Prologis, Inc.

Greetings and welcome to the ProLogis fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Jill Sawyer, SVP with Investor Relations. Thank you, Jill. You may begin.

Thanks, Sean. 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 guidance. Hamid Moghadam, our CEO, and our entire executive team are also with us today. With that, I'll hand the call over to Tim.

Thanks, Jill. 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 a very challenging environment, 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 two-thirds 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 outside 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 three 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, $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%. Net effective rent change over the quarter was 74%, bringing the full year to a record of 77%. With another impressive result out of Southern California at over 150%, 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 on a net effective 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 disputes. In energy, and as seen in our new supplemental 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% and term of 10 years. Our total debt portfolio remains at an overall in-place rate of just 3%, with more than nine 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 remained moderate as customers exercised 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 revived customer interest with healthy showing activity to start the year. This includes bill-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 rent has been so large that it provides ample room for property owners to deviate from market in order to attract customers. But looking ahead, the positive news is that we are watching two 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 lags in valuations emerge has protected investors and demonstrated how we stand apart as a responsible partner. With this quarter's value declines and 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 at 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 and $440 million, and strategic capital income to range from $530 to $550 million. We have a very big year of stabilization activity ahead of us with a range of $3.6 to $4 billion at expected yields 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 sale portfolios to the market over the year with expected proceeds to range between $800 million and $1.2 billion, and additionally forecast $1.75 to $2.25 billion in contributions to our strategic capital vehicles. In the end, we are forecasting gap earnings to range between $3.20 and $3.45 per share, Core FFO excluding promotes will range from 550 to 564 per share, while Core FFO including net promote expense will range between 542 and 556 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 FIBA Prologis and 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 low 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 you 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 is to simply provide high-level rent growth expectations on a rolling 12-month forward view. As mentioned earlier, in terms of our three-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?

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. And the first question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.

Excellent. Thank you. You know, 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 2024, 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?

I'll take that. I think, Tom, that it will actually be relatively similar. You know, there's a pretty long tail on how the lease mark to market is going to affect quarterly rent change. It'll 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.

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

Hey, just two quick ones from 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 are seeing in sort of the Sunbelt 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. Thanks.

Hey, it's Chris Caton. I'll take that. So the year closed out with market vacancy rates at mid 5%, just like Tim described. And the vacancy rates remained lower on the coast, excuse me, so both East Coast and West Coast, and higher in the Sun Belt. 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. 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?

That's exactly right.

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

Great, thanks. 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 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 on 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, 18 months. Are you seeing any early green shoots on that improving as you guys are talking with customers?

Yeah, 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 were about 14%, roughly 15% the prior year. And yeah, focusing in on property improvements, I'd 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 12 cents on the year versus the 21 cents 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 averaged on that basis $0.12 versus the prior year $0.10. And I would 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.

And maybe, this is Dan, Craig, on that second part of your question related to tenant sentiment. I would say at the investor day, we had talked about 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. Forty-five percent of our available space is in discussion right now with active proposals. We've anecdotally I 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.

Yeah, 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 leasing over time.

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

Hi, good morning, team. Tim, earlier you mentioned how development starts are down maybe two-thirds from the peak and that you're seeing little in terms of new starts broadly. When we look at your own built-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 built-to-suit over the course of this year?

Kalen, this is Dan. I'll respond here. A few thoughts for you. First of all, we started just over a 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 2020 four starts at the 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 bill 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.

And the next question comes from the line of Ki-Bing Kim with Truva Securities. Please proceed with your question.

Thanks, Dan. Good morning. 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 traditional industrial versus data centers or other property types? And does the previous percentage that you're expecting differ a whole lot? And sorry to add a third here. Typically, how long would the data center developments take to cash flow?

Sure, Kevin. 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 five years, 20 or so opportunities, three gigawatts of data centers, seven to eight 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 hire 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.

Yeah, so 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 the installations are pretty complicated to get these going. But all of that is built into the budgets and the economics of the transaction. And this point that Dan made on the negotiating posture is really important. I mean, the last thing we want to do, there are four or five customers out there, and it's pretty obvious given the scale of the numbers, they can figure out, you know, 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.

And the next question comes from the line of Jay Posket with Evercore ISI. Please proceed with your question.

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

Hi, 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, yeah, 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 and starts that we've profiled for you.

Let me just punctuate that. Vacancy rates will go up through the second quarter. So don't be surprised by that. But we're pretty confident they'll come back down after that.

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

Thanks. 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. There's actually a good sign where space utilization is. I guess I'm wondering if you can give us some reminders 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, you know, picking up in the fourth quarter. If you had any benefit already, you know, from that industry or even anecdotally, you could talk a little bit about the discussions there. Thanks.

