Ladies and gentlemen, thank you for standing by, and Welcome to the First Industrial Q3 results call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question and answer session. To ask a question during the session , you need to press star then one on your telephone. If you require any further assistance, please press star zero Also, please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Art Harmon, Senior Vice President, Investor Relations and Marketing. Thank you. Please go ahead.
Thanks a lot, Chris. Hello, everybody, welcome to our call. Before we discuss our third quarter 2020 results and updated guidance, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans, and estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, Thursday, October 22nd, 2020. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements, and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplementary report, earnings release, and our SEC filings are available at firstindustrial.com under the Investors tab.
Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer, and Scott Musil, our Chief Financial Officer, after which we'll open it up for your questions. Also on the call today are Jojo Yap, our Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Senior Vice President of Operations, and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now, let me turn the call over to Peter.
Thanks, Art. Thank you all for joining us today. We hope each of you and your loved ones are doing well, staying healthy and productive. I would like to once again thank the entire FR team for all of their efforts over the past seven months while navigating the pandemic to maximize collections and achieve our leasing, investment, operating, and capital markets objectives. In the third quarter and fourth quarter to date, the industrial market has experienced an increased level of leasing activity, with e-commerce leading the way and other broad-based industries represented among new lease signings. In its preliminary third quarter report, CBRE reported 56 million sq ft of net absorption versus 68 million sq ft of completions. I'll discuss what this pickup in business activity means for our upcoming speculative development efforts in a moment. First, let me briefly touch on cash rental collections.
Our results continue to be very strong, reflecting the quality of our tenant base and portfolio as well as the great work of our team. For the second and third quarter, we've collected 99% of monthly rental billings, and all nine of our remaining rent deferral agreements are current. Scott will walk you through collections and our third quarter bad debt expense in more detail later. I would like to highlight several key leasing solutions executed by our team in Southern California. We successfully replaced the largest tenant on our watch list at a 225,000 sq ft building in the Inland Empire. By executing the new lease at current market rents, we captured a 27% rental rate increase. In other major leasing wins, the Southern California region executed on a comprehensive plan to replace three tenants in the South Bay market of L.A.
These transactions allowed us to significantly enhance the credit profile of those tenancies and meaningfully increase rental rates at those properties. With a moratorium on evictions in California, these solutions generated substantial value in a fraction of the time it would have taken to go through the courts. We were able to accommodate a leading e-commerce tenant's need for our 214,000 sq ft building, which will serve as a state-of-the-art last mile delivery facility, and which also resulted in a 9% rental rate increase. We successfully moved the prior tenant to a smaller 23,000 sq ft building that better suited their current needs for a 58% rental rate increase. Lastly, we also replaced the tenant at our 63,000 sq ft transload facility at a 92% increase. Based on these successes, cash rental rate growth for leases commenced in the quarter was 20.3%.
For the full year 2020, we expect the increase in cash rental rates on new and renewal leasing to approximate 14%, which would be at the top end of the original range we set forth on our pre-COVID fourth quarter 2019 earnings call. To give you a look into cash rental rate growth for 2021, as of today, we have signed approximately 32% of our 2021 rollovers at a cash rental rate increase of 12%. I'd like to share with you some recent development leasing progress since our last earnings call. We signed a tenant for 100% of our 103,000 sq ft First Sawgrass Commerce Center in South Florida on a long-term basis, which is set to commence upon completion in the fourth quarter.
In Dallas, we signed a full building lease for the 199,000 sq ft First Fossil Creek Commerce Center that commences November 1st. We also leased 37,000 sq ft at one of our First Park 121 buildings, which is slated to commence January 1st. That 125,000 sq ft building is now 80% leased. The investment market continued to rebound during the quarter, and the industrial sector continues to be favored by institutions, local investors, and users, given the solid fundamentals and the secular driver of e-commerce. The sector remains highly competitive, and we continue to use our platform to uncover select opportunities in target markets. Acquisitions totaled $20.2 million in the quarter and included three well-located land sites. In Seattle, we acquired a 6.6-acre site developable to 129,000 sq ft . We added a 26-acre site in Central Florida that can accommodate up to four buildings totaling 329,000 sq ft .
