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Prologis (NYSE: PLD)
Q4 2024 Earnings Call
Jan 21, 2025, 12:00 p.m. ET
Prepared Remarks Questions and Answers Call Participants
Operator
Ladies and gentlemen, we thank you for your patience. We will begin momentarily. Again, we do thank you for your patience. We will begin momentarily.
Greetings, and welcome to the Prologis fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Justin Meng, senior vice president, head of investor relations.
Thank you. You may begin.
Justin Meng — Senior Vice President, Head of Investor Relations
Thanks, Jamali, and good morning, everyone. Welcome to our fourth quarter 2024 earnings conference call. The supplemental document is available on our website at prologis.com under Investor Relations. I’d like to state that this 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, and 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 and other SEC filings. Additionally, our fourth-quarter earnings release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP.
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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; Dan Letter, president; and Chris Caton, managing director, are also with us today. With that, I’ll hand the call over to Tim.
Timothy D. Arndt — Chief Financial Officer
Thanks, Justin. Good morning, everybody, and thank you for joining our call. I’d like to begin by recognizing the devastating wildfires still affecting Los Angeles. We operate a large portfolio there, but more importantly, we have colleagues, customers, and their communities struggling with the aftermath.
It’s too early to predict the full ramifications, but we’ll continue to support the response and stay connected with local and state leaders as well as service organizations as the region works to recover. We have no doubt that a vibrant and dynamic Los Angeles will emerge from this crisis even stronger. In our business, the bottoming process across our markets continues to progress. Leasing in our portfolio accelerated following the U.S.
election, and the pipeline has started the year at healthy levels. During the quarter, we signed more than 60 million square feet of leases, a company record, and saw interest diversify across customer profile, size requirements, and markets. Looking ahead, we believe market vacancy is topping out and rents will inflect later this year. Turning to our results.
Core FFO, excluding Net Promote Income, was $1.42 per share and including net promotes was $1.50 per share. Our full-year results ended at the top end of our guidance range, and in the end, represent 8.4% growth over 2023, putting us in the 86th percentile of all REITs. Average occupancy was 95.8% for the quarter, 96.3% for the year. Net effective rent change during the quarter was 66% and on a full-year basis was 69%, activity which added over $340 million in annualized NOI.
Our net effective lease mark-to-market finished the year at 30% and represents a further $1.4 billion of incremental NOI. And finally, net effective and cash same-store growth during the quarter were 6.6% and 6.7%, respectively. In terms of capital recycling, we had another active quarter. Importantly, we contributed $2 billion of assets to our strategic capital ventures, bringing the full-year total to over $3.3 billion.
While capital flows in 2024 remain challenging, we did raise over 1.7 billion across the platform, driving the growth in third-party AUM by over 7%. We disposed of over $900 million of assets in the quarter and acquired approximately 450 million. And stepping back, over the full year, we disposed of over 2.1 billion and reinvested into a similar 2.3 billion of acquisitions at a positive IRR spread of 170 basis points, demonstrating our ability to self-fund and earn a return regardless of the yield environment. Included in our disposition activity for the quarter was the sale of our Elk Grove data center in Chicago.
Elk Grove was a logistics asset that we converted to a powered shell before securing a build-to-suit turnkey transaction with a hyperscaler last fall. We simultaneously identified a buyer and closed in the fourth quarter at very attractive economics. Because the property was owned by USLF for our structuring, procurement, leasing, and monetization efforts, Prologis earned a value creation fee of $112 million, which was not included in our prior guidance due to the uncertainty and the timing of the transaction. Elk Grove is a great showcase of our data center development capabilities, which are more comprehensive than most.
Today, we have 1.4 gigawatts of secured power and 1.6 gigawatts in advanced stages of procurement. Over the next 10 years, we see 10 gigawatts of development potential across our portfolio. As a platform, we have the team, customer relationships, development and energy expertise, advanced procurement capabilities, and the capital required to create significant value for our shareholders. Turning to market conditions.
As mentioned, quantitative measures of the market such as vacancy and changes in market rent met our expectations. More importantly, indicators in our pipeline and dialogue with customers have us encouraged that conditions are set for a recovery in net absorption leading to a bottoming of global rents. It’s worth highlighting that our non-U.S. portfolio fared better in rent growth over 2024, particularly in places like Japan, the U.K., Southern Europe, and Latin America, which all grew over the year.
Customer engagement is improving, and we saw a notable increase in activity among our larger global customers who often lead in the recovery of demand as we’ve seen in past cycles. The improvement in decision-making is reflected in our proprietary metrics where proposals increased earlier in the year, lingered for a period of time, and then began converting more meaningfully after the election. That leasing pattern translated to elevated gestation also seen in our metrics. Our ’25 forecast for net absorption calls for approximately 20% improvement over 2024, gradually building over the year.
We also know that completions will decline significantly, contributing to a supply forecast that is approximately 35% below ’24. As such, we expect a decline in vacancy over the year, which will pave the way for rent growth. Longer term, we continue to see the path for uplift from market rents to replacement cost rents, a dynamic that will build upon our already significant lease mark-to-market. Today, we see replacement costs as 50% higher than in-place rents.
