Prologis, Inc. Price & Performance (PLD)

A 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 ks or other SEC filings. Additionally, our first quarter earnings press release 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 Arch, our CFO, who will cover results real time market conditions and guidance Amit Mogadam, our CEO Dan Leder, President and Chris Caden, Managing Director are also with us today. With that, I'll hand the call over to Tim. Thanks, Justin. Good morning to everybody, and thank you for joining the call. Prologis delivered a very strong quarter. We leased 58,000,000 square feet, a near record, broke ground on several build to suit developments with key customers and expanded our power capacity by 400 megawatts to support growing demand for data centers a 13% increase.

We outperformed our expectations on earnings, occupancy and rents. Prior to April 2, industrial fundamentals were improving And had it not been for the recent uncertainty from global tariffs and their downstream impacts, we would have raised our expectations for 2025. Instead, we are electing to maintain earnings guidance as there are no policy conclusions right now to plan differently and our severe stress test to core FFO supports the existing range. While the instability created in the last two weeks may disrupt logistics and supply chains, it will certainly slow decision making. Many companies now question where to source, manufacture or even sell their goods. In speaking with customers, they echo this sentiment while at the same time revealing the need for flexible inventory positioning in the evolving landscape. Let's be clear, the range of outcomes is wide, We see potential for recession, inflation or possibly both. And let's also not dismiss the potential for a quick resolution. It's important to remember that Prologis was designed to weather any environment. We have a global footprint with a highly diversified rent roll Our revenues are contractual with fixed or inflation linked escalations Our Fortress balance sheet has unrivaled access to global capital.

We are a trusted partner to many of the largest institutional investors in our strategic capital business, all of this positioning Prologis to be a partner of choice for our customers especially in turbulent times. Before I review the quarter, let me share three high level thoughts. First, a disconnected world will require more warehouse space, not less. Second, the current environment is an endorsement of our long standing strategy to invest in markets where goods are consumed, not where they're produced, And third, we've built our company with the intention to not only withstand disruptions, but to take advantage of opportunities as they arise. Turning to the quarter, core FFO, including net promotes, was $1.42 per share and excluding net promotes was $1.43 per share each ahead of our forecast. Occupancy ended the quarter at 95.2%, down 70 basis points from year end, which was better than expected principally to strong retention. Net effective rent change during the quarter was 54% and on a cash basis was 32%, As a result, net effective and cash same store growth during the quarter were 5.96.2%, respectively. Our net effective lease mark to market ended the quarter at 25%, with most of the sequential decline driven by the increase of in place rents.

This 25% represents a further $1,100,000,000 incremental NOI after capturing another $105,000,000 during the quarter. On capital deployment, we started approximately $650,000,000 in new developments outperforming our forecast with nearly 80% of the activity on build to suits with lease terms that average sixteen years. We have been describing the build to suit pipeline as robust for some time and in the last several months, decision making finally thawed. Which we believe highlights the need for space is real, but what has kept volumes low is confidence. We have over a dozen deals still in active dialogue today, and in fact have signed an additional two transactions for 1,100,000 square feet post April 2. The pace so far this year has been well ahead of normal. In our data center business, 400 megawatts of power has moved to our advanced stage category upon agreement with utilities for projects in a Tier one market. We now total two gigawatts in this category alongside our 1.4 gigawatts of power, which is already fully secured. Our conversations with utilities and hyperscalers alike have been very productive, and we will have start activity to report for the second quarter. And finally, at quarter end, we have over 900 megawatts of solar and storage capacity either in operation or under development, advancing us closer to our one gigawatt goal for the year.

With The U. S. And Globe both in great need for additional energy production, and solar as the least expensive format, we feel great about the long term prospects of this growing business. On the balance sheet, we raised approximately $400,000,000 in new capital for our flagship open ended funds yet had similar amount of redemptions leaving the capital raise near neutral in total. We had a relatively light quarter of debt issuance with $550,000,000 raised at a weighted average rate of 4.1%, including the Canadian bond transaction further insulating that currency exposure. Our balance sheet remains in great shape as evidenced by the upgrade we received from Moody's this quarter to an A2 rating, Prologis now being one of only two public REITs with an A flat rating from both agencies. Turning to the operating environment, which I'll cover by describing conditions before and after April 2. The post election uptick in leasing held steady throughout the quarter with improving proposal volumes and conversions. We saw increased touch points with our global customers and higher activity levels specifically within transport, food and beverage, consumer products and electronics. Week by week, we were on the lookout for any slowdown in the level of interest or pace of leasing following the strong fourth quarter, And while it did not manifest in our pipeline numbers, as early tariff threats came on and off and uncertainty grew mid quarter, we did speculate that we would see a slowdown in decision making.