Lastly, we acquired 3.1 acres in the Inland Empire West adjacent to our First Elm site, which will enable us to build 84,000 sq ft on the new larger combined site. Turning now to our development program. We're excited to launch our first speculative development project since the beginning of the COVID-19 pandemic. We plan to start the first phase of our First Park Miami development in the fourth quarter. Recall that we acquired this 60-acre site in the first quarter in the infill Medley submarket near the airport, but put the start on hold due to the pandemic. We can build a total of 1.2 million sq ft , and the first phase will be three buildings totaling 600,000 sq ft . Total estimated investment for this phase is approximately $190 million, and our targeted cash yield is in the mid-fives.
We also plan on starting the 141,000 sq ft First 95 Distribution Center a little further north in Pompano Beach. Total investment is approximately $21.7 million, with a targeted cash yield of 6%. To support our ramp-up of our developments at First Park Miami and First 95 Distribution Center, and potentially other sites in target markets which we continue to monitor, we tapped our ATM program during the quarter, issuing approximately 1.84 million shares at an average price of $43.16, generating net proceeds of $78.7 million. Adjusted for our fourth quarter starts, our on-balance sheet land holdings can accommodate approximately 13 million sq ft of future development, with the vast majority of sites entitled and ready to go.
Summing up our development pipeline at September 30, we had a total of $245 million of developments under construction or in lease-up, comprised of 2.6 million sq ft, which is 39% leased as of today. With a projected cash yield of 6.6%, our estimated average margin on this batch of developments is approximately 47% when compared to prevailing market cap rates for similar leased assets. Updating you on our joint venture activity, we successfully leased the 644,000 sq ft spec building at PV|303 Business Park to a single tenant. The building remains on track to be completed early next year. Our portion of the investment is $20 million, and our cash yield is 7.1%. We also sold two land sites at PV|303 Business Park in the fourth quarter, totaling 93 acres to two separate users, with our share of the sales price totaling $11 million.
Today, the venture has 139 of the initial 532 developable acres remaining and has returned 137% of the originally invested capital. In the third quarter, we formed a new JV that acquired a 569-acre site about one mile north of PV|303. We're pleased to partner once again with Diamond Realty, the U.S. real estate arm of Mitsubishi Corporation. Together, we purchased the site for $70.5 million in an all-cash transaction with our interest at 43%. Like the PV|303 venture, the new venture will engage in speculative development as well as build-to-suits and one-off land sales to users. First Industrial will earn development asset management, property management, disposition, and leasing fees, and we have the opportunity to earn a promote beyond an established return. Our rationale for this investment is the same as our PV|303 venture.
The new JV provides us the opportunity to capitalize on a large investment without incurring outsized risks and market concentration in Phoenix. Moving on to dispositions. During the quarter, we sold two properties for $15.2 million, and we completed the sale of the $55 million Phoenix asset for which the tenant exercised its purchase option last year. Thus far in the quarter, we've sold two buildings comprised of 194,000 sq ft for $5.6 million. Excluding the purchase option related sale, we've sold 759,000 sq ft for a total of $61.8 million year to date. On our way to meeting our sales target range of $125 million-$175 million. In summary, we had an excellent quarter with great execution by our team. We're very excited about restarting our speculative development program and taking advantage of the great growth opportunities in our target markets. With that, let me turn it over to Scott.
Thanks, Peter. Let me start with the overall results for the third quarter. Diluted EPS was $0.28 versus $0.62 one year ago, and NAREIT funds from operations were $0.49 per fully diluted share, compared to $0.44 per share in Q3 2019. Excluding approximately $0.04 per share of income related to the final settlement of an insurance claim, Q3 2020 FFO was $0.45. Third quarter 2020 FFO includes approximately $400,000 of cash bad debt expense related to tenant accounts receivable. As Peter discussed, we were able to replace the largest tenant on our watch list in Southern California. As a result, the replaced tenant will not impact our bad debt expense going forward. The other tenant on our watch list we discussed on the second quarter call has paid through September.
