We’re proud of our 2016 results—they speak to our diligence and focus on operations and to the simplification of our balance sheet. Still, it’s natural for investors to ask what we will do for an encore in 2017 and beyond. To answer this, I’d like to first provide some recent historical context.
We are at the cusp of yet another important market transition.
It has been almost six years since we closed the merger between ProLogis and AMB. Our initial focus was to integrate the two companies and deliver on our promised synergies. Shortly thereafter, we announced a 10-quarter plan to realign our portfolio, monetize our land bank, rationalize our strategic capital business, strengthen our balance sheet and invest in technology to make our teams more productive. We met or exceeded that plan’s objectives almost a year ahead of schedule.
In December 2013, we announced Vision 2016, our strategic plan to capitalize on what we saw as a significant recovery in rental rates following the sharp decline during the Global Financial Crisis. The fourth quarter represented the culmination of Vision 2016, and we exceeded most of the goals outlined in that plan.
Looking ahead to the rest of 2017 and beyond, I believe we are at the cusp of yet another important market transition—to a phase for which Prologis is ideally positioned.
In the next phase of the U.S. market, location and quality will matter even more, and there will be meaningful performance differentiation within the U.S. logistics markets.
In continental Europe, the macroeconomic recovery began about three years after it began in the U.S. Market rent growth is only now gaining momentum in Europe. We believe Europe will further extend the growth cycle for our company as its recovery picks up steam. What has been a headwind for us will become a tailwind for several more years.
There is a significant embedded rental upside in most industrial portfolios because in-place leases carry rents below current market rates. In our portfolio, the average lease is under the market rate by about 12 percent overall, and by 15 percent in the Americas. We acknowledge, however, that the easy part of the cycle is behind us. Market rental growth going forward will moderate, starting this year. Because of the embedded rental upside in our portfolio, however, our same store growth will remain predictably strong into the foreseeable future—probably well beyond 2019—and especially in large markets with high barriers to entry.
Growth in rents will be more sustainable in the current cycle than in past cycles.
The development of new supply remains disciplined. As a result, growth in rents will be more sustainable in the current cycle than in past cycles. In this environment, it will be more important than ever to be closer to key customers and to offer them the smartest real estate solutions.
Our heightened focus on customer experience, technology designed to streamline operations and advanced data analytics application will help to further simplify our business, get us even closer to our customers and make us faster, smarter and better. We’re already seeing tangible results. I will elaborate more in next year’s shareholder letter.
Last year was a landmark year for the industry and Prologis, but there is more work to be done to extend our competitive advantage. In addition, we acknowledge there is a new geopolitical landscape with which to contend. I’m looking forward to 2017 and the coming years with optimism. As I conclude this letter, I want to mention our employees. If not for the diligence and commitment they show every day, and across many time zones, our success would not be possible. Together with you, our shareholders, all of us at Prologis look forward to several years of profitable growth.