Prologis Inc (PLD) 2021 Q1 法說會逐字稿

Welcome to the Prologis Q1 2021 Earnings Conference Call. My name is Julianne, and I will be your operator for today's call. (Operator Instructions) Also, note that this conference is being recorded. I'd now like to turn the call over to Tracy Ward. Tracy, you may begin.

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 McKeown are also here with us today.

With that, I'll turn the call over to Tom. And Tom will you please begin?

Thanks, Tracy. Good morning, everyone, and thank you for joining our call today. Positive momentum from 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 has been a testament to the value of our Brazilian supply chains. Those who are prepared are now growing and taking market share.

There is great momentum in improved supply chain as signaled by retail sales, import volumes and rising inventory levels. This will continue as inventory and sales ratios have just begun to rise as companies race to keep pace with demand.

Starting with our proprietary metrics in our view of the markets, space utilization is 24.5%, up 100 basis points in the last 90 days. Our customers tell us their activity levels are rising at the fastest pace since 2019. These proposals reached 93 million square feet in the first quarter, a new high watermark and are up 13% 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 credit and rents, given our high volume of lease signings, our portfolio -- operating portfolio was 96.4% leased at quarter end.

Our leasing needs continue to broaden with strong demand continuing from space sizes above 100,000 square feet and solid sales demand is improving. E-commerce demand remains elevated, representing 25% of the 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 an absorption of 300 million square feet in 2021, which will be the highest in history. This strong demand has been maxed by supply as we expect 300 million square feet of deliveries this year. However, supplier 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 face shortages of land or logistics uses. In addition, obsolescence and convergence to higher better use of added broad-based scarcity.

Vacancies are below 2% in many of our top markets, such as something Southern California and Toronto, Germany's main markets and Tokyo. Our supply watch list continues to include just 4 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 2-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 and pricing roughly 5% low market and providing us with a 10-to-20-week schedule advantage.

Strengthening demand in 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 kind of work and a wide growth potential of more than $600 million.

Turning to valuations. Logistics assets values were up a record 7.5% over the last 2 quarters. A weighted capital in reversed can be both from rising realty allocation and investors strategically reassessing their property focus type. Applying the valuation uplift to our $148 billion loan and managed portfolio, we estimate that the value of our real estate rose by more than $10 billion over the past 2 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 forward occupancy to substantially all of our markets. Occupancy at quarter end was 95.6%, down 60 basis points sequentially, in line with normal first quarter seasonality.

Rent collections remained very strong, and 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 teams 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 operated 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 of a weighted average rate of 96 basis points and a turn of 11 years. This activity included the issuance of a 10-year U.S. dollar bond with a spread of 55 basis points, the lowest 10-year green bond spread ever and the completion of our 15 green bond offering. The assets backing these bonds of a product of 2 decades of sustainable development.

Our debt maturity stack is in excellent shape with minimal maturities until 2026. Subsequent to quarter end, we closed at a green revolving credit facility at a $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 an our share basis. We are increasing our cash same-store NOI growth midpoint by 75 basis points and narrowly the range of 4.5% to 5%. We now expect that net expense to be in line with our historical average at approximately 20 basis points of 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 (inaudible) promotes, will now raise 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 volumes. Whether you look at public comps or recent transactions, both would indicate that our strategic capital business is significantly under guidance. We are increasing development starts by $400 million and now expect a midpoint of $2.9 billion. The (inaudible) will comprise more than 40% of the volume.

Our land portfolio today comprised of land options and covered land place supports approximately $17 billion of future development. We are increasing the midpoint from recondition and contributions by $800 million in total, consistent with the rise in asset values and higher contributions were increasing realized development gains by $200 million with a new midpoint of $750 million. Net flow leases 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 in arrear range to $3.96 to $4.02 per share. Core FFO, excluding promotes, will range between $3.98 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 by saying that that 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.

(Operator Instructions) Your first question will come from Vikram Malhotra from Morgan Stanley.

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?

Let me take a crack at that. I think organic growth is -- the prospects are actually better than they've been in -- as far as I remember, replacement costs are moving very quickly, and interest rates are moving up or generally up in the last 6 or 7 months. So both of those things argue for the need for higher rents to pencil at a 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 2 different companies in the case of M&A. Those are not the 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. Or 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 plays. You add it all up together, and we can probably grow the portfolio organically by the size of one of the top 3 companies in the sector just with the land that we already own. So I feel really good about both organic and external sources of growth for the company.

