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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Prologis Q4 Earnings Conference Call. My name is James and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Also note this conference is being recorded. I will now like to turn the call over to Tracy Ward. Tracy, you may begin.
Thanks, James, and good morning, everyone. Welcome to our fourth quarter 2017 conference call. The supplemental document is available on our Web site at prologis.com under Investor Relations. This morning, we’ll hear from Tom Olinger, our CFO, who will cover results and guidance. And then Hamid Moghadam, our Chairman and CEO, who will comment on the company’s strategy and outlook; Also, joining us for today’s call are Gary Anderson, Mike Curless, Ed Nekritz, Gene Reilly, Diana Scott and Chris Caton.
Before we begin our prepared remarks, 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 and SEC filings.
Additionally, our fourth 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.
With that, I’ll turn the call over to Tom and we’ll get started.
Thanks, Tracy. Good morning and thank you for joining our fourth quarter earnings call. I will cover the highlights for the quarter, introduce 2018 guidance and then turn the call over to Hamid.
We had an excellent quarter and an outstanding 2017. Core FFO was $0.67 per share for the quarter and $2.81 per share for the year, reflecting an increase of more than 9% over 2016. We earned record net promotes of $0.16 per share for the year. Excluding promotes, core FFO was also up 9%. It's worth taking a step back to highlight that over the last four years we delivered a core FFO CAGR of 13% while also deleveraging by 1100 basis points.
We leased nearly 170 million square feet in 2017 with more than 42 million square feet in the quarter. Well located logistics product remains mission critical for our customers. Global occupancy at year-end reached an all time high of 97.2%, a sequential increase of 90 basis points. The U.S. led the way with a record occupancy of 98%. In Europe, year-end occupancy reached to 96.6%, up 120 basis points sequentially setting the stage for rental growth in 2018. Notably France was up 340 basis points sequentially.
Our share of net effective rent change on rollovers in the quarter was 19%, with the U.S. at nearly 30%. Global rent change was down sequential due to mix with higher leasing in France, Poland and the Central U.S. Our share of net effective same store NOI growth was 4.7% for the full year and 4.1% for the quarter. The quarter came in below expectations due to an expense forecast miss as well as lower than expected average same store occupancy.
On the development front we had an extremely productive year creating significant value for our shareholders. I would like to highlight development stabilizations which came in slightly ahead of expectations and had an estimated margin of 29% and value creation of $583 million. 2017 was also an excellent year for our strategic capital business. We combined several ventures reducing the number of vehicles since the merger from 21 to 8, further streamlining our business. We raised $2.9 billion in new capital from investors around the world and grew our third party AUM to $32 billion.
Our strategic capital business delivers a durable and consistent revenue stream with 90% of fees coming from long term or perpetual vehicles. Turning to capital markets. During the quarter we used a portion of our excess liquidity to redeem $788 million of near-term bonds. For the full year we lowered look through leverage by 340 basis points to 23.7% on a market capitalization basis. We continue to have significant liquidity of $3.6 billion and remain well protected from movements in foreign currency as we ended the year with more than 94% of our net equity in U.S. dollars.
Moving to guidance for 2018 which I will provide on an our share basis. We expect net effective same store NOI growth of between 4% and 5%. This is set in accordance with the new logistics sector definitions that we announced last week. I am proud of our sector for taking leadership on this important initiative. For comparison, our 2017 net effective same store results would have been 4.2% under this new definition. As I had mentioned previously, we had expected this impact to be less than 50 basis points.
Cash, same store NOI growth for 2018 should be approximately 100 basis points higher than net effective as the lag from longer lease terms and steeper rent bumps continues to close. Development starts will range between $2 billion and $2.3 billion, roughly in line with 2017. Build-to-suits will comprise about 45% of this volume. Dispositions and contributions will range between $2.3 billion and $2.9 billion. Given broad buyer interest, particularly for larger portfolios, we may elect to accelerate dispositions and effectively close out our remaining non-strategic assets in 2018.
I want to point out that the contribution volume includes the expected re-capitalization of Brazil. For strategic capital, net promote income will range between $0.05 and $0.07 for the full year, consistent with prior years there will be a difference in the timing of recognition between promote revenue and its related expenses. We expect to recognize $0.01 of promote expense in each quarter of 2018. From a timing perspective, we expect to recognize roughly two-thirds of the promote revenue in the first quarter. For net G&A, we are forecasting a range between $227 million and $237 million. For perspective, we have held G&A roughly flat over the last five years while growing AUM by more than $14 billion.