Note that we added another tenant to our watch list, which occupies a 137,000 sq ft building in Chino in the Inland Empire West. Let me walk you through some additional details on collections. Our regional teams continue to do a fantastic job. As of yesterday, we had collected 99% of monthly rental billings every month from April through September. So far this month, we have collected 99% of October billings, assuming collections from government-related tenants that pay at the end of the month. On rent deferrals, the total outstanding balance is only $250,000, all of which is expected to be paid off by year-end, and all tenants with deferral agreements are currently in compliance.
Please note, in our calculation of the collection percentage metric, the numerator only reflects cash collections, and we do not give ourselves credit under our methodology for the application of security deposits unless it is for a terminated tenant. Occupancy was strong at 96.3%, down 140 basis points from both the prior quarter and from a year ago. As expected, Pier 1 vacated our 644,000 sq ft building in Baltimore on September 1st, which impacted occupancy by 1.1 percentage points. We are underway with some make-ready work at the asset and are marketing the building for lease. We consider the lease up of this facility as similar to a speculative development, so we are assuming 12 months of downtime. As always, we will strive to beat that. For leasing volume during the quarter, we commenced approximately 2 million sq ft of leases.
800,000 were new and 1.2 million were renewals, and tenant retention by square footage was 68.4%. Same store NOI growth on a cash basis, excluding termination fees, was 1.3%, helped by an increase in rental rates on new and renewal leasing and rental rate bumps embedded in our leases. This was partially offset by lower average occupancy, an increase in free rent, and slightly higher bad debt expense. Cash rental rates were up 20.3% overall, with renewals increasing 14.9% and new leasing up 29.7%. On a straight-line basis, overall rental rates were up 33.9%, with renewals increasing 28.1% and new leasing up 43.8%. Moving now to the capital side. As announced on our previous earnings call in July, we closed on an extension of our term loan that was scheduled to mature in January of 2021 that effectively has a three-year term.
On September 17th, we closed on our $300 million private placement of 10 and 12-year notes with a weighted average interest rate of 2.81%. At September 30th, our net debt plus preferred stock to adjusted EBITDA is five times. Please note that we have excluded the one-time insurance claim settlement amount from EBITDA, and we normalized G&A. The weighted average maturity of our unsecured notes, term loans, and secured financings was 6.6 years with a weighted average interest rate of 3.7%. These figures exclude our credit facility. Moving on to our updated 2020 guidance per our earnings release last evening. Our guidance range for NAREIT FFO is now $1.82 to $1.86 per share with a midpoint of $1.84.
This is $0.04 per share higher than the midpoint of our guidance discussed on our second quarter call due to income related to the final settlement of an insurance claim previously discussed. Our guidance range for FFO before this item is $1.78-$1.82 per share with the midpoint unchanged. Key assumptions for guidance are as follows. In-service occupancy at year-end fourth quarter of 94.5%-95.5%, which implies a full-year quarter end occupancy range of 96.4%-96.7% with the midpoint of 96.5% unchanged. Our cash bad debt expense assumption remains $900,000 for the fourth quarter. Please note that guidance does not include any potential write-offs of deferred rent receivables related to tenants that are having financial difficulties. Fourth quarter same store NOI growth on a cash basis before termination fees of -0.75% to +0.75%, with the midpoint being flat.
In addition to the NOI impact from Pier 1 vacating, fourth quarter same store NOI also reflects the impact of free rent from the leasing solutions in the South Bay market we discussed earlier. Incorporating this fourth quarter guidance, our full year 2020 quarterly average cash same store NOI growth guidance is 3.8%-4.2%, an increase of 25 basis points at the midpoint, reflecting third quarter results and a tightening of the range compared to our prior guidance. Our G&A guidance remains unchanged at $31 million-$32 million, and guidance also includes the anticipated 2020 costs related to our completed and under construction developments at September 30th, plus the expected fourth quarter starts of First Park Miami and First 95 Distribution Center. In total, for the full year 2020, we expect to capitalize about $0.05 per share of interest related to our developments.
