Prologis Inc. (NYSE: PLD) Q1 2021 earnings call dated Apr. 19, 2021
Corporate Participants:
Tracy Ward — Senior Vice President of Investor Relations
Thomas S. Olinger — Chief Financial Officer
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Chris Caton — Managing Director, Global Strategy and Analytics
Edward S. Nekritz — Chief Legal Officer and General Counsel
Michael S. Curless — Chief Customer Officer
Gary E. Anderson — Chief Operating Officer
Analysts:
Vikram Malhotra — Morgan Stanley — Analyst
Elvis Rodriguez — Bank of America — Analyst
Emmanuel Korchman — Citi — Analyst
Derek Johnston — Deutsche Bank — Analyst
Craig Mailman — KeyBanc Capital Markets — Analyst
Ki Bin Kim — Truist — Analyst
John Kim — BMO Capital Markets — Analyst
Blaine Heck — Wells Fargo — Analyst
Eugene F. Reilly — Chief Investment Officer
Michael Carroll — RBC Capital Markets — Analyst
Steve Sakwa — Evercore ISI — Analyst
Vince Tibone — Green Street — Analyst
Tom Catherwood — BTIG — Analyst
David Rodgers — Baird — Analyst
Brent Dilts — UBS — Analyst
Michael Mueller — J.P. Morgan — Analyst
Caitlin Burrows — Goldman Sachs & Co — Analyst
Bill Crow — Raymond James — Analyst
Presentation:
Operator
Welcome to the Prologis Q1 2021 Earnings Conference Call. My name is Julianne, and I’ll be your operator for today’s call. [Operator Instructions]
I’d now like to turn the call over to Tracy Ward. Tracy, you may begin.
Tracy Ward — Senior Vice President of Investor Relations
Thanks, Julianne, and good morning, everyone. Welcome to our first quarter 2021 earnings conference 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 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 or SEC filings.
Additionally, our first quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures, and in accordance with Reg G, we have provided a reconciliation to those measures.
This morning, we’ll hear from Tom Olinger, our CFO, who will cover results, real-time market conditions and guidance. Hamid Moghadam, Gary Anderson, Tim Arndt, Chris Caton, Mike Curless, Dan Letter, Ed Nekritz, Gene Reilly and Colleen McEwan are also here with us today.
With that, I’ll turn the call over to Tom. And Tom, will you please begin?
Thomas S. Olinger — Chief Financial Officer
Thanks, Tracy. Good morning, everyone and thank you for joining our call today. Positive momentum in the fourth quarter has carried into 2021 as evidenced by our operating results, profitable deployment activities and strong outlook. Demand driven by the powerful economic recovery, retail revolution and higher inventory levels is unfolding more strongly than we expected. Headlines in the past 90 days have been a testament to the value of resilient supply chains. Those who were prepared are now growing and taking market share. There is great momentum moving through the supply chain that is signaled by retail sales, import volumes and rising inventory levels. This will continue as inventory to sales ratios have just begun to rise as companies race to keep pace with demand.
Starting with our proprietary metrics with our view of the market, space utilization is 84.5%, up 100 basis points from the last 90 days. Our customers tell us their activity levels are rising at the fastest pace since 2019. Lease proposals reached 93 million square feet in the first quarter, a new high watermark and are up 30%[Phonetic] from 2020 adjusted for the size of our portfolio. Lease signings were 60 million square feet, our second highest quarter on record. Much of this activity is in new leasing, and as a result, retention was 69% for the quarter as we’re optimizing the credit and rents. Given our high volume of lease signings, our portfolio — operating portfolio was 96.4% leased at quarter end. Our leasing mix continues to broaden with strong demand continuing from space sizes above 100,000 square feet and small spaces demand is improving.
E-commerce demand remains elevated, representing 25% of new lease signings in the first quarter. The balance of leasing is diverse, with outsized growth among companies that provide food and consumer products as well as renewed momentum in the construction segment as housing expands. In the U.S., we now expect net absorption of 300 million square feet in 2021, which would be the highest in history. This strong demand is being masked by supply, and we expect 300 million square feet of deliveries this year. However, supply remains broadly disciplined.
Years of historic low vacancy rates have constrained demand due to the lack of available properties, particularly in the most desirable markets. Many of our markets faced shortages of land logistics uses. In addition, obsolescence and conversions to higher and better use have added to this broad-based scarcity. Vacancies are below 2% in many of our top markets such as Southern California, Toronto, Germany’s main markets and Tokyo. Our supply watchlist continues to include just four markets. Houston, Madrid, Poland and West China, which taken together account for just over 5% of our NOI.