The capital markets were active with fourth-quarter transaction volumes that put the year in total back to pre-COVID levels. Unlevered IRRs have compressed to the mid-7% range, and valuations as reported in our third-party appraisals had the globe marginally up this quarter. Capital raising in our open-end vehicles was more muted in the fourth quarter as investors paused to take in changes in the yield environment, but we remain confident in our expectation for growing capital raises in 2025 as the pipeline is solid and conversations are active. In terms of guidance, which I’ll review at our share, we are forecasting average occupancy to range between 94.5% and 95.5%, which contemplates a dip in occupancy over the next one to two quarters, some of which is seasonal before rebuilding closer to 96% by the end of the year.
Net effective same-store growth is forecasted to be in a range of 3.5% to 4.5% and cash in the range of 4% to 5%, each driven by still significant rent change. Our G&A forecast is for $440 million to $460 million, and our strategic capital revenue forecast calls for $560 million to $580 million. As for deployment, we are forecasting development starts to range between 2.25 billion and 2.75 billion. We will continue to be selective in our starts and clearly have a lot of capacity to grow this number as conditions, rents, and returns warrant.
As a reminder, data center starts are excluded from this guidance given their lumpiness. That said, we do expect new projects to begin in 2025, likely in a range of 200 to 400 megawatts. Acquisitions will range between 750 million and 1.25 billion, and our combined contribution and disposition activity will range between 2.5 billion and 3.5 billion. Our development portfolio now stands at $4.7 billion with estimated value creation of 1.1 billion, 450 million to 600 million of which we expect to realize this year.
Finally, 2025 will be an important year for our energy business where our forecast is to hit our one-gigawatt goal for solar generation and storage by year-end. In total, we are establishing our initial GAAP earnings guidance in a range of 3.45 to 3.70 per share. Core FFO, including net promote expense, will range between 5.65 and 5.81 per share, while core FFO, excluding net promote expense will range between 5.70 and 5.86 per share. In closing, we navigated a challenging year in terms of an operating environment, clearly unwinding from the overbuilding of the COVID era.
Our ability to generate over 8% growth in such an environment is a testament to the resiliency and breadth of our company. We’re pleased with the increase in activity and improvement in sentiment that we’ve seen so far in the last two months. And working through gray space amid the favorable supply backdrop will further establish the foundation to build occupancy, grow rents, and increase values, unlocking the full earnings potential in our core business. And finally, we’re very excited with what the future holds for our data center and energy initiatives.
With that, I’ll turn the call over to the operator for your questions. Operator?
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator instructions] We also ask all participants to limit themselves to only one question. You may reenter the queue to ask an additional question.
Our first question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question.
Ki Bin Kim — Analyst
Thank you. Good morning, everyone. Can we flesh out the 2025 guidance a little further, please? And maybe you can touch on items like lease spreads, bad debt that you’re assuming. And on the occupancy front, the 95%, which is a little bit lower, I’m curious how much of that is same-store versus, let’s say, development projects coming into the pipeline that might not be leased up for some time of period.
Thank you.
Timothy D. Arndt — Chief Financial Officer
Hey, Ki Bin. It’s Tim. So, on rent spreads, we’re going to see them in the 50% range this year, a five handle over the course of this year, still quite elevated from that lease mark-to-market, even with market rent growth a bit slower in the last several quarters. Bad debt, we normally are expecting something on the order of 20 basis points.
Our history has been a little bit better than that. Our forecast is allowing for between 20 and 30 in this coming year as we enter the year with a few known tenants that we’re watching. But we’ll see that normalize hopefully by the end of next year. And then in terms of occupancy, the two pools are so large.
The average occupancy and ending occupancy, that we’re expecting broadly for the company are not very different than what we’ll see in the same-store pool.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Ki Bin. Operator, next question.
Operator
Our next question comes from the line of Samir Khanal with Evercore ISI. Please proceed with your question.
Samir Khanal — Analyst
Good afternoon, everyone. Hey, Tim. You guys made some positive comments around leasing. But when I look at the space utilization chart, it was a bit surprising that slipped from the last quarter.
Maybe reconcile the trends you’re seeing there with some of the comments you’re talking positivity around leasing, inflection, etc. thanks.
Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics
Hey, Samir. It’s Chris Caton. I’m going to take it. Thanks for the question.
Good to hear from you. So, at the end of the day, we think there’s some good news in this data and let me unpack that for you. As you look at the course of that material data over the year, utilization was largely ranged down in the low 84% range. And we do think a more typical level is 85% or higher.
Now, recall, over the course of 2024 and in particular in December, look, consumption growth and holiday sales were unexpectedly healthy, and that pulled goods out of the supply chain. And it led to this dip in utilization that is not really representative of the true trend. Customers instead are telling us that their utilization is rising, and we’re starting to hear reports of inventory building taking shape in 2025.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Samir. Operator, next question.
Operator
Thank you. Our next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.
Vikram Malhotra — Analyst
Hi, good morning. Thanks for taking the question. So, just on market rent growth, do you mind, A, just giving us what the actual realized market rent growth was across sort of the U.S. versus other regions, maybe even just coastal, non-coastal? And in the same view, if you can give your updated forecast for ’25 or just the 12-month rolling number you gave.
Thanks.
Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics
Hey, Vikram. Chris Caton. Thank you for the question. So, we had rents decline roughly 2% in the quarter.
And yes, there was a differential between coastal and non-coastal, although it had narrowed in the fourth quarter. As it relates to 2025, Tim described an outlook. Look, most markets are stable, but we expect modest further decline from here in a handful of submarkets. Later this year, we expect an inflection in positive growth to emerge.
Excuse me. Now, how that comes together for a view on 2025, there are scenarios where rents are flat, down, or up. And look, calling an inflection point within a single 12-month window is difficult and we do not want to offer that sort of sense of false precision.
Dan Letter — President
This is Dan. Let me pile in on that. One thing to keep in mind is it’s a point I made on the call last quarter is 90% of our leases actually roll beyond the next 12 months. So, to his point on whether rents fluctuate up or down two points throughout the year, it’s not going to impact the long-term earnings for this company or the value of the business.
And as Tim mentioned in the script, replacement cost rents are actually 15% higher than market rents, and that’s 50% higher than in-place rents. And it’s the gap between the market rents and replacement cost rents that are really going to be the ultimate driver of rent growth into the future.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Vikram. Operator, next question.
Operator
Thank you. Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.
Ronald Kamdem — Morgan Stanley — Analyst
Hey. Just going back to the dev starts, obviously picked up this year versus last year. I guess I’m curious if you’re thinking about commentary of leasing accelerating positive absorption, what do you need to see for us to see that number start to ramp back up to the 4 billion to 5 billion zip code? And do you think you could see it this year?
Dan Letter — President
Yeah. Thanks, Ron. What I would say is our starts last year, we deliberately slowed those starts. We continue a very disciplined approach to our spec program.
We also saw a number of very large build-to-suits push into 2025. So, what are we looking at right now? We’re looking at the market conditions improving. So, we do expect completions to come way down. They’re actually down 70% from the peak — excuse me, starts are down 70% from the peak as well.
So, the market itself is heading in the right direction, and we’re waiting for that rent to improve for the returns to improve. One thing to keep in mind is we do have 5 billion under development right now and 30 million square feet. We do have this very large land portfolio with 41.5 billion worth of opportunities, and that’s in literally hundreds of sites around the globe. And we’ve been making infrastructure investments, site work investments so we can really narrow the vertical build time and flip the switch when the time is right.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Ron. Operator, next question.
Operator
Thank you. Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Michael Goldsmith — Analyst
Good afternoon. Thanks a lot for taking my question. You stated in the prepared remarks, leasing in your portfolio accelerated following the U.S. election, and the pipeline has started the year at healthy levels.
Are you able to frame the magnitude of improvement? And from your conversations with tenants, what is driving that improvement? Is it more certainty? Is it more willingness to spend? Is it the deals that were dying on the CFO’s desk are now getting put through? Any commentary there would be helpful. Thanks.
Dan Letter — President
Yeah, Michael. I’ll start on this and maybe Tim or Chris will pile in. What we saw last quarter was really kind of a tale of two different markets. The first part of the quarter, first five, six weeks, it was very quiet.
And we did hear from customers, they’re waiting to see what was going to happen with the election. That was coming off five, six quarters of delay in decision-making due to cost of capital or geopolitical concerns. And then post-election, it really was this boom that we’ve had really 10 weeks of very solid decision-making, and it’s unlocking previously stalled deals. So, we’re seeing resiliency from e-commerce, general goods, electronics, food and beverage.
Really, it’s pretty broad-based where we’re seeing this activity and what we’re hearing from these customers. We’re also hearing from these customers — we still have a group of customers saying that they’re working through gray space. They’re focused on cost containment. But then I’ll tell you, 3PLs last quarter broke the record that they had in the third quarter of 25 million square feet of leasing.
So, 3PLs in the back half of the year leased nearly 50 million feet. So, kind of a tale of two markets and some really robust leasing from several customer segments. Chris, go ahead.
Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics
Yeah. Just in terms of the specific quantification, Tim already discussed record lease signings. And in terms of pipeline, the pipeline is up 17% January to January, specific response to your question.
Timothy D. Arndt — Chief Financial Officer
Yeah. The only thing I would add is that actually the end of the fourth quarter and the beginning of the first quarter are usually slow times. So, I think the bump was even more important or different than history.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Michael. Operator, next question.
Operator
Thanks you. Our next question comes from the line of Craig Mailman with Citi. Please proceed with your question.
Craig Mailman — Analyst
Hey, good afternoon, guys. Just on the occupancy piece, just a few follow-ups. Tim, maybe you mentioned a couple of tenants that you’re monitoring for bad debt. And then you also mentioned seasonality.
Could you frame up, within that range of 100 basis points at 94.5 to 95.5, how much of that’s sort of seasonality-driven versus how much of it is potential bad debt that may not materialize? And then that was helpful on the pipeline update. But I’m just kind of curious here also how you guys are managing the portfolio with an expected market rent inflection potentially by the end of the year. [Inaudible] you guys prioritizing occupancy over rate at this point to kind of firm up the portfolio? Or are you holding back at all kind of holding on price? So, just kind of curious how much toggle there is in that occupancy guide on kind of what you know versus how you’re managing the portfolio.
