Welcome to the Prologis Q4 Earnings Conference Call. My name is Julianne. 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. To ask a question, you will need to press star followed by the number one. 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 fourth quarter 2019 conference call. The supplemental document is available on our IR website on prologis.com. 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 10K or 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. In accordance with Regulation G, we have provided a reconciliation to those measures.
On October 27th, we announced the merger between Prologis and Liberty Property Trust. Materials regarding the transaction are posted on the company's websites and are available on the SEC's website. This includes the joint proxy statement containing detailed information about the transaction. This call will focus on our fourth quarter and full- year results, as well as our 2020 outlook. The company will not provide comments related to this transaction beyond what is included in our prepared remarks. This morning we'll hear from Tom Olinger, our CFO, who will cover guidance, results, and the company's outlook. Also with us for today's call are Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curless, Colleen McKeown, Ed Nekritz, and Gene Reilly. With that, I'll turn the call over to Tom, and we'll get started.
Thank you, Tracy. Good morning, everyone, and thank you for joining our call today. The fourth quarter closed out another excellent year. Core FFO was $0.84 per share for the quarter, $3.31 per share for the year. The full- year includes a record for net promotes of $0.18 per share. Core FFO excluding promotes grew 10% for the year and was more than 2% above our initial guidance. As we enter 2020, market conditions are very good, and we've seen no meaningful impact on our business from trade or retailer bankruptcies. Supply chains are increasingly mission critical to our customers' businesses, which is generating demand as they undergo structural changes to deliver high service levels. We see increased requirements across markets and product categories as more customers seek to strengthen their fulfillment capabilities.
Our proprietary customer metrics reflect healthy activity, showing deal gestation and conversion rates are consistent with the third quarter. U.S. market fundamentals remain excellent. I'd like to share Prologis' assessment of supply and demand as data providers use a variety of methodologies, resulting in a range of estimates. Completions in 2019 were 275 million sq ft, flat compared with 2018. Higher replacement costs, land scarcity, and elongated permitting remain governors to supply. Net absorption was 240 million sq ft, but limited by historic low market vacancy, which ended the year at 4.6%, up 10 basis points from last quarter and 20 basis points from last year. Market rents in our U.S. portfolio increased by 8% in 2019. We have no new additions to our watch list this quarter, but here are some color on two markets that remain on the list.
In Houston, while demand is strong, vacancy is 6.7% and expected to remain elevated, which will constrain near- term rent growth. We have a low role in the IPT and LPT Houston portfolios in 2020. Our near term outlook for Pennsylvania is more positive, specifically core Lehigh Valley, where demand has accelerated, the supply pipeline has decreased, and vacancy declined 140 basis points to 3.2% at year-end. In Europe, activity remains healthy. Rent growth on the continent in 2019 was more than 6%, the highest on record. Fundamentals in Japan continue to improve, with vacancy in Tokyo and Osaka at their lowest points in five years, and rent growth is accelerating. Turning to operations for the quarter, we leased nearly 38 million square feet with an average term of 73 months.
Quarter end occupancy was flat sequentially at 96.5%, while the U.S. ticked down 30 basis points as our team is focused on pushing rate and term. Rent change on rollover was just under 30% and led by the U.S. at 34%. Our share of cash same-store to NOI growth was 4.6% and was impacted by a 60 basis point reduction in average occupancy. Again, consistent with our strategy to maximize long-term lease economics. Globally, our in-place to market rent spread increased once again and is now over 15.5%, or more than $450 million in annual NOI. Moving to strategic capital, 2019 was a record-breaking year. We raised $6.5 billion of equity from 75 new and existing investors and grew our third-party AUM to $38 billion.
Our strategic capital business delivers a durable revenue stream with 90% of fees coming from long-term or perpetual vehicles. A critical differentiator that is often overlooked and undervalued. For deployment, we had a record year for development starts and stabilizations. We started $2.9 billion in new projects, 43% of which were build-to-suits. Stabilizations were $2.5 billion, with an estimated margin of 37% and value creation of $911 million. Additionally, we realized $468 million in development gains in 2019. We continue to have significant investment capacity to self-fund our run rate deployment for the foreseeable future. With over $11 billion of liquidity and potential fund sell downs, as well as an incremental $4.5 billion of third-party investment capacity in our ventures today.