Our guidance does not reflect the impact of any other future sales, acquisitions, or new development starts after this call other than the expected fourth quarter First Park Miami and First 95 development starts. The impact of any future debt issuances, debt repurchases or repayments after this call, and guidance also excludes the potential issuance of equity. Let me turn it back over to Peter.
Thanks, Scott. Before we open it up to questions, once again, let me thank our team for their great performance and commitment to our customers, each other, and our business objectives. We are excited about restarting our speculative development program to drive future growth. We also look forward to the further recovery of our economy and continued progress in the fight against COVID-19 and the careful restoration of so many important aspects of our daily lives. Lastly, I would like to remind everyone about our upcoming virtual investor day on November 12th. There, we will lay out in much greater detail the state of the industrial sector, the strength of our platform and current portfolio, and our vision for growth. We hope you plan to tune in. Please reach out to Art Harmon if you would like to RSVP or with any questions.
With that, we will now move to the question and answer portion of our call. We ask that you please limit your questions to one plus a follow-up, and then you are welcome to get back in the queue. Operator, please open it up for questions.
Thank you. Just as a reminder, if you'd like to ask a question, please press star then one on your telephone, and to withdraw your question, press the pound or hash key. The first question is from Craig Mailman with KeyBanc Capital Markets. Your line is open.
Hey, good morning, everyone. Peter, I appreciate your commentary on kind of swapping some of those tenants out that were on the watch list. I'm just curious, kind of an update on maybe what the watch list looks like today and how much you guys have looked at the percentage of your tenants that really relied on the PPP program and what this delay in kind of the second stimulus is ultimately doing to kind of their creditworthiness as we continue to go without a deal?
I'll start out, then Scott will pick up for the rest. As far as how many or how much of our rent took advantage of the PPP, we really don't know. We do know a number of tenants did take advantage of it. We don't know what they spent the money on. We don't know if they spent it on personnel or rent. It wasn't a big number, Scott, you want to talk about watch list and to go forward?
Yeah, sure. Craig, there's two tenants on the watch list, one a carryover that we talked about on our second quarter call, one a new one. Their quarterly rent is about $450,000. One of the tenants also owes us about $400,000 prior to fourth quarter. If everything goes bad with those two tenants, your total bad debt expense would be about $850,000 compared to our guidance of about $900,000. I would say that the good thing about these two tenants is if we're able to get to these spaces early, both tenants rents are below market. If we're able to work some magic there and work our way to get those tenants out, hopefully we can push rents up a little bit higher. On your question on PPP payments have been very strong. It's 99% for every month since March.
I would say the payments activity was a little bit stronger in the last couple of months. My feeling is that if there is not a new stimulus package passed, I still think our tenants will do pretty well from a collections point of view. I hope that helps.
That's helpful. No, that is helpful. Just switching to development. You guys are kind of turning on spec. One of your peers is turning on spec a little bit. Could you just talk about the risk appetite and kind of maybe the conversation you guys have in investment committee today versus pre-pandemic about that decision to start an incremental project, particularly with some availability still left in the under construction and then kind of lease up segments of your pipeline?
Sure. Obviously, at the beginning of the pandemic, there was enormous uncertainty. We hadn't gone through what we have just gone through, and so shutting down the development pipeline made a lot of sense. It was certainly prudent. Now we've had the benefit of the past six or seven months to see how we handle this as a nation, how we manage it, how it impacts health, and how it impacts the economy. There's a lot more information there. In addition, the business activity has picked up significantly. It began really in June. I would say back in June, it was a lot of conversation, and in the last two or three months, it's been much more in the way of people making decisions and signing leases. That's all good.
From a risk standpoint, we think that focusing on the higher barrier markets, the coastal markets, where consumption is still going to be the highest, business activity will be the highest, is the best place for us to begin new speculative developments. What was the second part of your question?
No, just in terms of did any of your underwriting criteria change or get more stringent to start new projects? Just kind of curious conversations within committee around starting the new projects.