Related to FX, our 2018 estimated core FFO is fully hedged and we have already hedged most of 2019. We don’t expect any material impact on our operations or earnings as a result of the new tax reform bill. Putting this all together, we expect core FFO to range between $2.85 and $2.95 a share for 2018. Core FFO growth excluding net promote income is expected to be 7%. This growth is particularly strong given further balance sheet delevering. We expect average leverage in 2018 to be approximately 200 basis points lower than last year. For reference, a 100 basis point increase in leverage translates to approximately 1% of core FFO growth.
To wrap up, we had a great quarter and year and are entering 2018 with strong momentum. The mark to market of our portfolio currently stands at 14% globally and more than 18% in the U.S. with an upward bias. This positions us for strong operating performance for the next several years. Our best in class balance sheet had significant liquidity and investment capacity to self fund our growth and to capitalize on opportunities as they arise.
With that I will turn the call over to Hamid.
Thanks, Tom. I will keep my remarks short as our business and our markets continue on a positive trajectory.
Market fundamentals are strong as they have been in my career. In the U.S., occupancy has continued to test new highs and rental growth accelerated in 2017, led by the large coastal markets. Net absorption was healthy last year, although it was constrained below 2016 levels as a result of limited new supply. Market dynamics today are highly favorable to [indiscernible] and should remain so for the foreseeable future. Today about 30% of our global portfolio consists of in-fill assets which are positioned for last touch delivery. In our view and notwithstanding all the market noise, it will be impossible to duplicate such holdings in any scale for late adopters of the now very popular last mile strategy.
In Europe, cap rate declines have lifted value significantly. While we expect cap rates to compress even further, we have now reached an inflexion point for rental growth in New York. Fueled by improved conditions on the continent, we expect rents to accelerate for the foreseeable future and narrow the gap with the U.S. The lag in rental recovery in Europe will carry our momentum beyond the inevitable point that the U.S. markets normalize.
Looking ahead, there is plenty of gas left in the tank. We are laser focused on capturing rental growth and deploying capital in profitable developments. The mark to market of our portfolio has increased steadily over the last 18 months, which will also extend the runway for continued rental growth. Our scale provides us with attractive capital sourcing and deployment opportunities around the world. We will continue to deliver value by putting our well located land bank to work and by leveraging our unparalleled customer relationships.
I will close by saying that our business strategy remains unchanged. Our balance sheet continues to strengthen and our portfolio is uniquely positioned to deliver strong results well into the future. We remain vigilant about unforeseen risks in this environment but are very optimistic about our prospects in 2018 and beyond. I would like to now turn it over to the operator for Q&A.
[Operator Instructions] Our first question is from Manny Korchman of Citi.
It's Michael Bilerman here with Manny. Tom, in your opening comments you talked about the 4Q same store numbers and you referenced an occupancy miss and expense growth miscalculation -- I can't recall what words you used. Can you just delve a little bit deeper into what those were, what impact they had, and how that reverts into 2018?
Thanks, Michael. So about half of the difference was due to the fact that we blew in expense forecast by about $2.5 million, which in the fourth quarter, that’s about 60 basis points impact. And again, we blew the expense forecast, we got it right in 2018. So no impact on 2018. The other driver was, same store average occupancy lower than we had expected. We actually had a 10 basis point negative impact of same store occupancy in the fourth quarter. We thought we would see a positive increase. But to give you context, our share of average same store occupancy in the quarter was 96.5% but our ending same store occupancy was at 97.3%. So 80 bps higher. So as you can see, the leasing happened just later than we expected.
Our next question is from Craig Mailman of KeyBanc.
On the occupancy guide, Tom, just curious how much of that is just conservatism from where you guys ended the year versus maybe your expectations about lower retention from kind of pushing rents even harder in '18.
Yes. I think it's the latter, Craig. We are going to continue to push rents to get the right long-term economic results and higher same store growth. And we might sacrifice occupancy in the short-term just like you saw in Q4, for getting the right long-term answer.