For 2020, given we just held our investor forum in November, our guidance remains consistent and includes the acquisitions of IPT, which closed on January 8th, and Liberty, which we expect to close on February 4th. Here are the highlights on an our share basis. For complete detail, refer to page five of our supplemental. Our cash same-store NOI growth range is unchanged at 4.25%-5.25%. I'd like to highlight two points. First, we're increasing our 2020 global market rent forecast by 120 basis points to 4.8%. This increase will have a minimal impact on same-store this year, given our lease expirations. Importantly, will increase our mark to market and future NOI growth. Second, the first quarter of 2020 will be up against a tough comp from Q1 of 2019, which benefited from an 80 basis point occupancy uplift.
We expect same store NOI growth to be lower in the first quarter then accelerate in the back half of the year. For strategic capital, we expect revenue excluding promotes of $350 million-$360 million and net promote income of $115 million. The IPT integration is largely complete the Liberty closing preparations are on track. We are confident about hitting our Liberty synergy targets on day one. For dispositions, we now expect a range of $1.3 billion-$1.5 billion, which includes approximately $1 billion of sales from the IPT and Liberty portfolios. When we announced the IPT and Liberty acquisitions, we identified approximately $3.8 billion of combined non-strategic sales on an our share basis.
Of this balance, $350 million has already closed or is under contract. With the sale of an additional $1 billion in 2020, we will have approximately $2.4 billion of non-strategic assets remaining at the end of the year, representing just 2% of our asset base. These are good assets. We will work through these portfolios in due time, and we don't see a need to hurry. Given our low leverage at 18%, we will dispose of the non-strategic assets at a pace that allows us to match sales proceeds with deployment opportunities. For net G&A, we're forecasting a range between $275 and $285 million, which includes $6 to $8 million of one-time transition and wind down costs related to Liberty. Excluding these costs, annual G&A growth at the midpoint is 2.4% while managing 15% more real estate.
We expect 2020 core FFO to range between $3.67 and $3.75 per share, including $0.15 of net promote income. Year-over-year growth, excluding promotes, is approximately 14% at the midpoint. To wrap up, we expect 2020 to be another exceptional year of growth. We look forward to adding Liberty's high-quality assets to our portfolio and welcoming 35 of their employees to the Prologis team. With that, I'll turn it back to Julianne for your questions.
Thank you. If you would like to ask a question at this time, please press star followed by the number one. To withdraw your question, press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jeremy Metz from BMO. Your line is open.
Hey, good morning. Just in terms of the rent side of the house, you obviously continue to see very healthy spreads. I think you had previously indicated some of the second half uplift was going to come from a higher percentage of coastal leases rolling here in the U.S. As you look at the U.S. here in 2020, is there anything notable in terms of geographic breakdown or just box size breakdown that's creating maybe an outsize opportunity from a rent side and from the increase to the global mark to market, the 120 basis points that you mentioned, Tom, how much of that is U.S. versus EU driven? Thanks.
I'll take the second part of that, Jeremy. The majority of the increase of the 120 basis points related to the U.S. Europe, continental Europe was about flat. From a mix standpoint, nothing really stands out. I mean, things can move a little quarter to quarter, but given the size of our portfolio, we are very well distributed across space sizes and geographies.
In terms of markets, you guys can see this reflected in the brokerage stats. The vacancy rates will give you a pretty good idea of where things are healthy and things aren't. I would say we saw a bit of a slowdown in big box activity during the year in 2019, but that actually picked up in that segment later in the year. If there's anything really new, it's that the demand is strengthening a little bit in big box.
Your next question comes from Derek Johnston from Deutsche Bank. Your line is open.
Hi, everybody. Good morning. Thank you. Just to follow on, do you feel this big box demand could be due to any delta that we've seen with the phase one trade deal completed or Brexit visibility? How is 2020 leasing velocity feeling to you guys and shaping up from your vantage due to these two events? Thank you.
Yeah, I don't think that the pickup in big box has anything to do with the two geopolitical items you mentioned. The year's starting off pretty good. We're early in the year, I'd say we feel a little better than we did a quarter ago. Things are starting off well.
Your next question comes from Craig Mailman from KeyBank. Your line is open.
Hey, everyone. Just quickly on the clarification, Tom, it sounds like nothing in the underlying assumptions changed here broadly in guidance. Does the improved market rent growth assumption change at all the accretion estimates for IPT or LPT? Separately, I know you guys have been aggressively trying to kind of push rents over occupancy. As you think about kind of revenue management here, is there a lower bound to how far you'd want occupancy to fall here, just given kind of the timing it takes to recoup the lost revenues from downtime?
