Prologis Inc. is pulling back on building new warehouses without tenants already signed on, as the world's largest developer of logistics properties braces for a potential economic downturn.
The shift away from what is known in the real-estate sector as speculative projects reflects "a more cautious approach," Tim Arndt, chief financial officer of Prologis, said on an earnings call Wednesday.
High inflation, which has been prompting the Federal Reserve to raise interest rates, the energy crisis in Europe and Russia's invasion of Ukraine are creating headwinds that may dampen economic growth and logistics demand, according to the San Francisco-based real-estate investment trust. The overall warehousing sector, which has been booming during the pandemic as retailers respond to changing consumer purchasing patterns, is already showing signs of peaking , with overall leasing rates slipping last quarter.
"I am concerned about inflation. I think the Fed's going to overdo it, whether we have a recession or not," said Hamid Moghadam, the company's co-founder and chief executive. Warehouse supply remains tight compared with demand, but Prologis will make decisions on new sites on a "deal by deal" basis, he added.
Prologis trimmed its plans for new development starts for this year to a range of $4.2 billion to $4.6 billion, from a projected range of $4.2 billion to $5 billion the prior quarter.
"We're definitely going to underperform the capacity of this industry," Mr. Moghadam said. "The consumer's in great shape. The consumer balance sheets are in great shape."
Prologis is the world's largest owner of warehouse space with a portfolio of about 1 billion square feet of industrial real estate in 19 countries and tenants that include Amazon.com Inc., FedEx Corp. and Home Depot Inc.
Mr. Arndt said leasing activity has softened somewhat compared with the height of the pandemic, although overall demand remains strong.
The average warehouse vacancy rate across the U.S. rose from 3% in the second quarter to 3.2% in the third quarter, the first increase in two years, although that remains far below the 5% rate during 2020, according to commercial real estate services firm Cushman & Wakefield.
Demand for storage space skyrocketed in 2020 as households locked down during the pandemic launched a wave of online shopping and retailers sought to get more goods positioned for rapid delivery to homes. Companies signed new leases for about 920 million square feet of warehouse space in 2021 compared with 619 million square feet in 2019, according to Cushman & Wakefield.
Amazon, which doubled the size of its fulfillment network in 24 months, now is halting growth in its warehousing operations and even subleasing some of its space as e-commerce growth slows.
Mr. Moghadam said Amazon hasn't pulled out of any of its Prologis buildings or projects and the e-commerce company is taking on new space. He said e-commerce companies overall have been leasing new space to compete with Amazon's sprawling network.
"Everybody is running to catch up on their e-commerce supply chain, because they're starting behind and they need to catch up. So the demand for e-comm space is broadening," he said.
Prologis reported its net income attributable to shareholders in the third quarter rose to $1.01 billion, or $1.36 a share, compared with $722 million, or 97 cents a share, a year earlier. The company logged core funds from operations attributable to shareholders, a measure of operating performance, of $1.73 a share, up from $1.04 a year earlier.
Revenue rose 48%, to $1.75 billion, with rental revenue increasing 12% to $1.16 billion in the period. Average occupancy was 97.7%, up 0.3 percentage points from the prior quarter, the company said.