Prologis cuts its 2026 property-sales plan as higher rates pull buyers and sellers apart

Prologis now plans to sell less this year

Prologis makes most of its money renting warehouses to some 6,500 customers, both online retailers and other businesses. It also builds and buys buildings, then sells some to outside investors and contributes others to funds it manages and part-owns. On 15 October it cut this year's plan for those sales and contributions to $3.5 billion to $4.75 billion at its share, from $4.25 billion to $5.25 billion in July.

Tim Arndt, the finance chief, said the cut "just reflects a little bit of caution in our willingness to be careful if there is some turbulence in pricing from here as the interest rate environment has been so volatile", and that a couple of deals had slipped into next year. Dan Letter, the chief executive, put the wider worry plainly: "We think the recent move in rates will slow transaction activity and could put some pressure on values."

The plan has swung through the year: $3.25 billion to $4.25 billion in January, $3.5 billion to $4.5 billion in April, then a July increase that has now been largely reversed. The third quarter was quiet. Prologis sold or contributed $169 million of property at its share, against $1.69 billion in the first half, so even the low end of the new range needs about $1.65 billion in the last three months of the year. It also trimmed its forecast for fees from its funds, citing "a tempered view on asset management fees as well as the timing of some transaction-based fees".

Rents on expiring leases still reset far higher

The rental business had a good quarter. When leases turned over, new rents were 38% above the old ones on a net effective basis, which averages the rent over the life of the lease, and 23% higher in cash terms. Occupancy ended September at 95.6%. Net operating income from buildings owned in both years, the measure landlords call same-store, grew 5.9% in cash terms: slower than the 8.5% of the June quarter, faster than the 5.2% of a year earlier. Prologis raised its full-year forecast for that measure to 7% to 7.5%.

Arndt put the gap between the rents tenants pay and today's market rents at 16%, which he valued at about $780 million of net operating income at spot rents. Core funds from operations, the recurring profit measure property trusts report, was $1.60 a share, up from $1.49, and the full-year forecast was narrowed to $6.25 to $6.29 from $6.22 to $6.30. The forecast for net earnings, the accounting measure that also counts depreciation and gains on property sales, was cut to $4.05 to $4.15 a share from $4.40 to $4.55. Management did not explain that cut on the call.

Cash set aside for SEGRO, and debt mostly at fixed rates

The rate jump finds Prologis partway through its agreed takeover of SEGRO, which would enlarge its European warehouse portfolio. SEGRO's shareholders approved the deal on 28 September, and Prologis expects to close in the first half of 2027 once regulators clear it. Arndt said "the vast majority of the capitalization of this transaction is known and certain": it is broadly an exchange of shares, the $2.4 billion raised from new shares in the quarter is "tucked away" for the closing, and the SEGRO debt it would take on carries rates that will not change. The regulatory process keeps Prologis from giving synergy or accretion figures, he said, and he does not expect January's first 2027 guidance to include SEGRO specifics.

Its own borrowing costs are largely locked in. About 95% of its debt is at fixed rates, debt was 4.5 times adjusted EBITDA, a measure of operating earnings, and liquidity was $8.8 billion at the end of September.

Management says dearer money also means fewer new warehouses

Management's argument is that the forces unsettling property prices also make new buildings harder to justify. Letter said construction costs are escalating, financing is more expensive and return requirements are trending higher, so that "the rents needed to justify new construction have expanded to 27% above current market levels". "All else equal, we expect fewer starts and a more favorable supply environment," he said. Arndt added that "the corresponding reassessment for higher rents provides the potential to offset some pressure on values".

Prologis is applying the same caution to itself. Letter said its bar for allocating capital "was already high. And in response, we've raised it even further." Even so, it raised its forecast for development starts, which Letter put down to a pipeline of build-to-suit projects, buildings developed for a customer already signed up, that is "probably about 20% to 25% larger" than a year ago. On deals, Arndt said: "We expect transaction volumes to moderate in the near term as buyers and sellers recalibrate."