With all of that being old news, let's turn to an update on the last two weeks. While it's ultimately announced on April 2 clearly went beyond our early predictions, making the environment less certain. Even with the pause in some tariffs or resolution of others, customers simply lack a steady backdrop upon which to plan their businesses. We've now dialogued with more than 300 customers, including two impromptu customer advisory boards, representing over 20% of our rent roll. This is what we've heard. Our customers are moving quickly to manage tariff volatility with many accelerating shipments where possible.

They're also rerouting volumes and have urgent demand for overflow space. Accordingly, they are looking for short term flexibility and 3PLs are typically where they turn. Indeed, 3PLs flex space is getting more utilized with one prominent name describing that they've increased their utilization from 83% to over 90%. Additionally, alternatives such as free trade zones and bonded warehouses are being evaluated. Our customers were focused on food and beverage, industrial industrial manufacturing and essential consumer products like health, and household goods are more insulated and are operating with confidence But of course, customers selling goods with China based production face the most uncertainty. Price increases to consumers will be passed through where they can, but margins will still come under pressure Therefore, planning horizons are shortening and flexibility remains key. And customers like everybody are concerned about a recession where consumption and demand will be negatively affected further shaping their response. The diversity of feedback was a good reminder that many of our customers source domestically and are relatively unaffected, while others have the capability to adapt or even stand to benefit. Whatever the scenario, our team is moving decisively to partner with our customers and meet their needs, In the last two weeks alone, we've signed approximately 80 leases for more than 6,000,000 square feet That's a roughly 20% dip from our usual pace, and we expect things may slow further but it does reflect a market that's still active.

Looking ahead, here are some things we expect. Inventory levels will increase as business is stockpile and build resiliency, E commerce is likely to take more share in an environment where product availability becomes an important factor to consumers in choosing how to shop. Global markets will become more important with Canada, India and Brazil among those in our portfolio that we expect to benefit Mexico will be another and it has stood out in terms of a growing level of interest pre and post April 2. Port markets may benefit from an immediate buildup of inventories From there, we will need time to know how or if trade flows ultimately adjust. Nevertheless, we still believe in the long term outlook for such markets with large population centers and significant supply constraints, a topic we'll be sharing further research on in the coming days. Finally, we believe that the inflationary effects of tariffs will only serve to increase the value of hard assets replacement costs and rents. Turning to our guidance. As mentioned, our first quarter results and outlook would have called for a tightening and increase of guidance including earnings. Given the circumstances, however, we've opted to hold most areas unchanged with the main exception in capital deployment.

We are reducing our development start guidance at our share to 1.5 to $2,000,000,000 which reflects a reduction in our expectations for spec development until visibility improves. Our combined contribution and disposition guidance is also decreasing to a range of $400,000,000 to $1,000,000,000 again reflecting uncertainty in both the capital markets and the fundraising environment. In turn, we are reducing our development gain guidance to a range of 100,000,000 to $250,000,000 We're also increasing our G and A guidance to a new range $450,000,000 to $470,000,000 in part due to the impact on capitalization from the lower development activity. Outside of this, all other areas of our prior guidance guidance are unchanged with core FFO, including the promote expense to still range between $5.65 and $5.81 per share, and core FFO excluding net promote expense to range between 5.7 and $5.86 per share. As I mentioned, we look carefully at our guidance in a severe stress test by examining the fallout from past crises including the dot bomb era, the GFC, Brexit, the early days of COVID. GFC had the most extreme outcomes in terms of occupancy loss, rent declines and defaults, which we mirrored and made worse by layering on additional levels of bad debt.

In this scenario, we see an earnings outcome that lands at the bottom of, but within our range. Anything can happen and we will reassess in the second quarter, but we feel good about the resiliency it reflects. In closing, we run the company in a disciplined way with the simple tenets to stay close to customers and invest capital accretively. So times like this do not call for dramatic shifts to our strategy. We will be attentive to our customers, and we will use our balance sheet wisely We will leverage our strengths in securing build to suits in both logistics and data centers We will continue to harvest all that the platform provides in the way of profitable adjacent businesses that support our customers and above all, will empower and rely on our people whose expertise and dedication are the foundation of our success. With that, I will turn the call over to the operator for your questions.