More recently, we’ve begun to see a rapid acceleration in replacement costs. In the U.S., we expect replacement cost to increase 20% to 25% over the two-year period through 2021, the fastest rate ever. Our procurement team is proactively mitigating these increases by securing favorable pricing and delivery schedules. For example, the team has procured steel for 5.2 million square feet of starts at pricing roughly 5% below market and providing us with the 10-week to 20-week schedule advantage. Strengthening demand and ultra-low vacancies are leading customers to increasingly compete for space, which is translating into pricing power.
Rent growth for the quarter, which was up 2.4% in the U.S., outperformed our expectations. We are raising our 2021 rent forecast to 6.5% in the U.S. and 6% globally. Our in-place to market rent spread now stands at 13.6%, up 80 basis points sequentially. This represents future annual incremental organic NOI growth potential of more than $600 million.
Turning to valuations. Turning to valuations, logistics assets values are up a record 7.5% over the last two quarters. A way to capital has emerged coming both from rising real estate allocations and investor strategically reassessing their property focus type. Applying the valuation uplift to our $148 billion owned and managed portfolio, we estimate that the value of our real estate rose by more than $10 billion over the past two quarters.
Moving to results. The work we’ve done to position the portfolio and optimize the balance sheet is continuing to deliver excellent financial results. For the quarter, core FFO was $0.97 per share, which includes net promote expense of $0.01. Net effective rent change on rollover was 27%, led by the U.S. at 32%. We are prioritizing rents over occupancy in substantially all of our markets. Occupancy at quarter end was 95.6%, down 60 basis points sequentially, in line with the normal first quarter seasonality. Rent collections remain very strong. We effectively had no bad debt expense in the quarter.
Our share of cash same-store NOI growth was 4.5%, driven by the U.S. at 4.8%. For strategic capital, our team raised $1.4 billion in the first quarter as investor demand remains robust. Equity cues for our open-ended vehicles are at an all-time high, at more than $3 billion at quarter-end. This level of interest is another indicator that valuations for high-quality logistics assets should continue to increase.
Looking at the balance sheet, we continue to maintain excellent financial strength with liquidity and combined leverage capacity between Prologis and our open-ended vehicles now totaling $14 billion. We were able to get in front of the recent increase in interest rates and issued $3.5 billion of debt with a weighted average rate of 96 basis points and a term of 11 years. This activity included the issuance of a 10-year U.S. dollar bond with the spread of 55 basis points, the lowest 10-year REIT bond spread ever and the completion of our 15th green bond offering. The assets backing these bonds are the product of two decades of sustainable development.
Our debt maturity stack is in excellent shape with minimal maturities until 2026. Subsequent to quarter end, we closed on a green revolving credit facility, adding $500 million more capacity to our already exceptionally strong liquidity position.
Moving to guidance for 2021. Our outlook is more positive across the board. Here are the updates on our share basis. We are increasing our cash same-store NOI growth midpoint by 75 basis points and narrowing the range to 4.5% to 5%. We now expect bad debt expense to be in line with our historical average at approximately 20 basis points in gross revenues, down from our prior guidance midpoint of 30 basis points. We’re increasing our average occupancy midpoint for our operating portfolio by 50 basis points to 96.5%.
Strategic capital revenue, excluding promotes, will now range between $450 million and $460 million, up $12.5 million at the midpoint. The increase is primarily due to higher asset management fees resulting from increased property values. Whether you look at public comps or recent transactions, both would indicate that our strategic capital business is significantly undervalued. We are increasing development starts by $400 million, and now expect a midpoint of $2.9 billion. Build-to-suits will comprise more than 40% of the volume.
Our land portfolio today comprised of land auctions and covered land place supports approximately $17 billion of future development. We’re increasing the midpoint for dispositions and contributions by $800 million in total. Consistent with the rise in asset value and higher contributions, we’re increasing realized development gains by $200 million with a new midpoint of $750 million. Net deployment uses are now expected to be $50 million with leverage remaining effectively flat in 2021.
Putting this all together, we’re increasing our core FFO midpoint by $0.06 and narrowing the range to $3.96 per share to $4.02 per share. Core FFO, excluding promotes, will range between $3.98 per share and $4.04 per share, representing year-over-year growth at the midpoint of 12%.
Our efforts over the past 10 years to reposition the portfolio and balance sheet have set us up to outperform in 2021 and beyond. And you’re probably tired of us saying this, but it continues to be true, we believe the best years for the Company are still ahead of us.
With that, I’ll turn it back to the operator for your questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Your first question will come from Vikram Malhotra from Morgan Stanley. Please go ahead. Your line is open.