Our next question is from John Guinee of Stifel.
If you look at what's happening in the office world and the retail world, base building and re-leasing CapEx are going up significant and investors awareness of these CapEx numbers are also going up significantly. When you are leasing space, are you providing turnkey TIs, as when TIs are needed. How much money are you putting into the base building, how much money is the tenant putting into the base building? Talk a little bit about your re-leasing cost.
Sure. John, this is Hamid. Let me start and then turn it over to Gene for some color on the specifics. I think the real estate industry generally, for the last 35 years that I have been involved, and that has always gotten CapEx strong. Because I think there is all these weird things that people count as recurring, not recurring, value-enhancing, non-value enhancing. And I think those problems are particularly acute in the sectors you mention. I think probably apartments and industrial are the most straightforward because we don’t have major [indiscernible] rehabs and all those kind of other stuff that goes on.
So generally the problem that you raise is a serious problem that AFFO many years ago tried to address but in my opinion didn’t do a very good job on it. So that is the general comment. I would say many of our tenants invest above and beyond our contributions significant improvements. Typically our improvements once the building is second generation, consists of paints and carpet and maybe a little bit of walls moving around in the office portion. Very little in the warehouse space. Now we have customers that may put in nothing about that and there are couple of occasions where our customers are actually using the buildings for data centers and may put at thousand or more dollars a square foot in there. But that’s really not reflected in the rent that we collect. We are not in the business of over improving space at our expense in temporary and specific customized improvements for anybody just to pump up the rent. I just want to be really clear about that.
Just to make this really simple, the way I would like to look at CapEx is actually to add up all the CapEx and look at it as a percentage of NOI. And historically in our business that number has been about 12% to 15% depending on where you are in the cycle.
Our next question is from Blaine Heck of Wells Fargo.
You guys have come a long way derisking and delevering the balance sheet over the past several years and it looks like you plan to continue that process in 2018. As you touched on, that usually comes with lower growth than you could achieve at higher leverage. So how do you guys think about setting the appropriate level of leverage and finding the balance between safety and growth.
So, Blaine, I think when we did the merger and we laid out some balance sheet objectives, that was really where we what the long-term capital structure of the business was going to be. And I think at that time we said we want to have a top three balance sheet in the industry and got a lot of giggles at that point. And here we are now with just under 24% leverage and an A minus rating, which we are happy about. I think the recent declines in 2017 and the projected declines in 2018 in leverage are not something that we are doing consciously to further improve the balance sheet. They are just a byproduct of executing our capital recycling strategy and you can't do that perfectly. So at some point when we are done with disposing of our non-strategic assets, which we expect to have that completed in 2018, our leverage will probably drift up by a few hundred basis points and thereby propelling our growth to where we really want it to be in the long-term. But that totally depends on investment opportunities and the attractiveness of those capital deployment opportunities. Bottom line, our leverage is lower than we planned it to be but that’s consistent with the other aspects of our strategy.
And our next question is from David Rodgers with Baird.
Maybe Tom, I wanted to go back to one of your comments that you made in the prepared comments about accelerating dispositions in non-core assets as the year progresses. It sounds like that’s not a done deal but I would like to know maybe what would get you over the hump of deciding to sell more. Is that a function of perhaps accelerating developments or finding acquisition, or just maybe new supply hitting the markets that you might be worried about. Any additional thoughts please.
Yes, Dave, there is no humps to get over. Just to put everything in context. We sold $11.6 billion of real estate since the merger. I think that represents a couple of companies added in our sector. So we have been very deliberate and active in the dispositions market, probably more than anybody in the business. We have approximately 1.6 billion of non-strategic assets left. Bottom line, we sold 88% of what we wanted to sell in the non-strategic area. And honestly, the improvement in the markets and the strength of the markets is such that we got a lot of these other non-strategic assets at least up sooner than we thought we would. So I think 2018 is the time to execute that plan. Mike, you want to add any color to that?
Yes, we saw last year, both in Europe and the United States, some of our smaller portfolios were aggregated. There was a lot of buyer interest in some larger portfolios and so we expect that trend to continue this year and we are very optimistic on our ability to execute our sales plan or even slightly more than we projected.
Next question is from Nick Yulico of UBS.
Hamid, I want to get your latest thoughts on new supply in the U.S. and which markets, if any, you might be concerned about.