Timothy D. Arndt — Chief Financial Officer
Hey, Craig. Let me start by unpacking it this way. As we look at our outperformance to market on occupancy historically, and I’m talking maybe 10, 15 years now, we have a history of outperforming the market maybe 100, 150 basis points. And I would just put a side note on that, that over that period of time, that portfolio has been improving greatly, and we expect that outperformance will grow.
And in fact, in the recent quarters, it has, or even years now, we’ve seen that outperformance level nearly double. If you put the elements of our forecast together with not only for our own portfolio but also what we see in the market, we think we’re actually going to see this level of outperformance that we have today, which sits in the high 200 basis points, probably where we end the year. What we do see is that in our own portfolio, just again, circumstances to particular leases, that our average will be a little bit lower. So, what my point here is, you can almost ascribe that difference that you observe in average occupancy to those rolling leases that are going to take a little bit of time to backfill, but we do think we’ll rebuild that overall outperformance level by the end of the year.
And then in terms of managing for rent growth or occupancy, as you can imagine, it’s not just a market or submarket conversations even down to the lease level given our revenue management capabilities. And we have a lot of markets and submarkets at different stages of recovery. So, those are really one-off decisions.
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Yeah. The only thing I would add to that is that credit loss averaging under 20 basis points across the cycle. The highest it got was in the global financial crisis, which was crazy. It was almost 100 basis points.
But even in the beginning of COVID, when the world was in a panic, it got to 50, 60 basis points and then went right back down. So, the credit loss issue is never going to be the big — I shouldn’t say never, but it hasn’t been a big explanation for that change. And one other thing. We actually track a statistic, which is the value pickup on credit loss.
And because there’s such a big mark-to-market, on anything that we lose to credit loss, we need to lease it within the next 15 months before we are worse off. In other words, if the space remains empty for less than 15 months, given the mark-to-market, we actually make money on that space. Sure, it’s a short-term earnings impact, but it’s actually a long-term value driver.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Craig. Operator, next question.
Operator
Thank you. Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Caitlin Burrows — Goldman Sachs — Analyst
Hi, everyone. Maybe for a while now, it has seemed like the new leasing was a tougher part of the business but that renewals were doing well. So, high retention, maybe slightly less price sensitivity. How would you describe that renewal business now? Is there anything changing in the trends that you’ve noticed and when leases come up for renewal or tenants staying? And if not, why not?
Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics
Hey, Caitlin. Chris Caton. Thanks for the question. When we look at our pipeline, we still have many of our customers interested in renewing and that trend continues.
But there are more new requirements coming to the market, customers looking to grow. And so, we also have seen an expansion in our new leasing pipeline. So, both things can happen at once. They are not mutually exclusive.
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Hey, Caitlin. Customers move because they may need more space or they may need less space or they may need space in a different location. And oftentimes, that actually occurs within our portfolio. But when you’re sort of 95% leased, the options are limited in the portfolio.
So, sometimes we lose them for that reason. But the preference of most customers in a stable environment is to renew. It’s just less costly to do that.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Caitlin. Operator, next question.
Operator
Thank you. Our next question comes from the line of Nicholas Yulico with Scotiabank. Please proceed with your question.
Nicholas Yulico — Analyst
Thanks. Just turning back to the guidance. I guess, Tim, I was wondering if there’s any way you could quantify a little bit more some of the impact on what feels like it’s going to be lower development NOI from stabilizations this year versus last year. I mean, you do have the stabilizations and guidance at 2.5 billion.
Last year, it was over 4 billion. So, I imagine there’s some NOI drag there. And then also if there’s also a capitalized interest issue to think about. And I guess with the starts also having now picked up and planning for this year, is 2025 sort of at a worst point in terms of that year-over-year delta on how like development might be weighing on FFO growth this year? Thanks.
Timothy D. Arndt — Chief Financial Officer
Yeah. Thanks, Nick. Look, you’ve got the right elements, of course. And the way I might even examine this question, if we look at same-store in ’24 compared to bottom-line earnings and then do the same embedded in our guidance for ’25, pardon me, that delta between the top line and the bottom line is apparent.
It’s due to the factors you described. I would throw in that interest rates as well, even though nominally, when we move from 3% to 3.2% interest, it doesn’t sound like much. But on a percentage basis, that’s a driver. The development start volumes being a little bit low to our capacity is starting to be seen as well.
What I feel good about is that all the things we’re describing here are normalizing, in some cases, below trend in others but are going to reset themselves to a new foundation for growth from here, which we’re very confident is going to be back up in the levels that we’ve seen this company historically provide.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Nick. Operator, next question.
Operator
Thank you. Our next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.
Vince Tibone — Green Street Advisors — Analyst
Hi, good morning. Can you discuss rent trends at the market level in a little more detail? Specifically, could you provide how much rents increased during 2024 in your better markets and how much they fell in 2024 in your weaker markets?
Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics
Hey, Vince. Chris Caton here. So, I think I’d start by saying let’s not go market by market, detail by detail. We’re a large global international business, but a couple of touchstones that we’ve had that I think are worth coming back to.
So, number one, if it’s not clear, it should be that international markets outperformed the domestic markets. Tim enumerated them in his script, but whether it’s Japan, whether it’s Europe broadly, and in particular, some of the geographies there as well as Latin America, that was a clear outperform. And then within the U.S., really talked about this dynamic of Southern California and the rest of the business. In Southern California, we had rents down 25% on a net basis.