Vikram Malhotra — Morgan Stanley — Analyst
Thanks so much, and good morning, everyone. Maybe just building off of some of the comments I heard, where strategic capital is undervalued and you’re just much more bullish about the growth prospects. I guess from — sitting on the other side, investors and the Street generally understand that things look really good, fundamentals have improved, NOI is trending up. So I guess I’m just looking forward, what would you say are some of the areas of organic growth that could surprise us positively? And second, what does this mean for Prologis’ ability to do external growth, be it development or even larger scale M&A? Thanks.
Thomas S. Olinger — Chief Financial Officer
Let me take a crack at that. I think organic growth is — the prospects are actually better than they’ve been as far as I remember. Replacement costs are moving very quickly and interest rates are moving up or generally up in the last six or seven months. So both of those things argue for the need for higher rents to pencil out of development. Now lowering cap rates mitigate that a bit, but we don’t — we can’t really count on that. So a prudent developer with more higher input costs and higher yield requirements would have to get higher rents to make that work. That just puts a pricing umbrella over our in-place rents and widens that in place to market spread, which gives us more pricing power going forward.
And given our concentration and focus on the most desirable markets where the supply picture is the tightest, I think organic growth is always the engine that we count on for propelling our growth. All the other stuff is episodic, and it’s basically a cap rate conversion between the private markets or the public markets or the public market valuation of two different companies in the case of M&A. Those are not things we control. But where we invest, how we invest, how we push rents, how we use our scale to drive value for our customers and how we extract that value in the form of higher rents and other fees for services is really where we add value.
The external growth can come and grow — come and go. Having said that, we have great external growth prospects too without having to do deals. We have a great land bank, they’re well positioned. We have even greater shadow land bank and covered land place. You add it all up together and we can probably grow the portfolio organically by the size of one of the top three companies in the sector just with the land that we’re dealing. So, I feel really good about both organic and external sources of growth for the Company.
Operator
Your next question comes from Elvis Rodriguez from Bank of America. Please go ahead. Your line is open.
Elvis Rodriguez — Bank of America — Analyst
Good morning. And this is either for Hamid or Tom. On the call, you mentioned the procurement team that you have and the ability to secure lower steel prices versus the market. Can you talk a little bit about sort of the team and what the team is doing there and how that helps you versus your competitors near term and longer term? Thanks.
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Yeah, let me start it, then I’ll turn it over to Gary, actually, who oversees that function. Look, scale gives us the advantage in two ways. One, we can make bulk deals, and two, we don’t have to guess right about where we’re going to use the steel because we can spread it over a bigger base. And if we guess wrong in one project, we’re going to use it up in another project. So those are really good dials to have to be able to play with. But Gary, why don’t you add to that?
Gary E. Anderson — Chief Operating Officer
Yeah. Hey, Elvis. So, we stepped this function almost three years ago now and really focused on our controllable spend, primarily on the construction side and on TI and operating expense side. And we set a goal at that time of delivering about $150 million per year in savings and we have exceeded that. This is the first time in my view in the Company’s history that we’ve actually taken advantage of our scale in a way that I think is really meaningful, and you’re starting to see it show up in development margins and operating margins.
And both Tom and Hamid mentioned steel. It’s not just about procuring a 5% to 10% cost savings on steel, it’s about procuring those critical raw materials. Tom mentioned 10 weeks to 20 weeks on schedule advantage. And when you’re talking development, particularly build-to-suits, that is a game changer. So I think that the procurement organization has created a real competitive advantage for us, not only on the construction and cost side, but also on the essential side where we’re now starting to deliver a different type of value proposition beyond the four walls and a roof.
Operator
Your next question comes from Emmanuel Korchman from Citi. Please go ahead. Your line is open.
Emmanuel Korchman — Citi — Analyst
Hey, good morning. Tom, you talked about the drivers of the retention being I think an upgrade you said to credit quality and maybe tenancy, but maybe I was a little bit surprised at the occupancy dip and I realized that 1Q is usually seasonally lower, but given the amount of demand, thought that maybe that would have been a little bit less. So could you address both of the topics or the seasonal occupancy dip as well as the retention, and what we should look at for retention going through the rest of the year here?
Thomas S. Olinger — Chief Financial Officer
Yeah, I think as we said, we are — we had more churn in the portfolios we’re pushing in certain indications credit and pushing rents. We have excellent credit quality by looking at our staff and our low bad debts. I think retention is going to improve over the year, but it’s something we really don’t look at, and I wouldn’t focus too much on it. I would focus on our leasing momentum and our rent growth — and rent change growth. And I think if we look at both, they are accelerating. The only thing I would point you to is look at our leased percentage at the end of the quarter, we were 96.4%. So we are leasing up that vacancy. And again, I point to the record level of proposals and increasing rents. So I think we’re making the right decision for the real estate by pushing the rents and getting the right tenants into those spaces.