Let me do this, let me have Gene start and maybe Chris to provide some color on that.
So with respect to new supply, right now we would call out probably Dallas, Chicago and Louisville, as having supply in excess of recent demand. And to drill into this a little bit, as we look forward, Chicago kind of concerns us a little bit but construction is way down in Chicago today. So they had 22 million in the pipe a year ago, now they have 9 million square feet. So that speaks to the conservatism we have seen in the few markets since the -- during this economic recovery. Those are the markets we would call out for excess supply.
Our next question is from Jeremy Metz, BMO Capital Markets.
Hamid, at this time last year your outlook called for supply demand equilibrium, moderation in rent growth to the mid single digit range. Rents, obviously, far outpaced expectations coming in nearly 10%. And in your portfolio occupancy reached an all time higher at the end of the year, it was above even your expectations at the end of 3Q. And this is all despite the fact you are actively really pushing hard on rents. So it maybe a very simple answer here but are you seeing anything today other than just being one year further into this cycle such that 2018 can be set up for a similar type of better than expected outcome.
Yes. That simple answer is, no, we are not seeing anything different. In fact, markets at this point are stronger than they were last year. Last year, you may remember, there were a couple of markets that we had seen excess supply, including by the way, Chicago, that Gene just mentioned. And we kind of talked about that and warned the market that maybe some of these markets are getting a little soggier. And then as you point out, we ended up getting between 9% rental growth in the U.S. So we clearly got that one wrong. We were too conservative in terms of what happened. But having said that, I mean nobody is going to go and forecast 10% rental growth into the future. We are in unchartered waters. So I think what we are counting on today is a growth rate much less than that and our assumptions and our guidance is based on numbers that are about half as much as big as that this year. But, who knows, it may be higher or lower and we don’t have perfect insight into the future. So, I don’t know, we will see. My hope is that we will even do better.
Our next question is from Ki Bin Kim of SunTrust.
Could we just talk a little bit more about the supply questions. How much do you think new supply actually impacts your portfolio. And I will use this as an example. For example, if you have an asset in Carson and LA by the Port of Long Beach, I wouldn’t think new supply [indiscernible] practically impacts your ability to raise rents in that asset. So if you take that thinking across your larger portfolio, how would you describe the real impact from new supply.
So in some of the markets like the [South Bay] [ph] just to pick the example that you mentioned, it's impossible to add any supply. In fact there is supply coming off and there is negative supply. San Francisco has had negative supply because people are turning [spots] [ph] to build apartments and all that. So there is very little supply there. And what happens is that there is substitution of locations, as people go further out, compromise on some other parameters just to be able to get the space that they need. So let me throw it to Gene for some more color in there.
So you bring up an interesting point because if we actually look at our strong markets, there are markets with obviously strong demand and great net absorption numbers. Some have a decent amount of supply as well. And then if you look at LA County for example, the net absorption isn't very impressive, neither is the supply because it's infill. But the rent growth is 17%, 18%. So there are couple of markets who fall in that category today. New York, New Jersey is one of them. 18% rent growth last year. Much of the Bay area falls in that category, Seattle. So your question was really about supply. In many of these infill markets, supply is really one off and as a percentage of what's going on the base, it's very small.
Yes. I think that is correct. Ki Bin, I think, the key differentiator in rent growth last year was barriers to supply, either by markets [indiscernible] versus other, or in terms of product size. So you saw better performance in smaller versus [big] [ph] product. But you know, let's also now let the question go in terms of the rate of supply growth. There has been a real slowdown in the rate of supply growth. Starts last year and for that matter the supply pipeline, I am sure numbers you follow, up 5% to 10%. But contrast in a market environment like we are discussing, historically it would have been double digits. So there is this discipline in the supply side that also is affecting it.
The next question is from Eric Frankel of Green Street Advisor.
Just have a two part question. One, Tom, I am not sure if you mentioned it, but were the effect of the uniform guideline on same store portfolio construction have an '18 guidance. And by the way, I obviously appreciate you guys working on that together. And then the second question maybe for Hamid or Gene, I think multistory construction has become a much more popular topic in United States. Do you see any pitfalls for any competitors or peers in that strategy going forward? I know you guys are obviously thinking pretty thoughtfully about it.
