Chris Caton: Yes. As it relates to market vacancies, we look at vacancies, not availabilities. Availability is a range between 150 and 250 basis points above these figures, depending on the cycle. We have vacancies peaking in the mid-6s later this year. So that’s up about 20, 30 basis points versus what we discussed last year. I think what’s important to understand in the cycle is the recovery potential in 2025 related to each of the constituent pieces. Hamid walked you through the demand picture. But what’s important to recognize is the supply picture. That was a big factor over the last year, 18 months. And the meaningful falloff in supply is marked. It’s off 80% from peak. It’s off about 1/3 from pre-COVID levels. So we’re talking about 35 million square feet of starts in the first quarter.
That annualizes to about 160 million, 170 million square feet. So you’re going to actually see this snap later this year and into next year, and those vacancy rates moving noticeably down, likely to move noticeably down from mid-6s towards 5% over the course of next year.
Hamid Moghadam: One other thing I would — your response has triggered this. Vacancy rates do not linearly affect pricing power. I think when you’re operating under 5%, you’ve got a lot of pricing power. Now whether that’s 2% or 3%, doesn’t matter. You have a lot of pricing power. And even though you might have two customers that really need the space, four are looking for the space because they just don’t want to be cut short down the road. So it just sort of feeds on itself. When the market gets to sort of around 6%, you’re at equilibrium. When it gets too much above that, you get into a soft market. And that’s a macro analysis, obviously, you’ve got to apply that market to market in each situation. But that’s the way we look at it.
We don’t think we’re getting into those levels of vacancy that we’ve seen in other cycles, even during the good times. The worst that we’re projecting in this period is almost as good as the best we’ve seen in other cycles. So that’s a key distinction. And we’ve just been spoiled by market in three years where vacancies have been lower than they’ve ever been. And I think you’ve heard me say at times that, if the normal range of a market is 1 to 10, we’ve been operating in a 12, 13, and more recently, I’ve said we’re in an 8 or 9. And today, I would say we’re in probably 6.5, 7.
Operator: And the next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question
John Kim: Thank you. I just wanted to get some additional color on the weaker net absorption due to tenants becoming more cost conscious. I’m wondering if this test-the-thesis that industrial rent is somewhat inelastic given it’s a small portion of the overall transport and logistics costs? And also, where are tenants going in your view? Are they simply not expanding, or are they downsizing or going to less expensive markets or submarkets?
Hamid Moghadam: So we’ve actually tried to test that theory by looking at whether Southern California’s loss has translated into an equal gain in adjacent markets like Vegas and Phoenix. And the answer is, while absorption has increased in those markets, it doesn’t fully account for the drop-off in Southern California. So some of that demand has just been deferred. And the question is when will deferred demand convert to real demand. And that’s the $64 million question. Is it one quarter? Is it two quarters? Is it three quarters? Don’t know. We think it’s a couple of quarters. But it will happen. And particularly the port coming back, that part accounts for over 30% of imports in the US, and it’s been basically down. So we think it’s going to — that’s going to have a dramatic effect.
Now we may have missed it already for this Christmas season, I don’t know. But certainly, next year, that market is going to come back absent a recession or some kind of geopolitical blow-up.
Tim Arndt: And John, I might just add, I guess, the way you’re putting the equation together, it is what we see that, yes, the rate environment causes this consternation. But as Chris has been highlighting in a number of his answers, as we look at where utilization sits and some of the capacity that’s available, it’s just the first place that customers can look in terms of finding a way to continue to operate in the short term. That would ostensibly end, and we’ll watch for that as utilization rises, and that’s what would add to new demand.
Operator: And the next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question
Vikram Malhotra: Thanks for taking the question. Just two quick ones. First of all, just on the three-year outlook. So it sounds like you’re saying ’24 is a bit lower than you predicted, ’25 and ’26 is similar. Does that essentially mean the three-year outlook is kind of adjusted down somewhat? And then secondly, just to be — just to give us some numbers. I think what you were saying is the rest of the market rent growth is now, I guess, flattish, but SoCal is down. Do you mind just putting some more numbers on that? Like just how much is SoCal down Q-over-Q or year-over-year versus what other markets in the US are doing? Thanks.
Tim Arndt: Hey, Vikram, it’s Tim. We’re not calling anything on ’25 and ’26. In my prepared remarks — or maybe I should say, I think our view would be that our views are upheld. And what I tried to highlight in the opening remarks is that if we get to a little bit lower average occupancy this year, recognizing that our three-year forecast called for a more normalized level of occupancy in the end anyway, that’s where this concept of, well, maybe the adjustment to same-store from an occupancy change is coming a bit more this year than it would otherwise next year. But right now, we would hold out our view for ’25 and ’26 in terms of aggregate NOI and same store. Now rent change in this very immediate term, I’m sorry, market rent growth is a little bit below expectations. That will have some effect, but that will be relatively muted through same-store over the period.