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Hey, Manny, I would add few things there. First of all, we can make the occupancy be whatever we want and retention be whatever we want, if we were more dovish on brands and what we can get. And I do think that we are actually leading the market in that direction. The other thing is you may remember from last year around this time, maybe it was the second quarter call, I don’t remember, but we talked about we’re taking very careful notes on who is behaving and who is not behaving, when the markets really soften and there were people who were requesting deferrals and where we’re really trying to take advantage of the situation where the businesses were not distressed. And those are the people that given fight between two tenants on a given space are going to be on the losing end of that fight. So people’s behavior does affect how we make these recent decisions and if it hurts a retention spat so be it we will make more money and we’ll have a better portfolio customers.
Operator
Your next question comes from Derek Johnston from Deutsche Bank. Please go ahead. Your line is open.
Derek Johnston — Deutsche Bank — Analyst
Hi, everyone. Just sticking on the development side. You have yields compressing across most or all of the markets through 2022 and beyond, but not as much as we would have thought. I mean given steel prices up around 100%, I don’t think a 5% or 10% discount gets us to that yield stickiness. So is this due to the cost basis on your land bank, or is it more demand and growth in rent are enough to offset expenses in the underwriting process at this point? Thanks guys.
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
First of all, you should be clear, we — in reported margins, we don’t use book value, we use the market value at the time that we do the — we start construction, but land markets have been moving. These increases, if you figure, it takes 9 months to 12 months to build the building, a lot of the steep price escalation has been during the period in the last 9 months to 12 months. So, we haven’t had — we don’t adjust the land basis in the middle of the project because land is going up. We do it at the beginning of the project. So we’ve had good surprise margin expansion, if you will, from rents being higher. Remember a lot of these things are also pre-leased. So if we were — if this space were available, again, look at least at the higher rate, that’s why I focused on in place to market rents because that’s what really is the additional fuel in the tank for extending the rental growth time period.
Operator
Your next question comes from Craig Mailman from KeyBanc. Please go ahead. Your line is open.
Craig Mailman — KeyBanc Capital Markets — Analyst
Hey, guys. I just want to touch on same-store here. We kind of figured maybe the initial cut was a little bit conservative, but the 75 basis point increase was pretty strong here for our first quarter up revisions. I know that occupancy guidance is moving higher, but just — could you walk through maybe the — bridge us into what really drove that upside here and give you guys confidence to bump it that high this early in the year and hopefully give yourself continued room to the upside in the next couple of quarters?
Thomas S. Olinger — Chief Financial Officer
Sure, Craig. The main driver — the substantial driver of our same-store growth is in-place to market role. But the increase that we saw quarter-over-quarter on our guidance, it would be occupancy, occupancy 50 basis points, bad debts lower by 10 basis points to 12 basis points and we are seeing higher rent growth. And most of the higher rent growth we’re going to get in the out years, but we’re getting a little bit of benefit of that this year, but those would be the main drivers of the increase. But again, I would point you to the proposal levels — the record level of proposals, demand is excellent and we are leasing up space at higher rents.
Operator
Your next question comes from Ki Bin Kim from Truist. Please go ahead. Your line is open.
Ki Bin Kim — Truist — Analyst
Thanks. Good morning. So, Hamid, your team has made 24 very interesting venture capital investments. And there’s some pretty clear themes that come across, which is mainly seeking to reduce customer pain points, reducing truck detention times or route optimization, improving workforce efficiency or energy efficiency. And let’s say all these ideas work out perfectly. My couple of questions are, what could it mean for the PLD platform? What does success look like to you in this arena? And lastly, where do you think we are in terms of converting these novel ideas to broad industry adoption?
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Well, the last part of your question is that we’re very early because we’re on the leading tip of that spear, and we are early in implementing it. So, very, very early. By the way, was this Ki Bin, because my earphones fell out? By the way, you know more about that venture capital portfolio based on the report that you wrote last week that I wrote and you can answer this question actually better than I can. But we’ve made roughly, as you pointed out, about 30 investments totaling about $100 million. I would — look if — and I said this five years, six years ago when we started this activity. If those investments were 5x multiple, which is a good venture capital outcome, okay, it’s great, we made $500 million, but across a company which has got an enterprise value of $100 billion, you know, it’s interesting, but it’s not huge. It’s not a game changer. But if we can change the effectiveness of our business, the value of our business to our customers by 5%. Now, you’re talking some serious though. I mean that’s $5 billion.
So, really the way — the reason we’re doing all this stuff is not because we’re great venture capitalist, but because we can actually assess the quality of an idea in this sector. We’re not in other sectors and we can actually affect the outcome probability by letting those companies get traction quickly, improve the product offering, etc., etc. So, by the way, not all of them are going to be successful for sure and we had one that has not — that has sold[Phonetic]. So far, but that’s actually a pretty good track record for a portfolio of this size. If 20% of them work out will be very, very happy, but primarily happy because of its impact on our customers and our portfolio.