Eric, this is Tom, I will go first. So the impact on our same store operating metric is about 40 bps in 2017. So if you look at on a comparative basis, 2017 under the new methodology would have been 4.2%. The midpoint of our new guidance under the new methodology for '18 midpoint is 4.5%. So we are seeing acceleration on a comparative basis on same store year-over-year.
Okay. And with respect to the multistoried product, I am not sure how popular it is. There are lot of people talking about it, my knowledge is there is only one multistory building being build in the U.S., but for sure overtime there will be more. We have got couple in the pipeline. And it's all about land value and growth pressures like the one Gene talked about in some of these infill markets that you know well. So I think there is more talk than action. These are not easy things to do. I mean eventually people will get the technology right but it's tough to find a 10 to 20 acre piece of land in a major metro area to build one of these things and all the mitigation measures and traffic and height limits and all that, really make it difficult to do this. So I think it's only in those markets where rents are sort of solidly in the mid double digits, mid to high teens, low 20s, that is penciled to do this kind of construction.
Eric, the only thing I would add which Hamid really implied, is that development schedule is much much longer. So this is an investment that requires a lot of patience and you are looking way into the future. So I think it's a different type of development. I am not sure a lot of people in this sector will ultimately jump in. Very expensive and very long schedules.
You know some of these things can be in the U.S. which is cheaper than Japan, can be easily $150 million, $200 million, and a couple of the ones we are looking at are $0.5 billion in investment. You know they are kind of approaching good high rise office type numbers and I am not sure there are that many people around that can right those checks.
Our next question is from Tom Catherwood of BTIG.
Following up on NREIT, if I am remembering correctly, I think the talk was that your portfolio was roughly 14% below market on a leased basis. Given the 19% leasing spreads, kind of your share of those this quarter, what's that below market leasing looking like as of right now and how do you see it trending through 2018.
Thanks. It's Tom. So as I said, our current in place to market at the end of the year, 14% globally, over 18% in the U.S. Two things you need to consider, is roll and the composition of the roll and rent growth. Those are the two drivers of what that mark to market, how that will move. Looking into 2018, I think there is an arrow up on the mark to market just as we were going to have about 20% roll, and you look at the composition of that role. And as Hamid said, thinking about 5%ish global rent growth. So I think there is an arrow up on that number.
Next question, Vincent Chao of Deutsche Bank.
Just curious on the demand side, if you are seeing any shifts in where the demand is coming from over the past quarter or two. And maybe if you just give us your best guess for the year and maybe for the quarter. What percentage of your leasing has been more specifically for the ecommerce channel?
I will take that and others may want to jump in. So the customer segments that have been active really haven't changed much over the last couple of quarters. There has been transportation, construction, food and auto have also been strong and ecommerce as a percentage of the demand has also been fairly steady. And as we look out into this year, that’s a tough thing to predict because there are several participants in that sector who have big plans for new distribution rollout. How much of that ends up being absorption in this year is really tough to say. But I would guess, on balance I would see an upper arrow for ecommerce in 2018. But those other industries I mentioned also very very strong right now.
Just to add a little something on Europe, European market continues to strengthen. As Tom mentioned in his opening remarks, we saw at least significant leasing activity in southern and central Europe, which is a huge positive for us. So demand is starting to pick up in those markets. I think the important statistics in Europe is that market vacancies are down to 5.5% and we are forecasting them to go even lower in 2018. So you should see increased opportunities for rental growth going forward.
I think construction -- I thin resi construction, resi related absorption is going to be higher next year, or I mean 2018 in the U.S.
Next question is from Nick Stelzner of Morgan Stanley.
So occupancy decrease in America is for think [fifth] [ph] straight quarter. Can you provide some color on what's driving that and do you expect to inflect any time soon? Thanks.
Yes. I think if you are looking at owned and managed, you are going to see Brazil drag that down a bit. If you remember, we consolidated Brazil in the third quarter, and occupancy on that owned and managed portfolio was 78%, kind of staying there. We obviously think it was a great time for us to get in there and get that portfolio. And more to come on Brazil but I think we are definitely going to see a turnaround there in 2018. But when you look at the U.S. for example, in Q4 U.S. was a record 98% occupied. All time record.