And our next question comes from Elvis Rodriguez from Bank of America.

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?

Yes. Let me start and then I'll turn it over to Gary actually who will receive that function. Look, scale gives us the advantage in 2 ways: one, we can make both 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 get strong 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?

Yes. Elvis, so we set this function almost 3 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 to 20 weeks of schedule advantage. And when you're talking development and 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 4 walls in the roof.

Your next question comes from Emmanuel Korchman from Citi.

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 realize that 1Q is usually seasonally lower, but given just the amount of demand, I thought that maybe that would have been a little bit less. So could you address both of these topics, sort of 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?

Yes. I think as we said, we are -- we have more churn in the portfolio. We're pushing in certain indications, credit and pushing rents. We have excellent credit quality by looking at our staffs and our low bad debt. 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. I would focus on our leasing momentum and our rent growth and rent change growth. And I think if you look at both, they're accelerating.

The other thing I would point you to is look at our lease percentage at the end of the quarter, we were 96.4%. So we are leasing up that vacancy. And again, I'd point to the record level of proposals and increasing rents. So I think we're making the right decision for the real estate by putting the rents and getting the right tenants into those spaces.

Manny, I would add 2 things there. First of all, we can make the occupancy be whatever we want, and we think it should be whatever we want, if we were more dovish on rents and what we can get. And I do think that we're actually leading the market in that direction.

The other thing, as 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's behaving and who's not behaving when the markets really softened, and there were people who were requesting deferrals. And 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 2 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 the exclusive decisions. And if that hurts a retention stat, so be it, we'll make more money, and we'll have a better portfolio of customers.

Your next question comes from Derek Johnston Deutsche Bank.

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 or enough to offset expenses in the underwriting process at this point?

First of all, you should be clear, 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 to 12 months to build the building, a lot of this steep price escalation has been during the period in the last 9 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 a good surprise margin expansion, if you will, from rents being higher. Remember, a lot of these things are also pre lease. So if we were -- if the space were available, again, we could lease it at a 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.

Your next question comes from Craig Mailman from KeyBanc.

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, upper revision. And 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 at that high this earlier in the year and hopefully give yourself continued room to the upside in the next couple of quarters?

The main driver of the substantial driver of same-store growth pacing in-place to market both. But the increase that we saw quarter-over-quarter on our guidance, it will be occupancy, occupancy 50 basis points. That's lower by 10 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 level, the record-level proposals demand is excellent, and we are leasing that space at higher rents.

Your next question comes from Ki Bin Kim from Truist.

So Hamid, your team has made 24 very interesting venture capital investments. And there are some pretty clear themes that come across, which is mainly seeking to reduce customer pain points, reducing truck detention times or route optimization, improving the workforce efficiency or energy efficiency. And let's just 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?

Well, the last part of your question is that we're very early because we're on the leading to triple spear, and we are early in implementing it. So very, very early. By the way, was this Ki Bin because my earphone fell out? You know more about that venture capital portfolio based on the report that your last week that I wrote that 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 5 years, 6 years ago when we started the sector, 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, 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 a great venture capitalists, 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 offerings, et cetera, et cetera.

So by the way, not all of them are going to be successful for sure. And we've had one that has not better sale so far, but that's actually a pretty good track record for a portfolio of this size. If 20% of them workout, we'll be very, very happy, but primarily happy because of its impact on our customers and our portfolio.

Your next question comes from John Kim from BMO Capital Markets.

A question on retail conversions. Amazon has been more actively pursuing the retail the last-mile distribution conversions, although primarily in secondary markets. Last fall, you estimated this would amount to approximately 5% of last mile stock over a 10-year period. Has your view on the amount or the timing changed at all since you reported last call?

No. It's probably even -- we were on 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, 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 we've got to go through the 5 stages of grief to get to them. So they're tough.

Your next question comes from Blaine Heck from Wells Fargo.

We noticed you guys bought a good amount of land. I think it was $225 million in the quarter. Given where your landholdings and land banks stand now, do you think you'll need to keep buying similar amounts quarterly? Or was this maybe outsized and maybe anticipation of continued increases in land values?

And then just given the increase in land prices that we've seen in this cycle, where do you think that fair value of your land bank stands relative to the book value?