So, a meaningful reset in rates there. And so then by contrast, when you look at sort of U.S. ex SoCal, it was only down modestly in the year.
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Yeah. And the best-performing markets would be in single digits up, and the worst performing markets other than SoCal would be in single digits down. And just while we’re on the subject of SoCal, just there are two issues that I think the market is not focused on. One is this whole discussion about immigration and its impact on labor supply and the impact of that on construction costs.
And secondly, the pressure that the rebuilding efforts are going to put on material supplies and labor. I think all of those things are going to drive replacement costs significantly higher. And so, that spread that you’ve heard us talk about, the 50%, I would bet that that spread is going to widen significantly.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Vince. Operator, next question.
Operator
Thank you. Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Blaine Heck — Analyst
Great. Thanks. Can you give an update on your overall mark-to-market throughout the portfolio? And secondly, I guess, how should we think about the cadence of same-store NOI throughout 2025? You’re coming off a fourth quarter at 6.7% cash same-store NOI. So, should we expect it to gradually come down throughout ’25 and end the year somewhere below that 4.5% cash midpoint? Or is there more nuance and seasonality in the forecast given that you mentioned, I think, that occupancy would build back up toward the end of the year? Any commentary there would be helpful.
Timothy D. Arndt — Chief Financial Officer
Hey, Blaine. It’s Tim. For the first part on the lease mark-to-market, I described that it’s about 30% at the end of ’24. We really don’t break that out for you in a very significant geographic detail.
You can certainly take it away that it broadly is representing the United States, and you know the state of rents in places like SoCal. So, I’ll leave it to you to unpack from there. In terms of the cadence of same-store growth, I think rent change is going to be relatively level over the quarters for that part of it, so it’s really going to be a function of what’s going on in occupancy. And I described that we think in the next coming quarters, we’ll see a little bit of giveback in occupancy is our expectation.
I hope to outperform that, but that’s followed by a rebuild. So, you would see some lower same-store potentially in the front half, and then it would grow in the second half.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Blaine. Operator, next question.
Operator
Thank you. Our next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.
Tom Catherwood — Analyst
Thanks, and good afternoon, everybody. Tim, if memory serves me, you previously talked about, I think, $7 billion to $8 billion of data center spend over the next five years. I think you mentioned 10 gigawatts of data center opportunities in your prepared remarks, which is likely above the top end of that previous range. Are we thinking of that correctly? And if so, what are your thoughts on data center spend as we look out over the next three to five years for Prologis?
Dan Letter — President
Hey, Tom. This is Dan. I’ll take that one. So, yes, that’s — you’re thinking about this correctly.
You should think about 10 gigawatts over the next 10 years. We’ve built internal capabilities over the last year, year and a half, we’ve been just getting deeper on our pipeline and have a lot more confidence in the numbers that you’ve heard. Like we said, we’ve got 1.4 gigawatts secured power. We’ve got 1.6 gigawatts in the advanced stages of procurement.
We’ve got another 1.5 gigawatts of applications that are right behind that. But all in, it’s 10 gigawatts over the next 10 years. And that doesn’t even touch upon the universe of opportunities. This is coming from a portfolio of 6,000 buildings and 15,000 acres of land that we own or control.
So, the universe of opportunities is much greater than that. Tim?
Timothy D. Arndt — Chief Financial Officer
Yes, I’ll just come back to maybe what was also underneath your question there on the sheer amount of spend. And you see this quarter, Elk Grove, as I mentioned, a great example of the playbook that we have at the moment is to recycle and monetize back out of these assets. That may take a different form over time, but the point is we will free up capital. We have an internal risk budget set up for this business that is sufficient for the team to execute.
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Yeah. One other thing, it’s always not easy to translate megawatts into dollars. Because, for example, Elk Grove started out being a power shell and ended up being a turnkey. So, that will maybe increase the capital spend by a factor or two.
So, we’re more comfortable projecting megawatts than dollars, but regardless, we can handle it.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Tom. Operator, next question.
Operator
Thank you. Our next question comes from the line of Nick Thillman with Baird. Please proceed with your question.
Nick Thillman — Robert W. Baird and Company — Analyst
Hey, good afternoon. Maybe digging in a little bit more into the development, starts and kind of maybe geographic mix and build-to-suit sort of mix of the two. I know you guys have tilted a little bit more ex U.S. on the development starts here in ’24.
But as ’25, are you expecting to start more in the U.S. or what’s the mix shake-out there? And then you noticed the pickup in the build-to-suit side. So, is that still going to be a strong proponent of that start this year?
Dan Letter — President
Yeah, Nick. This is Dan. Last year was a slow year for development starts in the U.S. I do see that picking up.
Hard for us to give you a mix at this point because, as I said in some remarks earlier, we have so many opportunities, literally hundreds of opportunities. And most of this land is ready to go. So, we’re going to pay attention on a deal-by-deal basis, market by market and make decisions that way. We do see build-to-suits improving year over year as well.
Our long-term average on build-to-suits is about 40% of the overall development starts. Hoping to hit that number. We definitely had some big build-to-suits that moved from ’24 into ’25. So, we’re hopeful that those may [Inaudible]
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Nick. Operator, next question.