Got it, Craig. I'll take the first part of that. On the accretion from higher rent growth, given the relatively low remaining roll for IPT and the LPT portfolios post-acquisition, similar to the Prologis portfolio, you won't see much. It's a pretty minimal impact for 2020. Again, as you point out, the important thing is that it's going to build our in-place to market and drive our same-store growth even more in the out years. I'll let Gene respond to the revenue management.
Yeah, I'd hesitate to put a lower bound on that. I would say that in general, this is a good opportunity for us to introduce. We've been in the 97% range. As you can see, particularly in the U.S., where we have the strongest market opportunities, we're ticking down, and we're very comfortable with that in the sort of mid-96 range. Historically, 95% has sort of been a rule of thumb in this business. I think that may be changing. Rather than get specific, I would just say there's some room to go. We're comfortable pushing harder.
The markets that have higher demand as a percentage of base can tolerate a lower occupancy because it represents fewer periods of lease-up. Markets that have lower percentage of growth compared to base need to be more full to have the same equivalent pricing power.
Your next question comes from Nick Yulico from Scotiabank. Your line is open.
Thanks. I just wanted to hear a little bit more about kind of what drove the increase in development guidance. I know you gave the mix on some of the spec versus build-to-suit, but how are you thinking about increasing development right now? Particularly, which markets do you think it's really attractive?
Yeah. Let me at least start with that. If you look at the health in the markets as defined by vacancy rates, as I said earlier, that's a good start. We want to focus on markets that are constrained more. In the U.S., that's New Jersey, that's Southern California, that's the Bay Area. It also includes some sub-markets of places like Dallas or Chicago. In continental Europe, there are several places we'd like to be doing more development. There you're seeing constraints on supply more significant than really anywhere else in the world.
The reason the number for starts went up is that we have more visibility into this year as we get closer to this year. We were a couple of months earlier, so some of the things that we weren't sure were going to happen, happened in a positive way, so the numbers are up. Just like for many years, I've commented on acquisition volume being highly predictable. The spec portion of the development volume also has some volatility associated with it. We're not compelled to start spec development, and those are really dependent on minute-by-minute market conditions and the supply-demand dynamics in those markets. The build-to-suits we'll build because we're pretty sure of the demand, obviously, there. 60% of the starts are spec, and if the market is better, we'll do more, and if the market is not as good, we'll do less.
Your next question comes from Jamie Feldman from Bank of America Securities. Your line is open.
Great. Thank you. I was hoping you could take kind of a big-picture view or provide a big-picture view, maybe reading from the holiday season and just kind of the conversations you're having with tenants. Where does it seem like people still need to get their supply chains right? Where does it seem like there's still things that aren't going so well? Just as we've been at this for several years now.
Just how should people think about the runway ahead?
Well, retail sales in the online category grew at 18%, and in the bricks and mortar category, it shrunk in real terms. That tells you where kind of demand is on the margin. That demand has gone up. Amazon is a big chunk of it, and they are probably more active every year. Certainly, going forward, we see them being more active than before. They're 40% of the market. The other people are catching up, and we're seeing a broadening of demand for e-commerce facilities as we move further into this category. E-commerce is very strong, and I would say, on the margin, the autos are probably a little weaker than they've been historically, and that's sort of a global thing. Probably housing is likely to be stronger on the margin than we saw last year.
Your next question comes from Ki Bin Kim from SunTrust. Your line is open.
Thanks. Good morning out there. If 2019 was the first year where national supply of 1.6% growth outstripped demand of about 1.1%, and there's probably a good degree of nuance in those statistics. For example, in L.A., it probably doesn't contribute much to the national demand growth numbers because you can't absorb what's not available. When you kind of dig into the numbers, what do you think PLD's exposure is to unfavorable markets where real supply is kind of eating away at the demand?
If you take our U.S. markets that are in the soft side, I would say Atlanta, Houston, and Pennsylvania would be the three markets. Dallas has come off the list. Dallas has just had an incredible run in terms of demand, much better than we expected. Those markets, those three markets, the leasing that remains to be done in those markets this year is about 14% of our total leasing. Once you add IPT and LPT, interestingly, that number goes down to 12% of the remaining leasing that we have to do this year. The global portfolio also is 12%. There is no over-concentration, if you will, in the weaker markets. They're exactly in line with our overall markets, and they're actually, the percentage is coming down as a result of these two acquisitions.