Let me start. I'll turn it over to Gene for some specifics and Tom, for his guess on the land value. But we are not that precise with respect to land purchases. We're opportunistic. So a lot of these land deals have long gestation periods. And we certainly can't time what quarter they fall in. We work on leases for years and years and sometimes they never happen. Sometimes they happen in the quarter different than what we thought would happen.

So it would happen. So don't spend so much time on the quarter because we don't control that. But the overall quality of 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 showed on land and some markets that we may be long online. And we're constantly in the process of adjusting that.

Based on our in-house underwriting, our land bank book value is about 40% on their value. And that number is moving up fairly quickly based on what you heard earlier. But Gene, Tom, do you guys have anything to add to that?

Yes, I guess. This is Gene. 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 our 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 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 to survive big, complex, difficult pieces. So we're not paying retail. So Tom, I don't know if you have anything else to add.

The only thing I would add is it's not just the land bank, but it's covered line place. Where you're going to see really important strategic acquisitions that allow us to further develop in these various bill sites.

Your next question comes from Michael Carroll from RBC Capital Markets.

Tom, I think, earlier in the call, you mentioned that your estimate supply will be around 300 million square feet in 2021. But Houston is the only market where there is current issues or 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 base?

Well, I'll start it out and then Gene can potentially weigh in. I called out 4 markets. So Houston was the one in the U.S. But I mean, across the board, we're trying to develop and where our tenants want to be, that's largely very (inaudible). We're going to watch that both markets like what we always do, like Phoenix, that type of a market. We'll watch it, but those markets are working effectively now. But I'll turn it over to Gene with any other color.

Yes. Houston has a couple of issues. I mean it's got a 9-plus percent 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 4 years. So obviously, we're calling for that with 300 each of demand and supply this year. I think you're going to see that for a while.

Your next question comes from Steve Sakwa from Evercore ISI.

Just 2 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 for me, as it relates to sort of things like the Suez Canal blockage and dislocation and transportation systems and low inventories, what is your expectation for, I guess, structurally higher inventory and better demand going forward?

This is Tom, I'll take the first one. The shorter term on the operating leasing was all mix. It was higher Southern Europe, particularly France where we've got 3-year leases; China, for example, lower; and the U.K., where we have our loans. So it's all mix. The length of leases when you look across markets are stable, if not increasing.

Yes. And Steve, in terms of structural inventory levels, there are 3 things that are driving them up. I'm -- for sure they're going to be up in my explanation for the foreseeable future. The first structural thing is that people are just carrying more safety stock because with all the fluctuations COVID induced and Suez Canal induced and everything else in this, you just need to carry more inventory to buffer yourself from these risks because the cost of lost sales is 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 space 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 sale ratios have been really stretched in. I mean we're -- 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, we'll drive that number up. So I think, yes, we're going to have more inventories of those system.

By the way, there's a fourth thing I hadn't thought about first, but you have utilization rates that are 85%, 86%. So it's not like there's 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.

Your next question comes from Vince Tibone from Green Street.

Could you provide some additional color on your U.S. market rent growth forecast, particularly how coastal market rent growth compares to noncoastal markets?

Yes, Dave, it's Chris Caton and thanks for the question. Indeed, it's actually widening out as I think you might be suggesting. So in the U.S., 6.5% with the top 5 markets with 7% or better growth, New Jersey, Baltimore, Toronto, obviously, 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 are markets that are running in kind of a 2% to 3% range. So that brackets it for you.

Your next question comes from Tom Catherwood from BTIG.

Excellent. Actually, following up on that previous question and Chris' comments. So I 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 3 quarters of '21, you started less than 600,000 square feet. And then just in the last 2 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 these kind of central markets in any way reflect an expectation that coastal markets could be weaker over the long term?

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 a quarter-by-quarter analysis. So you put those 2 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, a rough percentage 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, (inaudible) 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 large numbers.

But honestly, we're not -- 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 wine large has stayed stronger than we would have expected. So those are the 2 things I would tell you in terms of our strategy, but quarter-by-quarter numbers, I have no clue.

Your next question comes from David Rodgers from Baird.

Yes. Maybe first question. Tom, I wanted to ask you about the turnover costs and concessions on the leases in the last couple of quarters, obviously, these proposals have been up. Is that a function of maybe smaller leases or the lease term you addressed earlier? And then I was hoping that maybe Gene could talk a little bit more about small leases and maybe the percentage that, that's making us of your lease proposals going out the door and what the trend is there.