I mean outside of Brazil the occupancy was very high. Very high in Mexico, I might add.
Next question from Joshua Dennerlein of BoA Merrill Lynch.
Question on your development pipeline. Should we expect maybe a mix, a shift between spec and build to suit development going forward. I was thinking there would be more build to suit.
Josh, this is Mike. Last year we did about 47% in terms of build to suit. As we look out over the next year, we expect to range in similar zone and I think why we are seeing those high levels of build to suits driven margin because of dearth of type of space our customers want to be, particularly in global markets. And we expect that to be a number that feels pretty solid for 2018.
Well, 47% historically is super high. So probably the number across the cycle is more like 25%. So I don’t know of anybody get used to those kinds of numbers. We were surprised by that number being that high.
Next question from Steve Sakwa of Evercore ISI.
I know there has been a lot of questions on development. I guess Hamid I am just trying to think through the land bank and your desire to get the land bank down but also continue the development pipeline. How are you guys just sort of thinking about replenishing land today and what are you seeing in terms of land across and development yields on kind of new land being purchased.
Yes, Steve. Our goal is to get down to two years of development of land supply and our development guidance, I mean it bounces around every year but you may -- actually you will remember that back in 2010, the dark days, 2010, 2011, I think the first analyst meeting we had as a merge company, we talked about development volumes being between $2 billion and $3 billion in aggregate. Not our share but in aggregate. And that’s exactly where we are. We are now sort of around $3 billion in aggregate. And roughly the land that goes with that is about $750 million type of land. So about a quarter of the total investment volume. So if you literally want to own two years of land, that’s about $1.5 billion of land and that’s more land than we currently have on the books. Maybe not in market value but just in terms of book value. So we are pretty close to our long term goals with respect to land. We may want to push it a little bit lower but not too much lower than where it is because we need that land to support our business.
Getting land is very very difficult today. In the markets that we care about the most. The exactions, all the fees that people pile on, the traffic mitigation measures and all that, are getting to be really hard. So some of these parcels of land, you got to work on for a number of years before you get entitlements for it. We are pretty fortunate that we have land for almost $8 billion, $9 billion of development on our books. But on the margin we have been adding land, call it at the rate of maybe $400 million a year and chewing through land at the rate of maybe $600 million to $700 million a year. So waddling down the land bank by $200 million to $300 million a year. And that’s how we have gotten down to where we are.
About $150 million of our land bank is what we call C and D category land bank. Probably more details than you care about, but those are essentially parcels of land that we inherited that we wouldn’t have bought. And those things are slower to absorb. So you kind of mentally have to put $150 million of land bank on this side and say, look, we are not going to monetize that. We are going to over time sell it, probably to users and alternative uses. We chewed through a lot of that lands and that number was more like $450 million when this exercise started. So we are getting near the end of that but I kind of mentally figure out the best outside of the target land bank that we would like to have.
Steve, the other thing to think about from the land that you don’t see show up in our land bank is our redevelopment opportunities. So when you think about multistory, that’s going to go on land that’s either sitting in the operating portfolio today or sitting down in other assets. I think we have done a really good job over the last four to five years of buying what we call covered land plays, which has some sort of income stream, whether it's a truck terminal or something like that, where we are going through entitlement, we are flipping a coupon. So that’s over and above the $9 billion or $10 billion of development build out potential that we have that Hamid mentioned. So there is more redevelopment opportunity there than that just sits in the land bank.
Plus we have an increased emphasis on option agreements which will continue to add capacity to it.
Next question is from Jon Petersen of Jefferies.
As we are thinking about tax reforms and its impact on demand for warehouses, I am just curious as you talk to your customers, and I know you guys have a committee of customers you are talking. I am not sure you have spoken with them since the tax reform bill. But I am thinking about demand for leasing warehouse space and one aspect of it is expensing equipment over the next five years and if that might cause businesses to accelerate growth plans and buy equipment that will obviously need warehouses to go in. I know if you have any bigger thoughts on the tax reform bill or may be that specifically in what it means for warehouse demand.
So we essentially get two questions about tax reforms. One is the one that you asked and let me just answer that one. No, we haven't had a customer advisory meeting in January yet. So other than casual kind of decisions, we haven't had a really organized high level meeting with a bunch of customers to report any trends. But I think the net of the tax program is going to be that U.S. growth by people who know a lot more about these things than I do, is projected to be faster by about 25 to 50 basis points. So that additional growth is going to translate to obviously more demand for our kind of product.