Operator
Your next question comes from John Kim from BMO Capital Markets. Please go ahead. Your line is open.
John Kim — BMO Capital Markets — Analyst
Thank you. A question on retail conversions. Amazon has been more actively pursuing the retail the last mile distribution conversion, although primarily in secondary markets. Last fall, you estimated this would amount to approximately 5% of last mile stock over 10-year period. Has your view on the amount or the timing changed at all since you reported last fall?
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
No, it’s probably even — we were at the high side I think. I mean we’re working on lots of these deals, probably more than anybody combined — everybody combined, but they’re really tough. The 10,000 square feet, 20,000 square feet conversions, you can do, but if you think about it in the context of our business, I continue to believe that they’re going to be very attractive, but they’re going to be few and far between and you got to go through the five stages of grief to get to them, so they’re tough.
Operator
Your next question comes from Blaine Heck from Wells Fargo. Please go ahead. Your line is open.
Blaine Heck — Wells Fargo — Analyst
Great, thanks. We noticed you guys bought a good amount of land. I think it was $225 million in the quarter. Given where your land holdings and land bank stands now, do you think you’ll need to keep buying similar amounts quarterly, or was this maybe outsized and maybe in anticipation of continued increases in land values? And then, just given the increase in land prices that we’ve seen this cycle, where do you think that fair value of your land bank stands relative to the book value?
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Let me start. I’ll turn it over to Eugene for some specifics and Tom for his guess on the land value. But we are not that precise with respect to land purchases. We are opportunistic. So a lot of these land deals have long gestation periods and we certainly can time what quarter they fall in. We work on these things for years and years and sometimes they never happen, sometimes they happen in a quarter different than what we thought would happen. So don’t spend so much time on the quarter because we don’t control that.
But the overall quality of the land bank and size of land bank is one factor, but where it is, is also another factor. So our overall number may look in line with what our goals are, but there are definitely markets that were short on land and some markets that may be long on land,, and we are constantly in the process of adjusting that. Based on our in-house underwriting, our land bank book value is about 40% undervalued. And that number is moving up fairly quickly based on what you heard earlier. But Eugene, Tom, do you guys have anything to add to that?
Eugene F. Reilly — Chief Investment Officer
Yeah, I guess, this is Eugene, I’ll just add in terms of the magnitude. You’re going to see this number move up. It’s going to move up in tandem with how our development activity moves up. And frankly, land as a percentage of overall cost is also increasing with these escalations. And I’d also add our development volumes, if you look at the midpoint of our guidance for this year, the updated guidance, it’s less than 1.5% of AUM. So, we have room to go on — in that spec development activity. So we’re going to move this number up. And I don’t really have anything else except to punctuate the quarterly, almost even annual numbers aren’t that important because we see our opportunity with land is about big complex difficult pieces. So, we’re not be in retail. So, Tom, I don’t know if you have anything else to add.
Thomas S. Olinger — Chief Financial Officer
The only thing I would add is, it’s not just the land bank, but it’s covered land place, where you’re going to see really important strategic acquisitions that allow us to further develop these various build sites.
Operator
Your next question comes from Michael Carroll from RBC Capital Markets. Please go ahead. Your line is open.
Michael Carroll — RBC Capital Markets — Analyst
Yeah, thanks. Tom, I think earlier in the call, you had mentioned that you estimate supply will be around 300 million square feet in 2021, but Houston is the only market where there is current issues that you’re tracking. I mean, are there any other markets that you think could become an issue over the next 12-plus months or is demand just so broadly strong that will take down all that excess space?
Thomas S. Olinger — Chief Financial Officer
Well, sorry, [Indecipherable] potentially waiting, and I called out four markets and Houston was the one in the U.S., but I mean across the board, what we’re trying to develop and where our tenants want to be is largely very infill. We’re going to watch the bulk markets like we — we’ve always do like a Phoenix, that type of a market. We’ll watch it, but those markets are working effectively now. But I’ll turn it over to Eugene with any other color.
Eugene F. Reilly — Chief Investment Officer
Yeah, Houston has a couple of issues. I mean it’s got 9% plus vacancy rate and oversupply and some demand issues. So it’s going to take some time for that market to stabilize. Phoenix is on our watch list, but frankly, it isn’t that bad. And Tom really hit it. I mean the submarkets we like to operate in are very healthy right now. Most of them are quite constrained and these entitlement processes are just getting more difficult and longer. So I see equilibrium out there for a while. And if we’re really honest, we’ve been an equilibrium in the U.S at least for — about four years. So obviously, we’re calling for that with 300[Phonetic] each of demand and supply this year, I think you’re going to see that for a while.