Thank you. We will now be conducting a question and answer session. And the first question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.

Thank you so much and good afternoon everybody. Tim, I appreciated your commentary on interactions with customers over the past two weeks and appreciate how much is changing. Day to day basis. But the other side to the industrial equation isn't just customers and their supply chains, it's demand, which is ultimately driven by consumption. Are there lessons from prior disruptions? You obviously mentioned that the dot com and the GFC, but also from kind of the first round of tariffs during the first Trump administration that can serve as a guide for the current environment maybe inform a, what you're looking for to kind of judge consumption and demand? And also what are the risks to consumers going forward? Well, let me take a stab at that. Hamid here.

Clearly, if we get into a recession environment, consumption will take a hit. But I don't think you're looking to our call for predictions about whether we're going to have a recession not. There are better sources you can go for that. But certainly our business and any other business in a recessionary environment will suffer. You handicap that probability. We're not really qualified to do that. But with respect to the relationship consumption and GDP growth, that relationship has remained constant for decades now.

It's about 70% in The U. S. And it's lower than that in other emerging countries and coming up increasing. So I'm pretty confident that consumption in the long term will trend up. And during a recession it will take a hit. Now as the 2017 tariffs, I think we've shared this with you before. I can't tell you what happened to consumption. Basically nothing happened to consumption. I can tell you. I don't remember the exact numbers but what I can tell you is that since that date U. S. Production of things that are consumed in The U. S. Went up 2% in real terms What was made in China went up by 2%. Overall, consumption went up in the 20s, in the mid-20s. So where did that increase come from? It came from China plus one, and Mexico. To a lesser extent Europe. So certainly we've seen some of these trends change the picture and the origins of manufactured goods But again, as we said many, many times where they're consumed is what we care about and they didn't really do anything. Where they're consumed or how much they're consumed.

Operator, next question.

And the next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Yes, thanks. Good morning. I guess Tim, just wanted to maybe focus a little bit on the leasing, the commencements. And then I know that you had talked about occupancy dropping kind of in the early part of the year and then rebuilding in the back half of the year. But the occupancy drop, at least versus our estimates, was a bit wider than what we were looking for. I know you don't provide a quarterly lease expiration schedule, you kind of just provide the annual. But maybe just help us bridge the gap on the kind of spot occupancy decline in the quarter. And then maybe how do you think about occupancy cadence over the course of the rest of this year maybe where you are a couple of months ago?

Thanks, Steve. Yes, So look, we had a the other side of the equation that you need to consider in looking at occupancy drop in any time period as what are the what's the role that's coming up. So we had a disproportionate amount of leases rolling in the first quarter. So while I would describe our retention as pretty good at 73%, just a lot rolling there and that caused the drop. I'd characterize the drop is not dissimilar from history. And very much in line with our expectations. As for the second part of your question, in the stress test that we looked at, let me go back a quarter, our prior guidance imagine that we were going to lose some occupancy over the course of the year and build back up. By the end of the year. One of the main changes in the stress test is that we are going to lose that occupancy as planned and even more and it's going to basically stay at that level till the end of the year. That's what we've reflected when we looked at the stressed scenario. Thank you, Steve. Operator, next question.

And the next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Hey, just going back to sort of the stress test and thinking about sort of the specific tenant groups particularly 3PLs and sort of their impact? The Inland Empire West. Just sort of curious, just real time, how you guys are thinking about that group and what sort of the assumptions that are being baked in?

Thanks.

Hey, it's Chris. I'll jump in. So what I think you're talking about and is worth covering here is simply this category of Asian 3PLs This is a category that faces new risks but to keep it in perspective, The U. S. Businesses of these Asian 3PLs are just a little over 1.5% of our rent. Now policy is still evolving and let's not speculate here. But as you come to your own views, a few things to keep in mind. One, these customers are growing in response to just general e commerce growth. As well as stateside inventory fulfillment models. These companies have found a product market fit and the product will still need to flow. Companies have also taken steps to mitigate risk. They're pulling forward inventories They are diversifying their sources, their production sources. And they're also growing their domestic customer footprints. Now ultimately, their performance is going to be subject to how policies evolve from here, and we will keep you informed as the situation changes.

