in the next 6 months. So I don't think we'll be sitting here on calls like this worrying about L.A. and its absorption. Now will we worry about something else? I'm sure we will. I don't know whether that's going to be the East Coast or Houston or whatever. But yes, I mean, you've seen 2 big movements. It's not just Suez. It's also a Panama Canal and the water issues there and the expense of shipping stuff through the canal is leading to more reversion back to the normal way of doing it, which is getting it to a land and land verging it over. But there could be other disruptions. It could be something can blow up in the Persian Gulf. So it's very hard to predict those things. The big message is this, we can spend a lot of time guessing as to what the share of West Coast is, East Coast is all of that. The point is people thought COVID was the big unknown factor. And now that COVID over, the world is going to go back to a stable, predictable just-in-time type of inventory strategy. I think each one of these things, whether it's Panama, whether it's Suez, whether it's or in the Middle East, whether it's something in the Persian Gulf, we'll remind people that they generally need to have a more conservative inventory strategy. And that's the big long-term driver, which is going to be a tailwind for demand that we haven't really seen play out just yet. We're pretty confident that will.

[Operator]

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

[Michael Mueller, analyst]

Do your comments about seeing revised customer interest apply to big box leasing as well? .

[William Catherwood, analyst]

Yes. In fact, I would say some of the largest customers that we talk to are -- use an overused word, there are definitely some green shoots. Their is changing from that of let's hold off, and they've held up as long as they can because they're building out their networks, particularly on the e-comm side. And I think given that the economy hasn't tanked, like everybody thought it would 1.5 years ago, I think they're tip doing out there. And with the first couple doing it, I think the rest will follow. So I think, yes, the big box guys are coming out of the shadows and taking up some space again.

[Operator]

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

[John Kim, analyst]

On your commentary on Southern California coming -- rents coming down 7%. Can you give the same color on New York, New Jersey, that's a market you've seen a larger decline sequentially in occupancy and now you're discussing issues with port volumes and the canals? .

[Unknown Executive]

We are not going to get into quarterly rent forecast, and we're not going to get into market-by-market forecast. We run a 1.2 billion square foot business, and I think we are ready in terms of a company of our size and disclosure and details are definitely in the 99th percentile, and we just don't have that ability, so we're not going to put some numbers out there that we can't be certain up. So if you don't mind, just let's stay away from that fine level of dissection beyond our ability.

[Operator]

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

[Nicholas Thillman, analyst]

You guys touched a little bit on [Technical Difficulty] at your investor forum, you kind of mentioned that you expected ex U.S. to outperform U.S. in a market rent growth standpoint. Is still -- is that still the case? And then maybe could you just highlight some markets that you're a little bit more incrementally positive on over the last 30 days of activity? .

[Christopher Caton, executive]

It's Chris. Yes, indeed, we saw International outperformed in the fourth quarter, our view is that it will outperform in 2024. And there are a wide range of international markets that are enjoying really strong market rent growth. Latin America, both Brazil and Mexico, turning to Europe, probably Northern Europe is the strongest. And then here in North America, Toronto is a market that's also enjoying outsized growth.

[Hamid Moghadam, executive]

Yes, U.K. is outperforming, too.

[Operator]

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

[Vikram Malhotra, analyst]

Just 2 quick ones. So just first of all, going back, Chris, I guess, to your comment around $250 million in demand, if I heard that correctly, in '24. Can you just give us what's the actual number in '23, you're comparing that to? And with your leading indicators, just how long does the doing indicator sort of take in terms of conversion to leases. So that's just the first one to understand the comparison and the trajectory. And then second, do you mind just giving us some specifics on what you're baking in for numbers for cash rent spreads and where portfolio mark-to-market is?

[Christopher Caton, executive]

It's Chris. Thanks for the question, Vikram. I'll take the first one. So 250 million square feet of net absorption in 2024 compared to 192 million square feet of net absorption in 2023. And we consult a wide range of leading indicators, some of which are contemporary and some that have a 9- to 12-month lease.

[Timothy Arndt, executive]

Vikram, on the lease mark-to-market, I'll just say again, I don't particularly value the cash view of the lease mark-to-market, I think it's fraught with a few issues. But to answer the question, we saw it at 49% at the end of the year. And I would expect, we've seen a pretty wide divergence in cash to net effective rent spreads because of a few things. The absolute level of rents has been so high and the bumps have been pretty large around 4%, as you've known. So the [indiscernible] as well, of course. So the roughly 20, 25 points that we've been seeing lately, I expect we'll see mostly continue into next year.

[Operator]

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

[Todd Thomas, analyst]

Just wanted to ask about capital deployment, 2 questions actually. First, can you talk a little bit more about the acquisition pipeline today and whether you are seeing an increase in seller interest to transact more deals coming to market and more product hitting the market? And then second, the spread between stabilized yield and cap rates for both development stabilizations and new starts narrowed in the quarter. Can you talk a little bit about that trend in spreads and what we might expect in particularly as you move forward, just given the mix of build-to-suits and spec developments and some of the higher and better use projects that you're ramping up on.

[Dan Letter, executive]

Todd,, this is Dan. I'll respond to your questions here. First of all, yes is the quick answer to your first part of the question regarding the acquisition pipeline. Our teams are out there turning over every stone. It was a low volume year in the marketplace last year, and I expect that to be much higher this year. So very strong acquisition pipeline. And then spreads on the stabilized yields in our development portfolio, yes, we've been talking for the last several quarters about that tightening. I remember 5, 6 quarters ago was talking about cap rate expansion and that spread tightening and what that would do to impact our overall development portfolio. And that really just has to do with the cost of capital, volatile capital markets and who knows where that's going to go from here. It's certainly going to have something to do with the 10-year and what the tenure does and the volatility in the capital markets. But overall, we build in forward risk in our overall development portfolio for the numbers that you actually see in that spread.

Go ahead, Tim.

[Timothy Arndt, executive]

Yes. And I'll just highlight, I think if we look at the development portfolio, you see the margin there estimated at 22. Historically, that's still a very good margin. And under conservative underwriting assumptions, I would remind everybody, we've got an inflated cost of carry in there. We've got longer lease-up times and things that we expect that will be. So I'm pretty confident we'll be several points above that estimated margin anyway.

[Operator]

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

[Michael Carroll, analyst]

I guess maybe, Chris, can you provide some color on tenant's mindsets to adding more inventory? I mean is it fair to say the tenants or at least some tenants have delayed these decisions over the past year just due to the macro uncertainty? And when does this change? I mean have customer discussions changed at all given the holiday season that you kind of just highlighted and how they didn't have enough inventory levels? I mean has that been changing? Or are they ready to make those investments today? .

[Christopher Caton, executive]

Mike, it's Chris. I think you might have answered your own question. I totally agree with the sentiment in the direction you're taking it and there's likely to be a different posture going forward. And then I'd also look proposed that you can also recast them and get their feedback.

[Unknown Executive]

Yes. I bet you their answer is they have no idea. I mean it's just been 16 days, right, l6, 17 days since the end of the year. many of them haven't even added up their numbers. And I think those guys don't come out with earnings releases until much later. So with Michael's question, that was the last one. I wanted to thank you for not only this call but also attending our Investor Day, has got a lot of great feedback from you and we'll make these things better and better over time and look forward to talking to you next quarter, if not before. Take care.

[Operator]

Ladies and gentlemen, this use today's teleconference. You may disconnect your lines at this time. Thank you for your participation.