Operator
Your next question comes from Steve Sakwa from Evercore ISI. Please go ahead. Your line is open.
Steve Sakwa — Evercore ISI — Analyst
Yeah, thanks. Just two quick questions. Tom, on the weighted average term of the leases, it kind of dropped down here in the first quarter. I know it was also lower in the first quarter last year, just anything there? And then secondly, Hamid, as it relates to sort of things like the Suez Canal blockage and dislocation in transportation systems and low inventories, what is your expectation for I guess structurally higher inventory and better demand going forward?
Thomas S. Olinger — Chief Financial Officer
Hey Steve, this is Tom. I’ll take the first one. The shorter term on the operating leasing was all mix. It was higher in Southern Europe, particularly France, where you’ve got three-year leases, China for example, lower in the U.K. where we have a longer mix. So it’s all mix. The length of leases, when you look across markets, are stable if not increasing.
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Yeah, Steve. In terms of structural inventory levels, there are three things that are driving it up. And for sure, they are going to be up in my estimation for the foreseeable future. The first structural thing is that people are just carrying more safety stock because Suez Canal-induced and everything just need to carry more inventory to [Indecipherable] much greater than the additional cost of carrying inventory. So across the board, we quantified that as 5% to 10% more inventory in a steady state environment. I think you’ve seen Chris’ paper on that. And if I were going to pick a number, it would be on the higher end of that range, more closer to the 10%. So that’s a big driver.
Secondly, inventory to sales ratios have been really stretched. I mean the starting point of where inventories are is very stretched and it just has to normalize to its regular level. And then the third thing is that the transition to e-commerce as that percentage goes up will drive that number up. So I think, yeah, we’re going to have more inventories across the system. By the way, there is a fourth thing I haven’t thought about first, but you have utilization rates that are 85% to 86%. So, it’s not like there is a lot of slack in the system, so that the mechanism for having more inventory will translate for demand — to demand for more space pretty quickly because those are very high utilization rates.
Operator
Your next question comes from Vince Tibone from Green Street. Please go ahead. Your line is open.
Vince Tibone — Green Street — Analyst
Hi, good morning. Could you provide some additional color on your U.S. market rent growth forecast, particularly how coastal market rent growth compares to non-coastal markets?
Chris Caton — Managing Director, Global Strategy and Analytics
Yeah, Dave, It’s Chris Caton. Thanks for the question. Indeed, it’s actually widening out as I think you might be suggesting. So in the U.S., 6.5% for the Top 5 markets with 7% or better growth, New Jersey, Baltimore, Toronto, obviously it’s Canada, Southern California and Seattle. I think you can see the pattern there, that’s for sure your broader coastal markets. By contrast, if we exclude Houston, the low-end of the range or markets that are running in kind of a 2% to 3% range. So that bracketed for you.
Operator
Your next question comes from Tom Catherwood from BTIG. Please go ahead. Your line is open.
Tom Catherwood — BTIG — Analyst
Excellent. Thank you very much. Actually, following up on that previous question and Chris’ comments, so want to focus on development starts in the central U.S. If we look back at 2019, you guys started roughly 2.6 million square feet of developments. In the first three quarters of ’21, you started less than 600,000 square feet. And then just in the last two quarters, it’s accelerated to 3.1 million square feet. Can you provide some detail on kind of what you’re seeing that’s driving this investment acceleration and especially given Chris’ comments on the bifurcation and rent growth, does your investment in that more in these kind of central markets in any way reflect an expectation that coastal markets could be weaker over the long term?
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Well, you guys really think we’re smart. We’re not that smart. Let’s just start with that and our business doesn’t lend itself to quarter-by-quarter analysis. So you put those two facts together, we have no clue what exactly development starts are going to be by quarter in a region going forward. We can give you a pretty good sense of roughly overall development in the U.S., roughly percentages of where it’s going to be, rough percentages of how much of it is build-to-suit. But when you’re talking about numbers in the 2.5 million square foot range per quarter, one built-to-suit of the[Phonetic] million feet can really move that number around and depending on where that lands, it could really affect the numbers.
So, I hate to be in the position of some of these smaller companies answering those questions, because I mean for them, it must be a really tough question to answer, given that they don’t have the benefit of the large numbers. But honestly, we are not there — there is nothing systemic in the central region other than the fact that obviously we’re not going to do a lot of development in Houston. And I would say Dallas, by and large has stayed stronger than we would have expected. So those are the two things I would tell you in terms of our strategy, but quarter-by-quarter numbers, I have no clue.
Operator
Your next question comes from David Rodgers from Baird. Please go ahead. Your line is open.