The second question, and I don’t know what but I wouldn’t be surprised if it's 30 million, 40 million feet more absorption if the product were there. I am not sure the supply is going to respond quickly enough for that product to be there. But I think it's going to be good for business. The other question we have gotten is, whether the tax act, the new tax act, is going to shift more of the demand to the middle of the country because the coasts got hammered in the tax thing because of salt and all those other stuff. On the margin, the 25% to 50% extra GDP growth is going to lift boats. I am not smart enough to know whether that’s going to lift the boats in the Midwest more than the ones on the coast but I think all of those boats are going to be raised and there could be that some of the lower tax states and with lower residential cost and lower tax rates we get a disproportionate benefit. But I think pretty much everywhere will get a benefit as a result of that higher GDP growth.
Next question from Manny Korchman of Citi.
If we think about sort of shadow supply and maybe using the [same clubs] [ph] closures and conversions as an example of that. How much of that type of supply do you think about or worry about coming and disrupting maybe more sort of vanilla construction or is it down where you guys are doing.
Manny, that’s a good question and I think that’s a problem that certainly has hurt the office sector in the past at inflexion points. We got a pretty good handle on shadow space because we track utilization on a quarterly basis and we have done that pretty consistently for the last ten years. So we both have sort of period to period comparisons and actually absolute level comparisons. Right now utilization continues to be at the highest level it's been, within very few points of the highest level it's been. So there is not a lot of slack in the system and people are not hoarding space the way there were in the first dotcom in the early 2000s where a lot of people were just leasing twice as much as they needed in the hope of burying into it. I think people have been pretty disciplined after the global financial crisis and then as the vacancy rates went from 14% to 4.5%-5%, they just don’t have the opportunity of doing that. So we don’t think there is a lot of shadow space at all.
Next question is from Craig Mailman of KeyBanc.
Just two quick ones. I guess, first, on the 1.06 billion in non-core that you guys would still sell over time. Kind of what's the growth rate or internal growth rate on that versus the rest of the portfolio. And then second, just on the development starts, you guys are about 400 million higher on the initial guide here versus where you were last year. I guess I am just curious what the current visibility on the 2 billion to 2.3 billion at this point. And just a sense given, I guess the mix of built to suit to spec, kind of how we should think about margins.
Craig, it's Tom. On your first question regarding the relative return on what we are selling versus what our in place portfolio, I don’t have those numbers readily available. But clearly the rent growth that we are seeing in our whole portfolio is substantially greater than the rent growth in what the non-core markets that we are selling.
Yes. Historically that number has been about a cap rate differential of about 150 basis points across the cycle and a rental growth benefit of 250 basis points. So there has been roughly 75 to 100 basis points of free lunch, if you will, by taking it slightly lower yields in the more constrained markets and making it up in growth. I am not smart enough to know exactly what it is on the mix that we are selling. Mike, what don’t you talk about visibility of the development?
In terms of visibility, it's well over 90%. I would say that’s as good as it has been since the merger which gives our confidence in our forecast year. And then margins, your question there, you should expect us in the mid to high teens and good solid numbers based on the level of activity as well too.
And Craig when you look at our share of starts, they are pretty comparable year-over-year.
Yes, maybe that’s the confusing number. I mean the total development volumes are more like 3 billion and our share is in the low -- 2.22.
Next question is from [David Harris of Unit Plan] [ph].
I have a question on protectionism. Could you give some comment as to your thoughts on the impact if the United States would walk away from NAFTA? And secondarily, could you give also some comments on your thoughts over the Brexit in Europe next year.
Yes, welcome back, David, haven't talked to you in a while. With respect to protectionism, obviously there is a lot of protectionism but as you know, we are not so focused on the production side of that supply chain. We are focused on the consumption side of that supply chain. So frankly as long as people in LA and New York and all that continue to have to feed and clothe themselves, I really don’t care whether that inventory is coming from China or Kansas or Mexico. So we are really focused on where the consumption takes place and that’s where we have chosen to concentrate our investments. I think if your concern is mostly on the production side which it would have to be because all kinds of interference whether it's trade interference or tax regimes or whatever can shift that around, I think you are probably better off talking to people focused on those strategies. I don’t know much about that topic.