What did I mean Central Valley, Central PA, if I said something different. These guys are giving me hands signals. Anyway. The weaker markets are proportional to all our other leasing, and we're basically not concerned about it.
Your next question comes from Blaine Heck from Wells Fargo. Your line is open.
Great. Thanks. Good morning out there. Maybe I can go at the development starts guidance question from a different angle. 2019 starts came in at $2.9 billion at your share, which was over $1 billion more than you had guided to at the beginning of 2019. For 2020, and despite the IPT and LPT acquisitions, you are looking at start guidance that is $2.2 billion at your share. I guess I am just wondering how much conservatism is built into that start number, and what are the chances we could end up closer to $3 billion again this year?
That would be a good question for you to ask us next year, just like you pointed out this year. I don't know. We don't feel compelled to do any development other than places where there's customer demand. I think to try to predict something is actually irresponsible because it then gets the organization to drive to a number, and we don't need to drive to a number. Nobody gets paid for driving to a number or anything like that. We all get paid as the company does well, and we'll do whatever we can to make sure that the markets stay in balance and that our developments lease up appropriately and that we have good margins. It's all dependent. Remember, a year ago, when we were sitting right here, we had just seen the stock market decline significantly.
We had ratcheted down our business plan, and the world just looked very different than the way it ended up playing out. By the way, we weren't the only people who were conservative in our outlook. That was the responsible thing to do. As the year unfolded and we saw demand being better, we obviously scaled up our activity. We have the land to do it, we have the talent to do it, but we don't feel compelled to do it unless there's demand.
We'll always tell you exactly what we think at a moment in time. Particularly with spec development, we will ratchet that down or up as the market tells us. Remember that our development program, it's roughly speaking, 200 bets across 65 different markets. It's big, and it's going to be dynamic over time.
Your next question comes from Tom Catherwood from BTIG. Your line is open.
Thank you very much. Following up on Blaine's question on the developments. Obviously, huge start quarter in the fourth quarter. Back at the investor day, Hamid, you had mentioned how the development timeline has extended from nine to 12 months to kind of 18 months plus, just given the complexity. Due to that and the starts, does that mean you need to carry more land on your books to continue to feed the development pipeline? If that's the case, where are you looking from a complexity standpoint or a risk standpoint, as far as how far you're willing to go to take a risk on land right now?
If that were, Tom, the only variable, that would be the right conclusion to draw. Remember, there are two other variables that are going on. One is that we're generally trying to reduce land as a percentage of our total assets around the company. We're almost to our goal, not quite, and there are actually some markets where we're thin on land and other markets where we're balanced. That's one headwind going the other way, and also we're controlling a lot of land via options and other things that don't show up on the balance sheet. That's how we're kind of dealing with the need for more land without taking on more balance sheet exposure. Mike, do you want to say anything about that anymore? Any more about that?
Yeah. In terms of our land exposure, I think we're in pretty good shape. We managed that very effectively last year, and I think we'll be picking land in our strategic spots going forward in the major markets where our customers are migrating to, and I think we're in good shape there.
By the way, the extension in the development cycle is mostly on the front end and on the entitlement side. It's not taking us any longer to physically build buildings, and certainly our lease-up assumptions to get them stabilized has not been extended. Really, it's on the front end on the entitlement. Yeah.
Your next question comes from David Rogers from Baird. Your line is open.
Hey, everyone. Tom, you did a good job at the beginning of the call, I think, laying out some of the supply-demand fundamentals that you guys track, and we all use different numbers. I think one of the things that had been a little concerning was just kind of no matter what source you use, kind of net absorption before the impact of construction has been kind of trailing a little bit lower. I guess maybe throw a couple questions at that. One is, are you guys seeing that as well, and can you kind of denote where that's coming from, maybe outside of a global auto? Two, maybe Hamid, on your comment about Amazon being 40% of the market, can you just clarify, was that 40% of e-commerce or the embedded base and just kind of what you were getting at with that comment?
Thank you.