Yes. The other thing I would add to that is that if you just try this on your own, go on some of the big e commerce sites and try to buy some phone charges for your iPhone or iPad or pretty much anything of that hilt. And you'll see that it says sold out and don't know when we're gonna get some more. So the demand is clearly there. But the challenge is getting the inventory in to fulfill that demand. So I think the underlying demand is pretty good.

Thank you, Ron. Operator, next question.

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

Good afternoon. Thanks a lot for taking my questions. Just to the, I guess, you know, there's been some recent news about Amazon being back in the market. Can you talk a little bit about what that means for overall demand? How that can impact the overall industry and if that how that kind of influenced pricing power in the past and if that can have an impact to spend? Thanks. Yes. Thanks, Michael. This is Dan.

We have definitely seen Amazon in the market. As a matter of fact, we've signed some pretty good deals with them this year. And we're seeing the overall e commerce segment of our customer base very strong right now back to high teens 20% of our overall leasing. So really pleased with what we're seeing from them.

Thank you, Michael. Operator, next question?

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

Thanks. It's Nick Joseph here with Craig. In the opening remarks, you talked about the company looking to take advantage of opportunities. So I was hoping you could discuss that in more detail. Will there opportunities you're starting see emerge or, kind of trying to keep an eye on where you would look to lean into if possible?

Too soon. To, for for anybody thinking about putting something on the market or selling something certainly the last two weeks have not been the time to execute that strategy. So I think these things will take a while. To play out and things depend and depends on how bad things get. There are two things going on. One, there's pressure on rents obviously. And second, I don't know where the ten year is going to go and cap rates are kind of correlated with that. So I think most people in this environment are going to wait and see for some clarity. But depending on how bad this thing gets, it could be six months, maybe nine months, before you start seeing some opportunities. And let's not speculate about how bad it's going to get or whether this is going to be a blip. I don't know. I mean it changes every day.

Thank you, Nick. Operator, next question.

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

Hi, good morning. Maybe just on lease gestation, I know it was above average in 4Q and then it was up again in 1Q, which makes sense. But can you go through some more of what you're hearing from customers and potential customers with respect to kind of who is making decisions today, what driving them versus who's dragging out that decision making timeline and what could make them ultimately make a decision. And then the group that might just say for now we're standing on the sidelines.

Hi, it's Chris. I'll take a stab at that. So first, you're reading the statistics correctly. Gestation was elevated in the quarter. Some of that's really happenstance and mix in the first quarter. So there's going to be some seasonality as it relates to December and November deals that just take a bit longer with the holidays. And also the trend we discussed as it relates to pre election opportunities landing that continued into January lifting the number. We think it will continue to remain elevated. There is a range of customers that are talking to us that have growth requirements. They have need for space and they just need a clearer economic backdrop, tariff backdrop to make decisions. But there are a handful of customers making decisions. Some are responding to supply chain volatility and bringing in goods urgently for their own tactics.

Yes. I think you see that in the 3PL utilization rates. Because that's the first place you're gonna go. And remember, a lot of these people have been in delaying decision mode for a number of years. And if their underlying businesses are solid, they can't do that anymore. Perhaps the most surprising thing that I've seen is that even in the last two weeks we signed a lot of leases and we've signed built to suits. And these customers could have just said, okay, let's plant on those until we have clarity. So I'm actually very encouraged. And you can't take two weeks and extrapolate too much, but actually in those two weeks, the number of build to suits that we have signed are significantly larger in terms of square footage and rent than what we normally assign for a two week period going back a couple of years. Comparing. So but it's two weeks. So who knows? But there are definitely people out there making decisions. And I wouldn't be surprised if the vast majority going to try to delay it as much as possible. But water is building behind the dam. It's going to break at some point.

Thank you, Caitlin. Operator, next question.

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

Good morning. Thank you for taking the question. I just wanted to clarify kind of the stress test scenarios. Maybe you can give us a little more color. You talked about where you thought the occupancy was in the down case. Do you mind just giving us a sense of like where did rent market rent shake out for the quarter? Where did sort of net absorption or in your market shakeout for the quarter? And then if you take those other components, where are they in the stress test? In terms of low end and high end? Thanks.