With respect to Brexit, look a lot of people got all excited about Brexit when it was first announced as a surprise. I think our stock in one day went down five bucks but our occupancies in the U.K. went up and we had significant rental growth. And I would say the U.K. has slowed a little bit from that torrid pace back in 2016 but together with Germany it's probably, U.K. and Germany are the two best markets we have in Europe, and I would put them up against any markets anywhere including the U.S. So we have not really seen any evidence of Brexit having an impact yet and when it happens I don’t think it's going to be material either. Because what happened is that Brexit scared away a lot of capital and a lot of development that would have occurred didn’t occur. So the market actually ended up being tighter in the U.K. and I think that will continue.
Next question is from John Guinee of Stifel.
Another thing that came up, Hamid, my understanding is that Amazon has 30, 35 build to suits out there in the market which is a new prototype, much smaller footprint, maybe 100 to 200,000 square feet, but 75 feet clear height, multiple levels. Highly automated elevator systems. Can you comment on that prototype and how you feel about it?
So I can comment but I am going to let Mike comment because I am not sure what part of our discussions with them are confidential, what part of them aren't confidential. So Mike, why don’t you talk about that?
Yes, John, there is certainly a lot of buzz about the sizable rollout they have underway. But just to put some things in perspective, in any given year there is a massive amounts of RFPs that are suggested in those would could play out over a couple of years. This years, yes, a little big different. Some more unique approaches to the buildings. It's very early days on that and we are taking a hard look at that, just like we did to other buildings we have done at Amazon and to the extent they are very unique or we have the opinion that it would be better serve to sell those, we will certainly look at doing that as well. So very early in the process but you can always look at Amazon for being an innovator and we will keep up with them as well too.
Yes. The only thing I would add to that, John, is that look, Amazon has pretty much got the same strategy we do. They want to be near where the consumers are. And those market are, I should say, we have the same strategy as them, Amazon. I suppose we went public earlier, so. But look it's kind of being harder and harder to find large plots of land that support single storey, 800 million square foot type buildings in these urban areas. So they need to be able to squeeze that much business into a smaller footprint by going vertical. And even in the 800 million square foot, they mezzanine them at three levels. So operating multiple levels with low clear heights are not anything unusual for them by any stretch. But I think the key point is what Mike of sort of mentioned. Any building that we do for Amazon or anybody else, we go through the analysis, do we want to own this building in a soft leasing market without Amazon renewing. And if the answer to that is that the building is fungible and divisible and we can lease it to a normal tenant, we keep it.
If the answer is, no or maybe, we will sell those and there are planning people that want to buy that credit for 15 years. So there is not a shortage of capital for that kind of thing. And we have to do that otherwise they will end up being a very big portion of our portfolio and we kind of want to manage it to a lower number than our potential business opportunity with them.
And our last question is from Manny Korchman of Citi.
Hey, it's Michael Bilerman. Hamid, Prologis has been a leader in sustainability certainly within the real estate industry but I would say across all corporate. I guess how do you sort of react and sort of what's the impact to the new tariff and taxes on solar panels. How does that impact your desire to get up to 200 megawatts of self-sustaining power? Is it generally impacting the U.S. or the other countries that you are doing it in? Things like that.
So, Michael, you know there are so many different proposals coming in the early morning of everyday that we don’t really have the time or the ability to react to every single one of them. We will continue to have that commitment but as I have always said to our people, we don’t do this stuff to go to heaven, we do this stuff because it's good for our customers and we can make money doing it. Sustainability is a good investment because in the long-term the life cycle cost of operating the building are more favorable to our customers and eventually that translates to rent. So to the extent that tariffs or anything else might change those dynamics on the margin, the economics will change and we will do less in some areas and more in other areas. Once there are some specific proposals to react to, I can probably give you a more clearer answer. But we have never been in the business of saying, okay, we shall have x megawatts of power on our roof and therefore we are going to do that, whether or not it pencils or not. It's always been an economic calculation for us.
Michael, I think you were the last question. So thank you again for your interest in Prologis and we look towards to seeing all of you soon in the next couple of months. All the best. Take care. Happy New Year.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.