Yeah. They're actually 45% of e-commerce sales, I think is the latest number. I might be a point or two off, but it's as a percentage of e-commerce, and I think e-commerce is like 12% of the overall market, so they're like 4.5% of overall retail sales. I think this came up earlier, but maybe I can emphasize it. The demand is not uniform around the country, and some of the markets where there's exceptional demand, the supply is just so tight that a lot of that demand just doesn't show up. I don't know what that number is, but I can tell you it's a positive number. God, after 10 years of supply falling short of demand, we've all been predicting this year where supply exceeds demand for the last five years, and we've got it now. It's a big market.
It's 15 billion square feet of base. We got 30 million feet of difference between supply and demand. That doesn't even take into account all the real estate, all the industrial real estate that's being scraped for higher and better uses and is becoming obsolete. I'm not losing any sleep over that.
Chris, do you have a specific?
Hey, Dave. Just on the specific numbers, we have net absorption of 240 in 2019. The four-year average is 250 million sq ft, pretty consistent with the four-year average. Really at work there is the 4.6% vacancy rate that just made it more difficult to absorb stock. You saw some of that growth more in price than in net absorption. Rents were up 7%-8% in the U.S. last year. When we look at the demand trends late in the year, as Gene discussed, whether it's really good momentum in the fourth quarter or whether it's our proprietary indicators like the IBI, which is at 61, makes us feel like growth will improve in 2020.
Yeah, the picture going into 2019 was much more negative than or less positive. It was positive, but it was less positive than it is today. Market feels a lot better right now than it did on the call a year ago.
Your next question comes from Jason Green from Evercore. Your line is open.
Just a question on development yields. In total, you're developing assets now to 120 basis points spread per the supplemental. I guess at what point do spreads become too narrow to continue developing assets?
When we stop developing. Chicken or the egg. No, I'm not. 120 basis points is a pretty healthy margin when cap rates are as low as they are. We're really margin-focused, and if we can't really get going in at pretty, say, 15% on spec and maybe low teens on built to suit, we just won't do it. I guess we'll do a built to suit at around a 10% margin for a great tenant with a great credit that we can easily do and sell or something like that. That's the range of it. The only problem is, in the last however many years, 10 years, we've had double or triple those margins. Someday we'll have lower than those margins, for sure. The market goes through cycles.
There's definitely a narrow-up on margins from where we perform at these deals. I would say nine out of 10 deals at least, maybe even more, maybe 19 out of 20 of them, that we do a recap on. We do a recap on every deal that we do when it's stabilized, and we look at what it costs, what the yields were, and sort of grade our performance on that. I would say there are very few of them that have any reds on them. All of them have big green numbers on them. So far so good, and I expect that to continue for at least the foreseeable future.
Your next question comes from Eric Frankel from Green Street Advisors. Your line is open.
Thank you. I sincerely apologize for asking another development question. Based on your fourth Q starts and a little bit higher development volume in '20, can you talk about whether you think that overall supply is bound to increase more than it has the last couple of years, and how does that reflect on market rent growth generally? Then second, it certainly seems like you guys are a lot more active in buying assets of different types in the New York City boroughs. We also noted that Walmart's not going to be using that Bronx facility you guys acquired a couple of years ago and leased to them. Maybe you can just talk about your experiences there. Thank you.
Yeah, I think the experience in the Bronx has nothing to do with the real estate. It has to do with Walmart's decision not to pursue a strategy that they were going to pursue. We actually think the re-leasing market for that building is an upside from where that building is leased. Obviously, we have Walmart credit on it, so I don't think it means anything other than a change in strategy of the company. With respect to the supply picture, I think we're feeling better about supply right now than we did a quarter or two ago. Gene, what do you think?
Yeah, I think for sure a quarter ago, we felt a little bit worse about supply. Eric, if you look at the last couple of years, what's happened is that the development engine in the U.S., the industry just wasn't able to hit Chris's estimate for supply. I'd expect that next year, the same thing. The explanation is pretty simple. It is very difficult to, and more difficult every day to develop the space. I would probably say there is a down arrow.
Look, if we're all looking for things to worry about, I would be more worried about a recession because of something totally out of left field, like this virus thing or something globally that can affect something more on the demand side than on the supply side. Supply may be 10, 20, 30 million feet one way or another. That at the end of the day doesn't move the vacancy rates or the pricing power. If demand falls off the cliff because of some unknown thing or war or some bad thing like that is the thing that I worry more about. Supply, one way or another, it's going to be pretty close to what we think.