Dave, on turnover costs and concessions. Concessions aren't really increasing all. What you're seeing on turnover cost is really a mix issue driven by more new leasing relative to renewal leasing, and concessions are typically a bit higher renewal leasing. So you're seeing that mix. Also, with 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 for smaller spaces, it is certainly improving this quarter, particularly when we look at proposal levels, portfolio level by segment, where I believe we're 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.

Your next question comes from Brent Dilts from UBS.

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 do you think warehouse automation may advance over the next couple of years to help alleviate that?

There's a paper on warehouse automation that Chris wrote about 3 or 4 months ago that I think lays out our thesis around that. There are aspects of it that lend them -- 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 full whole automation. But companies are being used -- pushed into more automation than they would otherwise use because of the labor shortage.

And if the laboratory shortage being exist, it 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 will receive that activity for us. Ed, why don't you make some comments?

Great. Thanks for the question. So at the end of 2020, we had trained in excess of 5,000 individuals, and we are well on our way to our goal of 25,000 train throughout the globe. We have 9 programs underway in the U.S. and we just announced expansion of the CWI program in the U.K. So we fully expect to hit our goals, number one. Number two, the connectivity that we have with our customers is very significant as they're 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 for 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 final troll of the negotiating certifications for our programs. So there will be industry-known certifications that we're also very excited about.

Your next question comes from Mike Mueller from JPMorgan.

Development starts to increase to about $3 billion for 2021. Are we likely to see that number increase meaningfully over the next few years?

Yes Mike, it's Gene. 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 sites, we'll do as much build-to-suit as we can do, and that business is obviously going 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. They used to come. We'll cross that bridge when we come to it.

Mike, you would actually remember this because when we were coming out of the downturn of 2008, I think it was in our 2011, '12 -- 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 that Prologis kind of numbers in $5 million -- $5 billion, and that holds the buck.

So our number from literally 11 years ago is $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 4x 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 going 3 to 3.5 or whatever, it ends up being, 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 market 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 a 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, the old Liberty guidance, the old DCP guidance and a couple of private things in between and add them all together. So I think there is a potential upside opportunity if we could get our hands on good land, and that is where the (inaudible). That's why I think there's so much pressure on rents going forward.

Your next question comes from Caitlin Burrows from Goldman Sachs.

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?

Yes. 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 at a 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?

Yes. 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're 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 the 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, in fact, resisted to build-to-suits. This quarter, in addition to Amazon with Kellogg's and FedEx that represent kind of the continued strength of the durability of this broad customer demand that we're seeing.

Your next question comes from Bill [Coe] from Raymond James.

I just wanted to follow up on the construction on replacement cost inflation -- or construction cost inflation. How should we think about that growth translate into FFO and maintenance CapEx?

I think longer term, that will add to the growth rate in terms of same-store NOI. Long term, meaning 3, 4, 5 years, compared to what it would have been without that cost increase in the placement cost. But it's a hard thing to prove because we 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 a 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 who set up inventory and the people who do the demographic analysis of where they want to locate things. So I think all of that is going to translate into longer runway for rental growth compared to -- would have been.

Of course, turnover costs are going to go up as well because you use 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.

Your next question comes from Elvis Rodriguez from Bank of America.

Just one more question, maybe this one is for Gene or Hamid if you want to comment. Amazon, in particular. So on our [JL] call last week, they noted that there's an increased interest in medium-sized boxes from that tenant. Can you talk about sort of the demand in the quarter, your expectations for them for the year? And just generically, what you're seeing in their ship and your supply chains?

Well, Mike is actually probably the best person to answer that. But they've gone out and built out, by far, the base infrastructure of the big buildings. And now it's a trench warfare of getting the more or less (inaudible) and filling in behind it. In terms of square footage, you won't add up to the same impressive numbers. But those are much higher dollar-per-foot investments, and that's where their focus is going to be. I would say, 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?

Yes. Just to further add on. Last year was a historic year in terms of Amazon's per-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's going to be -- they're going to be smaller facilities and more focus incrementally spent in places like Mexico and Europe, seen evidence of that already. And we're certainly well positioned to take advantage of those opportunities there as well.

Okay. Thank you, Mike. That was the last question. So we really appreciate your interest in the company and look forward to our continuing dialogue. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.