Operator
Thank you. Our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.
Mike Mueller — Analyst
Yeah, hi. What was the solar FFO contribution in ’24? And what are you assuming for ’25 given the growth that you’re seeing in that business?
Timothy D. Arndt — Chief Financial Officer
Hey, Mike. In ’25, across the essentials businesses, I’ll provide that level of detail. We see probably $0.10 to $0.14 of overall FFO contribution from the three businesses. Solar, it’s pretty limited in mobility right now, to be honest.
It’s predominantly coming from solar and the operating essentials business. Across 2024, that number was $0.07 to $0.08.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Mike. Operator, next question.
Operator
Thank you. Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.
Jeffrey Spector — Analyst
Great, thank you. I know Hamid touched a bit on some of the executive orders or discussions from yesterday’s transition. I wanted to just follow up on the latest discussion around tariffs, and if there’s anything else to add to some of the executive orders that were executed yesterday. Thank you.
Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics
Hey, Jeff. Chris Caton here. So, look, on tariffs, we follow the news just like you do, and it’s really too early to speculate to how these policies will land and be implemented and the customer response. Couple of considerations.
Number one is, look, our business revolves around consumption, and 90% or more of the customer base is really serving consumers. So, that’s really the critical area to track. Now, as it relates to trade, we do think the historical precedent is instructive, and we stand by the views we shared on our last call as well as a white paper we published in November. A couple of highlights there.
Over the last eight years, trade has grown 30% on an inflation-adjusted basis, and supply chains adapted to changes in trade policy. So, trade with China is effectively flat over those eight years, whereas Asia ex China is up nearly 75%. Mexico is up 40%. At the same time, over the same time period, U.S.
domestic production rose only 3%. And really, the U.S. just doesn’t have the labor to produce more goods here and so tariffs are inflationary. So, trade policy earlier was crafted to accomplish industrial goals while minimizing the risk to consumers, and the administration will be guided by having a strong economy and tariffs are counter to that.
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Yeah. I would add just one comment. I think that Mexico — and let’s drag Canada into that because it’s usually used in the same sentence — is primarily an immigration discussion. Because at the end of the day, the combination of deporting people and wanting to put tariffs on, I don’t know where the labor is going to come from.
It’s either going to come from China Plus One or it’s going to come from Mexico. And my bet is that it’s going to come from Mexico but under new immigration controls and policies. I think with respect to China, container doesn’t care whether it’s coming from Vietnam or China. It’s going to be pretty much the same dynamic.
And it’s driven by geopolitics. It’s not really driven by economics. At the end of the day, I think the new administration and the old administration were smart enough to understand that tariffs are highly inflationary. Forget about the narrative.
But at the end of the day, given the limitations on labor, tariffs are going to be extremely inflationary. We’re going to have them, for sure, we’re going to have more of them. But I think they’re going to be more moderated once the other political objectives are achieved.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Jeff. Operator, next question.
Operator
Thank you. Our next question comes from the line of Brendan Lynch with Barclays. Please proceed with your question.
Brendan Lynch — Analyst
Great. Thank you for taking my question. That was very helpful color on the tariffs and how we should think about them. Maybe you could just relay what the discussions you’re having with tenants are about how they’re viewing tenants — excuse me, how they’re viewing tariffs.
Are they pulling inventory into the U.S. faster than they would otherwise or taking more of a wait-and-see approach?
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
I think some of the de minimis people have pulled more trade into the U.S. in anticipation of some of this. But that is only shifting volumes maybe a quarter or two. It’s not going to be able to affect the long term.
So, there’s going to be some noise in the numbers that you’ll see in the fourth quarter and the first quarter of next year, but I think that the fundamentals are going to take over starting in the second quarter.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Brendan. Operator, next question.
Operator
Thank you. Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.
Michael Carroll — Analyst
Yeah, thanks. I wanted to touch on the promote income recognized during this quarter. Is there something different with the data center sale that allowed PLD to earn this promote? And correct me if I’m wrong but I thought the USLF didn’t have a promote opportunity until the second quarter of 2026. So, I guess, did this pull this forward?
Timothy D. Arndt — Chief Financial Officer
Hey, Mike. Well, all of our funds beyond the three-year recurring promote events or sometimes incentive fees can be earned at the end of the life of a closed-end funds. Our vehicles typically provide for promote opportunity upon completion of some kind of successful development. Now, in funds like USLF or PELF, which are typically operating vehicles, you don’t see very much of that.
But here, we had a large development — redevelopment opportunity in Elk Grove that we frankly, I have to think of it this way, Prologis is building a business here. We’re bearing all of the G&A and cost of this data center business that our funds are going to enjoy the benefits of. So, we are structuring and have structured ways to get compensated for those activities, and that’s what’s reflected in this quarter.
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Yeah. It’s not just development. Remember, one of the big advantages that we have in this business over other people is that we can actually procure stuff ahead of time. And that oftentimes puts us in a position to be able to convert on leasing opportunities because the timeline for delivery becomes compressed.