David Rodgers — Baird — Analyst
Yeah, maybe first question to Tom, I wanted to ask you about the turnover cost and concessions on the recent — in the last couple of quarters, obviously lease proposals have been up, is that a function of maybe smaller leases or the lease term you addressed earlier? And then I was hoping maybe Eugene could talk a little bit more about small leases and maybe the percentage that that’s making up of your lease proposals going out the door and what the trend is there? Thanks.
Thomas S. Olinger — Chief Financial Officer
Hey Dave, I’ll turnover across concessions. Concessions are really increasing at all. What you’re seeing on turnover costs is really a mix issue driven by more new leasing relative to renewal leasing and concessions are typically a bit higher on renewal leasing. So again, you’re seeing that mix. Also a turnover costs, we’re certainly seeing higher rents and with turnover costs and including lease commissions that will be a driver as well. When you think about short-term leasing or — I’m sorry, leasing or smaller spaces, it is certainly improving this quarter particularly when we look at proposal levels, performing levels by segment, where I believe were the highest. The growth was the highest in the quarter amongst all the segments. So proposal activity is good and rent change is accelerating. So I think we’re going to see the smaller spaces improve pretty well over the next — balance of the year.
Operator
Your next question comes from Brent Dilts from UBS. Please go ahead. Your line is open.
Brent Dilts — UBS — Analyst
Hey, thanks. Could you just talk about your community workforce initiative and how it’s doing, given the labor shortages you read in the press? And then how you think warehouse automation may advance over the next couple of years to help alleviate that? Thanks.
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
There is a on [Indecipherable] warehouse automation those Chris wrote about three or four months ago that I think lays out our thesis around that. There are aspects of it that lend — there are aspects of the activities in the warehouse that lend themselves more easily to automation and those aspects are going to take place sooner than fulfill automation. But companies are being used — pushed into more automation than they would otherwise use because of the labor shortage. And if the labor shortage didn’t exist, they wouldn’t automate so much because it’s expensive and the ROIs are pretty unproven in many cases. But they simply have to do them to meet the service levels that their customers demand of them. On the community workforce initiative, let me turn it over to Ed Nekritz, who oversees that activity for us. Ed, why don’t you make some comments?
Edward S. Nekritz — Chief Legal Officer and General Counsel
Great. Thanks for the question. So at the end of 2020, we are trained in excess of 5,000 individuals and we are well on our way to our goal of 25,000 trained throughout the globe. We have nine programs underway in the U.S. and we just announced expansion of the CWA program in the U.K. So we fully expect to hit our goals, Number 1. Number 2, the connectivity that we have with our customers is very significant as they are looking for us to help them train and enhance their initiatives with their employees, not just from acquiring employees, but also retaining employees.
And I will mention, it’s also significant development for us to be in front of our local municipalities in terms of showing and demonstrating to them that we are focused on delivering labor in order to keep those communities vibrant. The last thing I’ll say is that we are in the trial — final trials of negotiating certifications for our programs. They will be industry known certifications that we’re also very excited about.
Operator
Your next question comes from Mike Mueller from J.P. Morgan. Please go ahead. Your line is open.
Michael Mueller — J.P. Morgan — Analyst
Yeah, hi. Development starts to increase to about $3 billion for 2021. Are we likely to see that number increase meaningfully over the next few years?
Eugene F. Reilly — Chief Investment Officer
Yeah, Mike, it’s Eugene. I’ll take that one. It is hard to say what we’re going to do next year and the year after Mike because obviously the market environment is going to guide us. But as I said earlier, at this point, our speculative development starts. We’ll do as much build-to-suit as we can do and now that business is obviously growing very well right now, but our speculative activity at less than 1.5% of AUM is relatively low. So the market environment looks really good right now, the years to come, we’ll cross that bridge when we come to it.
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Hey Mike, you would actually remember this because when we were coming out of the downturn of 2008, I think it was in our 2011-2012, no, it was in our 2010 Analyst Meeting before the merger with Prologis that we actually said for the next decade, development guidance is going to be between $2 billion and $3 billion, that’s a reasonable amount of development to expect. And at that time, remember, everybody was scared of Prologis kind of numbers around $5 billion and that whole debacle. So our number from literally 11 years ago was $2 billion to $3 billion. And that was with AMB, which at the time was about 250 million square feet. Today, the new Prologis is 1 billion square feet, that’s four times as big. So to normalize that number for today, given the size of the base, that number would have to be $8 billion to $12 billion. So the fact that we’re doing $3 billion to $3.5 billion[Phonetic] or whatever events be is in the historical context and the size of the Company is much, much smaller than the numbers you used to see in the mid to late-80s.