Okay. I'll take on the stress test description and Chris can hit some of what happened during the quarter. Basically, in the GFC, what we had seen in the first twelve month period at least was a market occupancy decline of 170 basis points We took that in, added it to our the decline that we had already. And as I mentioned earlier, just had it sustained through the end of the year. We had seen market rents drop 18% We brought that into the forecast, had it effective immediately.

Instead of playing out over some months, just took it upfront.

And then the last piece is bad debt. Our experience in the GFC was bad debt of 56 basis points We actually have integrated a higher level there by picking apart parts of our portfolio, have something that's closer to 75 basis points on an annualized run rate So we think we hit it pretty hard. So on conditions in the first quarter, we saw net absorption 21,000,000 square feet. We saw global rents declined 1.5% Almost all of that by the way was Southern California, Globally excluding Southern California rents only dipped about 50 basis points with many markets flat or rising.

Yes. And the thing I want to make sure everybody understands here We are not setting up a new range. This is not a prediction. We just wanted to know what's the worst thing that can happen. Of course, the worst thing that can happen is nuclear war and, you know, this is all academic. But going back and looking at the last four or five major downturns, and taking the worst on every parameter on every independent variable. Combining it together and then adding some basically still gets us to the bottom of the range. But please, this is not a prediction We are incapable of making a prediction in this environment. And there's no data and we have more of it than anybody, can power us to confidently predict anything for you. So we just wanted to know how bad it could get.

Thank you, Vikram. Operator, next question.

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

Thank you. Good morning. Do you have a sense of what the level of import tariffs your average customer could possibly bear know there's a wide range of customers, but this high level question. And I'm not sure if the 10% tariff is a win for your customers or does it have to be at 5% Just any kind of thoughts you can share. Thank you. Yes. Again, this is Pure speculation because we haven't had any discussions for these kinds of tariffs I think since the turn of the century. But my sense is that given the way this policy was rolled out, I think people were prepared for something around 10%.

But on April 2, they basically, I would say, if you pulled our average customer, they would have said A, we don't know and B, it's going to be a lot higher. And then with the pause, I think they feel somewhat a sense of relief. I think that the economy can absorb a 10% tariff, And but it will change how these inventories are routed to some extent and where they come from. I think net net if you go beyond sort of what happens next month or next quarter, I think if we're if I were going to predict anything, I would say Mexico would be a big beneficiary of all this. So would Brazil and we would probably have less coming from China for sure. And the countries surrounding or around China in Asia would have a higher share. And Europe I think is going to probably tread water or maybe decline a bit because there's still Germany, the big exporter is very focused on internal combustion cars and and I think those are going to come under pressure. So So that's what I think is going to happen, but who knows?

Thank you, Ki Bin. Operator, next question.

And the next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.

Hi, good morning. I wanted to follow-up on the comment that a disconnected world requires more warehouse space. Can you just elaborate on that remark and how you arrived at that conclusion?

Yes, Vince, let me tell you a story. I was in Brazil when Brexit was announced.

By the time I got on the plane and landed in San Francisco, the market had discounted the value of our U. K. Portfolio by more than its entire value. Okay?

And I was bombarded by questions of what's going to happen and do you think is going to happen to your U. K. Business. They've already written off more than 100% of the value of our U. K. Business in the stock during that ten hour flight. What did happen? For the ensuing three or four years the need for inventory increased both in The U. K. And in the continent. [indiscernible] those supply chains that were optimized across Europe had to be rebuilt for the continent and for The UK separately and that required net more space. So that's what happens when you when you go through these transitions. And by the way, throughout that period occupancy remained at 99%. In The UK. So these things don't play out the way some of the news newspaper articles, talk about it.

And we believe that duplication of what is a highly engineered supply chain during times of uncertainty will lead to more inventory. Therefore more space to put it Thank you, Vince. Operator, next question.

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

Great, thanks.

Can you talk a little bit more about any change you might be seeing in demand from your fund investors how they're thinking about their allocation to the industrial sector overall? And current pricing?

And I guess whether you'd expect to see increasing redemption requests in the funds in the coming quarters?