And obviously, to the extent we do that with our balance sheet, there’s some value creation that comes out of that as well. So — and we can do that because we have multiple data center opportunities. And as long as you’re smart about procuring the right stuff that’s fairly fungible, you can move it around. So — and all of that is done very transparently and working with the independent advisory councils of these funds.
So, yeah. We have other opportunities to earn fees based on value we contribute.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Mike. Operator, next question.
Operator
Thank you. Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.
John Kim — Analyst
Thank you. On data centers, given the amount of capital and capacity that you’ve highlighted today, any updated thoughts on establishing a data center fund or some kind of structure with recurring income? And then specific to this year, it looks like you have $100 million of data center developments that are your partners’ share in your current pipeline. Should we assume some margin on this will be recognized this year as a promote income?
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Let me take the first part of that question, and I’ll let Tim take the second part. We have not yet made the decision as to what we’re going to do with the capitalization of our data center business long term. Let me tell you what the current thinking is. The current thinking is that we are a developer, and that we’ll monetize and sell these assets upon completion.
And we use the capital that they generate as a way of expanding our core logistics business. That’s the strategy today. We may expand that strategy to include a fund management approach, either a dedicated fund or possibly expanding the investment mandate of some of the existing open-end funds, obviously after talking to our investors about that, as a way of including some data centers within those funds. That decision hasn’t been made because right now, we’re thinking about it as a funding mechanism for our core logistics development business.
But we may change course that. One thing we will not do is hold 100% interest in data centers on our balance sheet because the capital requirements of that are going to be — even for us, are going to be pretty significant.
Timothy D. Arndt — Chief Financial Officer
And, John, it’s Tim. Maybe I’ll grab you offline to see what you’re looking at to believe some of the current activity is within funds. But it is not. It’s on our balance sheet.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, John. Operator, next question.
Operator
Thank you. Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.
Todd Thomas — Analyst
Hi, thanks. I just wanted to, first, follow up on the comments about the post-election leasing that you’ve experienced. And thinking about the 2025 guidance, does the guidance and occupancy assumption assume that leasing interest or demand in ’25 remains consistent with what you’ve seen in the last 10 weeks or so? And then also, not sure if I missed this, but can you provide what ’24 net absorption was and what your expectation is for ’25 and how you expect that to trend throughout the year? Thanks.
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
We actually prepared the business plan for the following year, usually in the October, November time frame. So, I would say the period was right bridging around the election. It was too early to see some of the activity that we’ve seen. I would say compared to where our head was at the time, we are more encouraged.
But let’s leave it at that and let’s see whether this recovery has significant legs or not. But yes. We’ve put our plan together right before the election and have left it there.
Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics
And as it relates to net absorption, we saw net absorption of 39 million square feet in the fourth quarter. That amounted to just shy of 150 million square feet in the year, and we are looking for 185 million, 190 million square feet of net absorption in 2025. And that is expected to build over the course of the year.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Todd. Operator, next question.
Operator
Thank you. Our next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.
Vikram Malhotra — Analyst
Thanks for taking the follow-up. Just two quick ones. So, you gave the GAAP NOI components. I’m just wondering if the cash NOI growth, I think you have like 3.5%, 4% bumps.
Assuming the cash spread is probably in the 30s, but do you mind just bridging GAAP and cash NOI, number one? And then just number two on the net absorption view. I think Chris mentioned it will build through the year. But in the past, you sort of highlighted the rate environment is sort of crucial to that view. I’m wondering now what the offset is given the view is rates might be stable and maybe there’s even a rate hike.
Thanks.
Timothy D. Arndt — Chief Financial Officer
Hey, Vikram. As for the cash same-store, as is always the case, the most kind of volatile difference that we can see between GAAP and cash in the year is going to be what’s going on in free rent. And we are seeing free rent levels grow back to, I’ll say, normal amounts of the lease value. So, that’s our expectation for the year and reflected in our guidance.
Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics
Yeah. And as it relates to net absorption, Vikram, Dan touched on the transition in customer engagement and thinking earlier in the call. And so, as we look at 2025, that work, in our view, is really customers have been deferring decision-making. Now, they see the new administration is, they have — there’s a decline in uncertainty, and that has translated to better decision-making and is part of the lift in net absorption that we expect over the course of 2025.
Justin Meng — Senior Vice President, Head of Investor Relations
Thank you, Vikram. Operator, next question.
Operator
Thank you. Our next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.
Vince Tibone — Green Street Advisors — Analyst
Thanks for taking my second question. How does the higher treasury rate impact your view of where unlevered IRRs and stabilized cap rates could head in the future? And ultimately, like how do you determine what is the appropriate yield for a new U.S. speculative development start?
Dan Letter — President
Yeah, Vince. I’ll take that one. So, first of all, there has been volatility in the 10-year for some time. And if you look at last year, the 10-year was bouncing 100 basis points up and down throughout the year, and we saw volumes actually grow back to pre-COVID levels.
So, deals are happening. I think there’s this notion out there that there’s this one-to-one correlation between 10-year and value, which is just — it’s not the case when you look at the total return. There’s many more considerations to take into investment decisions, replacement cost, the lease mark-to-market, and what have you. So, what does that mean for values for the year? I mean, we saw three of the last four quarters values uptick in our open-ended funds.