Certainly a year out, you have pretty good visibility into what supply is because 2/3, maybe three-quarters of the stuff that's going to be supply should be under construction right now. We know kind of what that number is. Really, the wiggle room is on the last 25, 30% of supply.
Your next question comes from John Guinee from Stifel. Your line is open.
Great. Very, very impressive 14% year-over-year growth, but probably even more impressive is issuing 110 million shares at, looks like about a 25x forward multiple and a 3.6% implied cap. Tom, if you're at liberty to talk about it, can you talk about, because of FAS 141 accounting, you're probably bringing both the IPT and the Liberty portfolio in at a much higher GAAP cap rate than a cash cap rate. Are you at liberty to talk about the GAAP cap rate that these assets are coming in, and also your thoughts on FAD growth and dividend growth for 2020?
Yes. Can't talk about the first component.
You can guesstimate it pretty well. Average lease is six years, and average built-in rent growth in these leases is, call it 3%. You can kind of do the math. Three years of 3%, that's how much the GAAP is higher than. By the way, the reason I'm not going to get in trouble, because I don't actually know what the number is, but, the math on it should be pretty damn close to my guesstimate.
John, I'll point you back to the presentation we gave when we announced the transaction. We had $25 million in fair value lease adjustments, but that also included straight line rent adjustments. That's a net number because you back out the straight line rent that's embedded in the IPT and the Liberty portfolios. More to come on that. To your point about FAD ultimately getting to the dividend, as we've said in the past, our dividend levels are going to need to increase pretty consistently with what you see our FAD and AFFO growth because we'll pay out as close as we can to the minimum threshold at which where we're staying. That's a consistent theme you're seeing here.
Your next question comes from Michael Mueller from JPMorgan. Your line is open.
Yeah. Hi. You talked about, I think, a pickup in demand that you were seeing in Lehigh Valley. I was just wondering, can you give us a little more color on what you see is driving that?
Your question was a little bit muddled. I think your question is about recent activity in Lehigh Valley. Lehigh Valley has, over the past year, experienced a little bit of overbuilding. News in the last six months is pretty good. Demand there is strong. I would say that is contrasted with Central Pennsylvania, where demand is still a little bit weak right now.
Yeah, Gene, I think driving that is a combination of both general supply chain modernization, so we see some customers who are feeding their store network, and also a fair amount of e-commerce also wanting to serve the greater region, and in particular, New York.
Probably record low vacancy in New Jersey.
Indeed.
Yeah. Southern New Jersey, there's virtually no product.
A key message there would be the prioritization of proximity and the proximity of core Lehigh Valley to New Jersey, and in particular, New York. That's driving that demand.
Our next question comes from Eric Frankel from Green Street Advisors. Your line is open.
Thank you. I guess I have a few more thoughts from earnings this quarter. One quick question. Housekeeping item. Of the $1 billion of sales from IPT and Liberty, how much of that is office? Second, I think Walmart, just speaking to them, they debuted an automation product they're going to be using in their stores to distribute product just directly to consumers via pickup. Can you talk about automation and how that's impacting supply chains? Obviously, Amazon's always trying to reinvent how they're utilizing the fulfillment centers, and maybe you could touch upon how your other customers are thinking about it.
I'm going to pitch this to Chris, because he spent a lot of time together with Will O'Donnell on the topic of automation and its impact generally on logistics demand. One of these days you may see a paper coming out on that that's pretty extensive and detailed. We think automation is a way of making employees more productive because it's so hard to get employees to do this kind of work. That's really the impetus for automation. The downside of automation is that unless you have very standardized products, the state of the industry is not such that you can have special purpose automation or general purpose automation installed that can handle a lot of different goods, sizes, shapes, et cetera. We're marching in that direction, but we're quite some time away.
Also what we're hearing from our customers, the majority of our customers, particularly the 3PLs, is that the capital needs of automation are just way beyond their ability to be able to do that. In order to implement automation, they need to have longer term contracts with their customers and be able to amortize those investments over a longer period of time. Chris?
Yeah, spot on, underline the variety of operations that are going in our customer space. That translates to two things. One is an adoption rate of automation within logistics facility that is low and rising at a moderate pace. Two, the ROIs on some of these investments are still pretty low given the complexity and the complex nature. Another point I'd make relates to productivity-enhancing equipment. That's what this really is. That's been around for a long time, whether you look back 40 years at forklifts. We've seen the constant effort to improve employee productivity within our facilities, and this is no different.