The answer is, we were seeing a really strong positive trend leading up to April 2. And lots of discussions and lots of interest and inquiries and reverse inquiries and all that, more than any time I would say since 2022. After April 2, I think people are waiting to see what the denominator effect is going to be. I mean it's not a real estate question. Real estate as a percentage of allocation of the overall portfolio and the stock market is down, I don't know teens. So by definition, even with increasing real estate allocations it could be that the absolute dollars available for real estate are going to go down. Also, a lot of institutions have committed, maybe over committed to some private assets classes venture, private equity, etcetera. And the liquidity coming out of those coming back from those certainly going to be curtailed. I mean there are fewer IPOs that are going to happen in this uncertain and liquidity events are fewer and farther between. So I think it's the denominator effect that will affect that will determine how much money will come out, not so much interest in industrial real estate, which was really good and getting better.

Thank you, Blaine. Operator, next question.

And the next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.

Yes, hi. How do you see UPS is downsizing Amazon exposures in the next couple of years?

Mike, could you repeat that, please?

Yes. Sorry about this.

Mike, do you UPS is downsizing of its Amazon exposure impacting you over the next couple of years?

We've had and we've our business with you UPS has continued, and we've done actually some pretty significant leases with them lately. So I don't know. That's not something that's come up in our discussions.

Just ask them.

Thank you, Michael. Operator, next question.

And the next question comes from the line of Samir Khanal with Bank of America. Please proceed with your question.

Good afternoon, everybody. Just looking at the smaller spaces below 100,000 square feet, that 92% occupancy seems a bit lower versus the other sizes. I guess that was a bit surprising. Can you maybe provide color around that and maybe markets that are seeing that space seeing more challenges than others? Just trying to understand usually that type of space I thought is as a bit less supply and would have been faring a little bit better. Just want a bit more color. Thanks.

Thanks, Sameer. That 100,000 square foot in less customer base is typically actually the lowest occupancy you see if you look quarter over quarter. In our supplemental. It is there's nothing unusual this quarter or last quarter that would suggest there's any issue there. As it relates to markets where there may be issues Yes, it's Chris. I'll jump in.

So the strongest markets, first off, are global. So being international is great in this environment, whether it's Europe, whether it's Latin America, whether it's Japan. As it relates to the American markets, we've seen a broadening of strength across categories So the Southeast has been and the Sunbelt has been resilient, whether it's Seattle, Nashville, Houston and increasingly Dallas. And we're also seeing an inflection and improvement in the Midwest. So pick a market like Indianapolis, that's one that's really moved a lot in the last year.

Yes. One more thing, Samir, is the smaller spaces actually have shorter lease terms. So that's where you see a lot more churn. And certainly if you look at that customer base, it's going to be the smaller businesses that may have more of an impact. We're paying very close attention to it, we're just not seeing anything today.

Yes. And they have lower credit by and large. They're small customers with lower credit. So if you believe in a recession scenario, that sector is going to get hit more. But you said something that's really important. I do agree that replacement cost for that product is significantly higher than values today. So there is some protection on the supply of smaller spaces. They're very expensive to build. And while I'm on that topic let me answer a question that hasn't come up which is that in this environment, and its inflationary effect we are seeing replacement costs go up significantly. And with the ten year backing up, the yield requirements on development has gone up significantly. So the combination of those two means that the replacement cost rents that will justify new construction are now much higher than they were a month ago. And I think that bodes well for the long term supply picture here.

Less supply.

Thank you, Samir. Operator, next question?

And the next question comes from the line of Brendan Lynch with Barclays. Please proceed with your question.

Great. Thanks for taking my question. The 6.2% cash same store NOI in the first quarter was quite strong compared to your annual guidance for 4.5%. Can you just walk us through what your expectations are for the cadence throughout the rest of the year?

Well, it's going to be influenced mostly by occupancy from here. That's a stat that's pretty volatile to the quarter. Year over year, I'll say, differences in free rent for leases that are commencing within these quarters. So it can be volatile for that reason. It's a net effect of both are going to be largely a function from here of the year over year occupancy changes which we've already made clear. We think in our base case that was going to march down and in our stress case, still the case and a little more so.

Yes. The main driver of that is the mark to market. [indiscernible] It's not at this point a change in near term increases in market rent and occupancies tough to predict but if we're going to bed are probably going to come down a little if this thing continues.

Thank you, Brendan. Operator, next question.

And the next question comes from the line of Michael Carroll with RBC. Please proceed with your question.