We’ve not seen deals die, whether — we had a big disposition year last year. We did not see any deals retrade because of it. And we’re seeing deeper buyer pools right now. Logistics is still a very attractive investable category for investors out there.
And so, we feel strongly that we’ll see a pretty strong year on the transaction market, maybe a slow start to the year. As it relates to appropriate yield for spec, like I’ve said so many times in this call, we have just such a large universe of opportunities. We’re always going to be looking for that spread, that 125- to 150-basis-point spread from market cap rate to our yield.
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Yeah. Let me add a little color to that. Look, and you can go back to calls a couple of years back when money used to be free. We always talked about the market not having priced real estate with zero or 1% treasury costs.
Historically, the treasuries have been trading at about 200 basis points over the implied inflation rate. That’s been kind of — other than when the Fed has been doing weird stuff, that’s been the norm. So, given that inflation expectations were then two and now, they’re more like three heading back down to two, let’s call it two to three, that means treasuries are going to be 4% to 5%. I mean, that is where they should be and that’s where they will be, OK? Four percent or 5% treasuries.
That means 7% to 8% IRRs unlevered gives you anywhere between 300 and 500 basis points of real inflation-adjusted return. That’s appropriate for real estate, which is somewhere between stocks and bonds. So, those are the relationships. I think the market just got used to free money for too long.
And — but the real estate market never priced assets as if that money was going to be free forever. Some of the leverage buyers may have had a different math on this. But in terms of institutional, capital, and what return it takes to attract it to real estate, those are the numbers. On the issue of margins, what’s interesting is that Dan is correct.
We look for about 125, 150-basis-point premium over exit cap rates. We used to want that also when cap rates were 8% or 9%. It’s just that with cap rates at 5% or 6%, 125 basis points is a lot bigger margin. So, ironically, margins actually have increased even in this area — in this period where there’s been some weakness in the past year.
Still our margins are way above our expectations and the way we underwrite properties. So, I can’t really explain that one, but the margins have been very healthy. And I think it’s because it’s so difficult to bring on land in some of these supply constrained markets.
Justin Meng — Senior Vice President, Head of Investor Relations
Operator, final question, please.
Operator
Thank you. Our last question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Blaine Heck — Analyst
Great. Thanks for taking the follow up. Hamid, just taking a step back, I wanted to see if you could talk about your relative level of visibility into the operating environment as you all were kind of formulating your outlook and commentary for this call. It just seems like there are a lot more moving pieces, with Trump taking office, the wildfires in LA, tenants who have been taking longer to make decisions, the prospect of tariffs, deportation, among other things.
So, I guess how did you take all of those variables into account? And do you think there’s maybe a higher level of conservatism built in because of all that?
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Look, let’s be very frank about this. This company has never reduced guidance in the last 12 years. Last year, we reduced guidance as we saw the softness going in. Can I look you in the eyes and tell you there is not a degree of conservatism built into our projections when you work through everybody in the system that’s involved, all the way from the person who is leasing the space in the market, all the way up to Tim? I can’t look you in the eyes and tell you that.
So, there is a bit of an ask even internally within the company, to be quite frank with you. My view is that the market is going to surprise people in the back half of the year. That’s my view. I’ve been wrong before, but that’s my view.
I would say the rest of the team — I shouldn’t say the rest of the team. I would say the real estate people are generally there, and some of our financial people are a bit more conservative. And there is no point answer. There is a wide range of views on this.
So, you’re smart. You figure it out.
Dan Letter — President
Thanks. So, that was the last question. And thank you, all, for joining the call today. As we wrap up, we have a few thoughts we’d like to leave you with.
First, we’re very optimistic about the recent activity and the improving customer sentiment, and we have expectations of stronger momentum throughout the course of the year. Second, we’re making great progress in our data center business. We have a growing pipeline, a very skilled team. All of this is highlighted by this Elk Grove Village transaction.
And then lastly, we’re very confident in the long-term earnings power of this company. Looking forward to connecting at the upcoming conferences here or during the next quarter’s call. Thanks for joining.
Operator
[Operator signoff]
Duration: 0 minutes
Justin Meng — Senior Vice President, Head of Investor Relations
Timothy D. Arndt — Chief Financial Officer
Ki Bin Kim — Analyst
Tim Arndt — Chief Financial Officer
Samir Khanal — Analyst
Christopher N. Caton — Managing Director, Global Head of Strategy and Analytics
Vikram Malhotra — Analyst
Chris Caton — Managing Director, Global Head of Strategy and Analytics
Dan Letter — President
Ronald Kamdem — Morgan Stanley — Analyst
Michael Goldsmith — Analyst
Craig Mailman — Analyst
Hamid R. Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Caitlin Burrows — Goldman Sachs — Analyst
Hamid Moghadam — Co-Founder, Chairman, and Chief Executive Officer
Nicholas Yulico — Analyst
Vince Tibone — Green Street Advisors — Analyst
Blaine Heck — Analyst
Tom Catherwood — Analyst
Nick Thillman — Robert W. Baird and Company — Analyst
Mike Mueller — Analyst
Jeffrey Spector — Analyst
Brendan Lynch — Analyst
Michael Carroll — Analyst
John Kim — Analyst
Todd Thomas — Analyst
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The Motley Fool has positions in and recommends Prologis. The Motley Fool recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.
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