As it relates to the specific reference you make, kind of in-store automation as well, something we have seen in the marketplace are more requirements, not just to serve e-com, but also to serve store fleets that are needing to handle this buy online and pick up in store. There's more activity to also think about the existing supply chains to support that activity in store.
Eric, I'll respond to your first question relative to the split-out of the $1 billion in sales for IPT and LPT. I would say this: it's going to be fluid, the office component that remains is quite small. As we said, we're going to match fund disposition proceeds with opportunities to redeploy them. I would say it would be fluid. Again, the office is a small piece that's left out of that.
Yeah. The non-Comcast office, I would expect to work through that. Really office comes down to Comcast, and that is, as you know, pretty liquid, pretty straightforward type of position, and it's only a matter of what's the ideal time to do that and the dynamics with the customer, which is a very important customer anyway, over time, what happens. There's not a lot of wiggle room on the economics of that deal. We know it's 100% leased, and we know what the economics are. Office is gone. We're not in a big hurry on the industrial. We've just got to match fund it as we're 18% leveraged. Why would we want to do more than match funds? We're not in a hurry. It's a good market.
Your next question comes from Vikram Malhotra from Morgan Stanley. Your line is open.
Thanks for taking the questions. Two quick ones. On slide 15 of the slide deck, you give the occupancy broken out by unit size. Could you give us the rent spreads using that same breakout?
Yeah, Vikram, this is Tom. The rent spreads were pretty consistent this quarter across all the different size categories. I think the small space under 100 probably picked up a little bit, a little higher than normal, but this quarter very consistent across all three sizes.
I would say small space is recovered a bit. Small space was way ahead of big space maybe a year and a half ago. It went the other way and softened, and now it's coming back a little bit. Most recently, the big space is recovering more in the last couple quarters. They're all even, but they're coming to even from different directions.
Your next question comes from Manny Korchman from Citi. Your line is open.
Hey, it's Michael Bilerman here with Manny. Hamid, I had a question for you just sort of about the sort of acquisition market overall. We clearly know there's an insatiable desire by private capital to put capital to work really on a global basis in industrial. It's a favorite asset class. It's been that way for the last few years. I wanted to get your sort of thoughts on Sleath from SEGRO's comment that he made earlier this year that the market is paying full price even for assets with warts on them.
That their focus is on development and granted it was self-serving, but he made a comment about the acquisition market, and I sort of wanted to get your feel about what you see on a global basis about how investors are pricing assets and differentiating assets and how that may play into your disposition plans as well.
Yeah. We've basically been saying the same thing, more or less, with a slightly different accent. The acquisition market in Europe, which is, remember, that's what they're talking about, is pretty expensive. If you have a good land bank and you are an active developer like they are and we are, obviously the best use of capital is to put your land bank to work, and the incremental returns on those investments are quite high. There are still opportunities here and there that are priced below replacement cost. For example, short-term income in Europe is discounted. If you have a building that has a two-year lease on it or something, maybe a perfectly good building, but you could buy it at below replacement cost. That kind of thing would be interesting. You can't buy $1 billion of it.
I don't know where you would go to buy $1 billion of that kind of stuff in Europe. The rest of the world is a different story. There are places where, like in Mexico, if an acquisition opportunity were to come up, cap rates are for the very best product are around seven, but you can buy some things that are eight or nine. If you look at their treasuries, the equivalent, their treasuries, there's a big spread there in that market. The global picture is a little different. I would generally agree with their commentary for Europe. Dean?
Yeah, I wouldn't add much to that. Europe, while expensive on a relative basis, look at risk-free yields in Europe. You get negative rates in the best economies. There's got to be four countries with negative rates. I'm not frankly sure that the cap rate environment today in Europe is all that expensive.
The other thing I would say about Europe. It would be interesting to do the math on this. We haven't, but this is a guess. There are a lot of institutional investors in Europe that are focused in Europe. The size of the industrial asset class in Europe is still a relatively new industry, and institutional quality products proportionately is a lot smaller than it is in the U.S. You've got a lot of institutional private capital focused on a market with fewer opportunities. I think that's pushing on yields in Europe pretty hard. Development is preferred to acquisitions in all these markets anyway. I think that was the last question. Thank you for joining our call, and we look forward to talking to you next quarter, if not sooner. Take care.
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