And the reason for that is that development is that much tougher to do, particularly in the markets that people have figured out they want to be. At that time, people didn’t have quite the same appreciation of the quality differences between markets that they do now. But — so in the historical context, those are really small numbers. I mean to get to their equivalent, you would have to take old Prologis’ guidance, the old AMB guidance, they old Liberty guidance, the old DCT guidance and couple of private things in between and add them all up together. So I think there is a potential upside opportunity, if we could get our hand on good land. And that is where the [Indecipherable]. That’s why I think there is so much pressure on rents going forward.
Operator
Your next question comes from Caitlin Burrows from Goldman Sachs. Please go ahead. Your line is open.
Caitlin Burrows — Goldman Sachs & Co — Analyst
Hi, I was just wondering maybe if you could talk about leasing volumes, obviously, they’re really strong. Could you go through who you’re seeing the most demand from what type of tenants, how broad it is and any recent shifts that you’ve noticed either stronger or possibly weaker?
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Yeah, I think the healthy companies really stepped up in pretty much every sector during COVID and use that opportunity, particularly the early days, to jump in and do more activity. Obviously CPG companies, food and beverage companies, e-com of any form, those are the growth sectors. I think housing is going to accelerate because housing has been operating in the pretty low level. Health care is accelerating for all the reasons that you can imagine. But Chris or Mike, do you want to add to that?
Chris Caton — Managing Director, Global Strategy and Analytics
Yeah, I can add — just give a little more flavor. Obviously, e-commerce is a big component of it, but certainly not all about Amazon. Certainly they are the most active customer, but we’re seeing a lot of activity from the Targets, the Walmarts, Home Depots and lots of evidence of the Chinese players making their way to the U.S. and Europe as well. And then don’t forget about just some of the conventional players that are really active right now, food and beverage very active, transportation fact we just did two build-to-suits. This quarter in addition to Amazon with Kellogg’s and FedEx, that represent Canada, the continued strength of the durability, this broad customer demand that we’re seeing.
Operator
Your next question comes from Bill Crow from Raymond James. Please go ahead. Your line is open.
Bill Crow — Raymond James — Analyst
Yeah, good morning. Thanks. Just wanted to follow up on the discussion replacement cost inflation, the construction cost inflation. How should we think about that growth translated into AFFO and maintenance capex?
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
I think longer term, that will add to the growth rate in terms of same-store NOI. Long term meaning three, four, five years compared to what it would have been without that cost increase in replacement costs, but it’s a hard thing to prove because you never are going to know what it would have been to compare it to. But I think it’s a longer kind of burn and that compounded with the challenge of getting more land. I just think that those are going to be all tailwinds for rent growth into the foreseeable future.
And going back to something that I think we shared extensively with you guys couple of years ago, at the end of the day, rent is anywhere between 2% and 4% of supply chain costs and people are just getting smarter about how to use well-located real estate to actually save cost on the other aspects of supply chain costs as they are pulling together their space buyers and their logisticians and the people would set up inventory and the people who do the demographic analysis of where they want to locate. Thanks. So I think all of that is going to translate into a longer runway for rental growth compared to what would have been. Of course, turnover costs are going to go up as well because steel and all that in building out the space, but I think rents — as a percentage of rents, which is the way we like to look at them, I don’t think they’re going to change that much because rents are going to be affected by the same factors too.
Operator
Your next question comes from Elvis Rodriguez from Bank of America. Please go ahead. Your line is open.
Elvis Rodriguez — Bank of America — Analyst
Hi, just one more question, maybe this one is for Eugene or Hamid, if you want to comment. Amazon in particular, so [Indecipherable] call last week, they noted that there is an increased interest in medium-sized boxes from that tenant. Can you talk about sort of their demand in the quarter, your expectation for them for the year and just generically what you’re seeing in their shift and their supply chains? Thanks.
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Well, Mike is actually probably the best person to answer that, but they have gone out and built out by far the base infrastructure of the big buildings and now it’s a trench warfare of getting them more last touch type locations and filling in behind it. In terms of square footage, it won’t add up to the same impressive numbers, but those are much higher dollar per foot investments and that’s where the focus is going to be. I would tell you, they’re pretty much ahead of everybody else in terms of the backbone infrastructure and now it’s a race for the last touch. Mike, anything?
Michael S. Curless — Prologis, Inc.
Yeah. Just to further add on. Last year was a historic year in terms of Amazon’s square footage leasing. I think you’ll see the same kind of velocity, if not more going forward in terms of the transaction account. But to Hamid’s point, there is going to be smaller facilities and more focus incrementally spent in places like Mexico and Europe has seen evidence of that already and we’re certainly well positioned to take advantage of those opportunities there as well.
Hamid R. Moghadam — Chairman of the Board of Directors and Chief Executive Officer
Okay. Thank you, Mike. That was the last question. So, we really appreciate your interest in the Company and look forward to our continuing dialog. Take care.
Operator
[Operator Closing Remarks]