I think, look, when we first went into the First Park Miami opportunity, the math associated with that hasn't changed. The initial underwriting we did has been confirmed by the economics and the general outlook for the economy that we have today. Yeah, if we saw a deterioration in those economics relative to the risk, we'd obviously make a different decision.
Great. Thank you.
Our next question is from Michael Carroll with RBC Capital Markets. Your line is open.
Yeah, thanks. Scott, can you talk a little bit about the 137,000 sq ft tenant in Chino? Why were they added to the watch list this quarter? Was there a specific catalyst that occurred over the past few months?
This is a tenant we've been working with on payment. They're very actively using the space. We've had a lot of dialogue with the tenant, we weren't able to make an agreement with them on payment. This has been going on a quarter or so, we decided to add them to the watch list, Mike. That's basically the story behind that new tenant.
I'd remind you on this that California has a moratorium on evictions, and this particular tenant seems to want to take advantage of that.
Okay. Is there an ability, I know that you kind of mentioned this earlier, about replacing a tenant like you did in South Bay with the new tenant and moving them to a different place. It sounds like this tenant in Chino does not want to do that. What about the second tenant that's on your watch list? Are they open to that type of move?
Hi, this is Jojo. Definitely that's part of a potential solution. We are not ready to announce yet what solution we come to, whether that's a solution or at the end of the day, we collect the full rent or we accept any kind of plan. That's in the works. We're very pleased we were able to execute that in a multiple number of buildings. What Scott mentioned is 137,000 is in our new developments, First Ranch, which is one of the tightest sub-markets in L.A. The other 45,000 footer is in the heart of South Bay, and that's in a new development too. That in place rent's maybe about 40% below market. Like Scott said, just want to support that we'd be happy to take back that space. The conversations are ongoing.
A lot of owners have prized their business, and they want to keep their business. We're just trying to get to a win-win approach, just like the other three leases we mentioned in our prepared remarks.
Chris, next question.
Our next question is from Ki Bin Kim with Truist. Your line is open.
Thanks. Good morning, guys. You guys mentioned that you signed about a third of the 2021 lease rollover at a 12% cash lease spread. Any particular details behind the remaining 2/3 of what's rolling in terms of is there any reason to expect the lease spread to be materially different than 12% going forward?
Ki Bin, this is Chris. We're pleased with what we signed so far on the 12%. Right now we're going through our budgeting process. We'll give you more outlook on that when we do the earnings release in February. We're very pleased with the 12% so far.
Okay. Any update on the couple pockets of vacancy that you have remaining in the development pipeline for assets like Redwood or Independence? Any kind of color you could provide on just the activity you're seeing from prospective tenants?
Peter Schultz, you want to talk about Independence, and then Jojo can talk about the rest?
Sure. Good morning, Ki Bin. On Independence, that's our 100,000 sq ft building that we finished in Philadelphia at the end of the second quarter, which as you might recall, was delayed a couple of months because of the construction shutdown. We're one of very few choices for tenants. We have had some activity on the building, but nothing to really comment on today. We continue to be encouraged by that opportunity to outperform. Jojo?
Yes, Peter. Ki Bin, hello. In terms of our developments that we completed overall, as you know, we're 24% leased. Basically, our Houston development project. Houston's somewhat slow. There is supply that's came in that exceeded net absorption. We love our project in Grand Parkway. Great access to the freeway, that's one of the best product with the freeway frontage. What we've noticed in that market is that, basically in the second quarter, the activity kind of shut down, now the activity's starting to pick up, we're responding to more RFPs. In terms of the projects in Linden and Park West, which is First Redwood Logistics one and two. In that two situations, those buildings are completed already. We're getting a lot of activity. We're responding to significant amount of proposals and a lot of inquiries, we're very bullish on that.
We're very happy where that's been. In terms of the buildings in Dallas, in Northwest Dallas, we're very happy that as you know, we built a big building there that's not yet completed. That's now 77% leased at 433,000 sq ft . We have two smaller buildings there, which right now is about 20%, or slightly over 20% leased. That has seen good activity as well.