Yes. I had a more basic leasing question. So how long does it typically take from an industrial lease to be signed versus when it actually commences? So if activity was pretty healthy in the first quarter and slowed down 20% in April, and I understand that's only two weeks so far. When could that actually start to impact lease commitments? And your overall occupancy? I mean, we talking about this being a 2Q type issue or is it more of like a 3Q type issue?

I'll give you a couple of facts here and others may jump in. This is Chris. Renewals can be signed well in advance anywhere from three months to twelve months depending on the size of the lease. And then new lease commencements can be really rapid. We've had a handful of customers want to move in a couple of weeks up to order of magnitude maybe forty five days. So it really depends on the mix in terms of new versus renew. And also the size.

Yes. New buildings, it takes longer because they got to build it out.

Thank you, Michael. Operator, next question.

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

Thank you. Going back about a month ago, Hamid, you discussed in a Bloomberg interview that the change in tone has slowed in the past couple weeks prior to the interview. Not really reflected in the data, but that has happened. I guess my question is, if the tariff uncertainty is resolved, will demand completely recover to where it was earlier this year? Or were there other reasons tenants were acting more cautious pre April 2?

No other reason that I can think of. And by the way, if I knew the answer your second question, I would I would ask you where do you think the market's gonna end up at the end of the year? I I don't know. I mean short term it's very hard to predict these things. That's why I don't even try. But long term is what where folks focused in around here and the path to that long term can take many different directions.

Thank you, John. Operator, next question.

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

Thanks. I want to go back to the some of the net absorption data you talked about. I think, Chris, you said in the first quarter, it was $21,000,000 A year ago it was in the first quarter, it was twenty $7,000,000 And you guys were saying that wasn't a great number and you ended up reducing a net absorption forecast for the year. So just trying to understand, it right to look at that number year over year because it based on that it feels like this first quarter for the overall market wasn't as good as it was a year ago and not sure what we should be reading into that. Versus TLD having what you thought was sort of a better leasing quarter overall, but maybe the market is not also reflecting that?

I think you answered the question for me. Completely agree with the way you position that, which is yes, the first quarter is seasonal. It's a seasonally light quarter. So the 2021 annualizes to around 105, 110. There can absolutely be variability in the numbers as I think you postulated in your question. I think more important to us is the conversation we're having with our customers and their growth requirements and their growth outlooks. So that's how we made our assessment.

Yes. And the last year, we didn't have an election. So a lot of the decisions on leasing that would have turned into actual leasing and occupancy in the first quarter would have been made in the fourth quarter which was still an unknown from an election point of view. There was a big uncertainty didn't exist in the prior year. We used to have a ruler in here that absorption in throughout the year was one, two, three, four. Now I don't think it's leveled out a little bit from that. It's not quite that extreme. But actually the normal seasonal pattern is that absorption and occupancy and leasing of space increases throughout the year.

Let me add one more point here actually. Something Prologis can control We had about 12% of our rent roll rolling this year.

We actually have put 7% of that in the bank So we're about 60% of the way through that. With only 5% of that left to go. So we're in pretty good shape at this point in the year. Thank you, Nick.

Operator, next question?

And the next question comes from the line of Steve Sakwa with Evercore. ISI. This is the final question. Please proceed with your question.

Thanks for squeezing in the follow-up. Tim, to go back, I just want to make sure I understand that there's kind of the base case and there's your kind of worst case scenario. But in your base case, and you did mention that in the last couple of weeks, leasing volumes were down 20%. I guess I'm just trying to figure out what I guess what level of leasing activity are you assuming in sort of your base case or guidance? In terms of either reduction or increases in leasing kind of from here through the end of the year?

Look, described it's hard to put a number on that because ultimately we reflected in occupancy drop that we think is going to be more severe and and stay low, as I mentioned. That's a mix of both lower retention as well as a slower pace of new leasing. And the way we tested all that was put it through some ranges. So it's just one of those things that is unknowable. But I think the end result ultimately drives occupancy same store earnings we've got covered in the stress test.

So that was the last question. So to close out, just want to make a couple of remarks around the fact that no doubt we're in a very fluid environment right now.

The good news is we are built for this. And I really want to thank our teams out there for their execution and focus. Thanks for joining the call and we'll speak to you next quarter.

And ladies and gentlemen, that does conclude today's teleconference. You may your lines at this time. Thank you for your participation.