Yeah, so the easy way of thinking about this is this. Basically, absorption and demand for a product follows a one, two, three, four scenario as you move through the quarters. It's back and 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.

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

Great, thanks. 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 the near term? And I guess, does that potential volatility present you with any investment opportunities?

Yeah, we don't think real pricing and real returns have really changed because return expectations should have been higher six 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 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 that the realities, the expectations of the market participants and the 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.

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 question. 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 that does that happen, you know, through the third quarter and into the fourth quarter? Or is that going to happen just as soon as the delivery is slow? Thanks.

Hi, it's Chris. So I'll start off by offering, look, the vacancy rate's going to go up to 6%. Hamid and I are very clear, the whole team's clear on that. Bear in mind that's a very low level in the context of history. And so, yes, it will take, you know, 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 a vacancy rate's going to go from 6%, it's going to move to 5.5%, and likely to 5%. given this supply cliff that we see.

And the next question comes from the line of Camille Bonnell with Bank of America. Please proceed with your question.

Hi, good morning. Your outlook for development stabilization 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? 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? Thank you.

This is Dan. I'll start with your question on stabilizations. It is a big year on stabilizations for us. We actually started the year out with some good news. December, we actually pulled in four 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 2024 stabilization volume is 46% leased already, which is actually three, 400 basis points above the average at this point over the last several years.

Hey, Camille. It's Chris. I want to jump in on the disruption of the ports. We are 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 in Southern California.

Let me make that point a little stronger. I think all this concern about LA is over, and it hasn't shown up in the numbers yet, but it will in the next six months. So I don't think we'll be sitting here on calls like this worrying about LA 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, yeah, I mean, you've seen two big movements. It's not just Suez. It's also Panama Canal and the water issues there. And the expense of shipping stuff through the canal is leading to more, you know, reversion back to the normal way of doing it, which is getting it to LA and then landverging it over. But, you know, 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 is 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 war in the Middle East, whether it's something in the Persian Gulf, will 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.

And our next question comes from the line of Mike Mueller with J.P. Morgan. Please proceed with your question.

Yeah, hi. Do your comments about seeing revived customer interest apply to big box leasing as well?

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

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

Thank you. On your commentary on Southern California 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.

We are not going to get into quarterly rent forecasts, and we're not going to get into market-by-market forecasts. We run a 1.2 billion square foot business And I think we already, 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 of. So if you don't mind, just let's stay away from that fine level of dissection beyond our ability.

And the next question comes from the line of Nick Tillman with Baird. Please proceed with your question.

You guys touched a little bit on the... At your investor forum, you kind of mentioned that you expected XUS to outperform US in a market rent growth standpoint. 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? Thanks.

Hi, it's Chris. Yeah, indeed. We saw international outperform in the fourth quarter. Our view is 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.

Yeah, UK is outperforming too.

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

Thanks for taking the question. Just two 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. A, 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 do these leading indicators 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? Thank you.

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

Vic, I'll take on the, excuse me, Tim, on the lease market. I'll just say again, you know, I don't particularly value the cash view of the lease 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, you know, we've seen a pretty wide divergence in cash to net effect of 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. And also Duke. Duke's a factor as well, of course. So, you know, the roughly 20, 25 points that we've been seeing lately, I expect we'll see mostly continue into next year.

And the next question comes from the line of Todd Thomas with KeyBank Capital Markets. Please proceed with your question.

Hi, thanks. Just wanted to ask about capital deployment. Two 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, you know, more deals coming to market and more product hitting the market? And then second, The spread between stabilized yields 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 24, particularly as you move forward, you know, just given the mix of build the suits and spec developments and, you know, some of the higher and better use projects that you're ramping up on?

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 are Yeah, we've been talking for the last several quarters about that tightening. I remember five, six quarters ago 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 10-year 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.

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

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

Yeah, thanks. I guess maybe, Chris, can you provide some color on tenants' mindsets to adding more inventory? I mean, is it fair to say that tenants, or at least some tenants, have delayed these decisions over the past year just due to macro uncertainty and And when does this change? I mean, have customer discussions changed at all given the holiday season that you kind of 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?

Hey, Mike, it's Chris. I think you might have answered your own question. 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 propose that you can also reach out to them and and get their feedback.

Yeah, I bet you their answer is they have no idea. I mean, it's just been 16 days, right? So 16, 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. We've had a lot of great feedback from you and we'll make these things better and better. Over time, I look forward to talking to you next quarter, if not before. Take care.

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