Data Center Landlord: Higher Rates Will Slow Deals as Data Center Demand Holds Up

Prologis Inc. said Thursday that higher interest rates will slow property sales and could lower values. But the warehouse giant said demand from customers building artificial intelligence data centers has not slowed.

The San Francisco-based company reported third-quarter core funds from operations of $1.60 per share, up from $1.49 a year earlier. Occupancy was 95.6 percent across 5,941 buildings and 1.3 billion square feet in 20 countries.

“We think the recent move in rates will slow transaction activity and could put some pressure on values,” Prologis’ CEO Dan Letter told analysts on a conference call after the earnings announcement.

 “Our bar for allocating capital was already high, and in response, we’ve raised it even further,” he said. 

Prologis data center pipeline totals 5.8 gigawatts of power: 1.7 gigawatts secured under binding utility agreements and 4.1 gigawatts in advanced talks. Customer letters of intent cover about 1 gigawatt, most of which Prologis expects to start building in 2027.

Prologis has started more than $2 billion in data center projects this year. All were fully leased before construction began. Letter said the company’s bar for investing “was already high, and in response, we’ve raised it even further.”

Asked whether financing turbulence had changed how Prologis assesses large technology tenants and required returns, Letter said the market for data center buildings is still taking shape.

 “These markets are still forming, and certainly rates matter in a big way for sure,” he said. “But these values, they’re not driven by one variable.”

The company factors construction risk, supply chain delays and the eventual value of a finished data center into its return targets, Letter said. It plans to maintain the profit margins it has quoted since 2023.

The comments came amid a week of visible strain in AI financing. The cost of insuring Oracle Corp. debt against default rose to a record 288 basis points Oct. 15, according to S&P Global Market Intelligence data reported by Reuters. Oracle has borrowed to build capacity ahead of the AI revenue expected to pay for it.

Global AI-related debt issuance fell from $113 billion in June to $23 billion in September, the Financial Times reported, citing Morgan Stanley data. Several banks that lent to large data center projects have pulled back. JPMorgan Chase has described its own AI financing exposure as modest but not immune to a reversal.

The buildout is also putting pressure on rates. Minutes of the Federal Reserve’s July meeting attributed part of elevated inflation to “the surge in demand related to the AI buildout,” citing higher prices for chips, steel and electricity and rising wages for electricians, machinists and engineers. Three members wanted an immediate quarter-point rate increase, and markets began pricing in hikes.

Local opposition poses another challenge. Nearly 100 communities in more than 30 states have moved to pause data center permitting, typically for six to 18 months. They cite electricity costs, water use and concern that existing ratepayers could bear the costs. PJM’s independent monitor told federal regulators Sept. 25 that about 42 percent of forecast growth in data center power demand has been delayed or canceled.

Letter said no power in Prologis’ published pipeline has been affected by a moratorium. Some local actions are “a pause while more analysis is taking place” and may delay a project by a quarter or two, he said. He said 85 percent of the 5.8-gigawatt pipeline can start construction by 2030.

Chief Financial Officer Tim Arndt said Prologis adds a reserve to its financial projections during volatile periods. It has been “a little more cautious” over the past six weeks as Treasury yields swung, he said. The 10-year yield fell 20 basis points on the day of the call.

About 95 percent of Prologis’ debt has fixed rates, with an average remaining term of roughly eight years. The company borrowed $1.3 billion during the quarter at just under 4 percent and ended September with nearly $9 billion in liquidity. Arndt said it can fund its data center work without outside partners, though it has financing structures available for unusually large projects.

Data center construction is also boosting Prologis’ warehouse business. Suppliers, including large technology companies, equipment makers and distributors, accounted for 17 percent of new U.S. leasing in the quarter, a growing share. Prologis estimates the segment could need as much as 150 million square feet of logistics space through 2030 in Texas, Northern California, Northern Virginia, Arizona and parts of the Midwest.

Higher rates are also limiting new warehouse supply. Prologis said the rent needed to justify construction is now 27 percent above market rent. The company expects fewer projects to start, leaving room for rents to rise.

Prologis raised its 2026 forecast for development starts to $6 billion to $6.75 billion, citing an expected wave of projects built for specific customers in the fourth quarter. It cut its forecast for property sales and contributions to $3.5 billion to $4.75 billion because of pricing caution and deals slipping into next year. It expects core funds from operations of $6.25 to $6.29 per share for the year.

Prologis expects its acquisition of British warehouse owner SEGRO, approved by SEGRO shareholders Sept. 28, to close in the first half of 2027. The next indication of whether financing pressure is affecting demand will come in late October, when the largest technology companies report earnings and update their capital spending plans.