Okay, thank you.
Again, please press star one if you'd like to ask a question. The next question is from Rob Stevenson with Janney Montgomery Scott. Your line is open.
Good morning, guys. With the start of First Park Miami and First 95, and then you guys completing Sawgrass and Park 121, the development pipeline looks like it is going to be 85% South Florida in a few months. Is this just a timing quirk? Is this concentration on purpose? Is South Florida that strong right now to have $1.2 million of spec space under construction? Help us understand that one.
Sure. First, basically, Sawgrass, as you know now, is 100% leased. We're very pleased about that because we're not even done that building. In terms of the starting of new projects, they're catering to different submarkets. One, the First 95 is further north. There's very, very little vacancy. That's very, very accessible to the freeway. Very low vacancy at that submarket. The FP Miami, that is right in the heart, just north of Doral. That's a very, very tight market. We're very bullish on that. We're very excited about that project because our project there would probably be one of the most highest quality locations that you can find out there in First Park Miami. Bullish about that project. A lot of activity. Of course, our job is to execute on the building completion and lease it out.
We're already getting inquiries, despite the fact that we just started on our First Park Miami.
Okay. You guys talked about rents being up on the new leasing, both in the quarter and the stuff for 2021. What about the cost to get them signed? Any notable changes to leasing costs today versus previous quarters, previous years?
This is Chris. As far as the leasing costs, obviously, new deals are typically four or five times more than a renewal deal. As far as what we're seeing, we're not seeing any real changes as far as the cost. Obviously, if you have longer terms, the total dollars will go up. We're really not seeing any significant changes from that standpoint.
Okay. Thanks, guys.
The next question is from Sumit Sharma with Scotiabank. Your line is open.
Hi, guys. Thank you for giving me an opportunity to ask a question. Just wondering with regards to some of the recent large leases, First Nandina to PV|303, First Fossil Creek, what's the free rent period look like in terms of accretion into the cash NOI stream?
Basically market. Market today is basically less than a quarter to half a month of free rent per year of leasing the deal. That's across the market, and it hasn't changed. Again, let me repeat. It's a range from a quarter to half a month, and it depends across the country per lease year.
Got it. Thank you so much. Wondering about this topic that has been brought up by one of your peers, shadow supply conversions from retail. A lot of focus is on complete conversions of existing retail into warehouses which have their own sort of issues. Just wondering what you guys are hearing from your clients, network planners, site feasibility guys? Where the tenants are actually looking to run smaller fulfillment operations from existing retail footprints. If that is the case, and whatever the bogey you put on that, just wondering how you guys are thinking about it with regards to your portfolio, in terms of shadow supply risk?
Conversions have been a topic for quite some time now. We have been saying really all along that that's really not going to be a significant part of the overall supply base. We've got 17 billion sq ft approximately of industrial sq ft around the country. You're looking at a much, much smaller amount of conversion space that's going to make sense from an economic standpoint. We also don't have a lot of retailers in our tenant roster, so we wouldn't be having discussions necessarily about the conversion of retail and what they might do there. It's going to happen here and there. You've got lots of different barriers. Economics are a major barrier. The rents for industrial are much lower than the rents for retail or mixed-use.
You've got also the permitting and approval process where the neighborhoods don't want 53-foot trucks or even big vans going through the neighborhood. It'll happen here and there, but we don't see it as being a big component of the overall competitive set.
Thank you very much.
The next question is from Eric Frankel with Green Street. Your line is open.
Thank you. Can you just help provide the bridge to your somewhat lower same-store NOI growth results from the last quarter? It makes sense that the occupancy drop with Pier 1, that same-store results would be a little bit lower. Maybe you could provide just a breakout of what the cash, what the free rent and bad debt did to same-store. Thank you.
Hey, Eric, this is Scott. I'll compare the first half of the year to the back half of the year, because I think that's the big change. There's a couple of different items there. The impact of free rent is going to be the largest item. Remember, in the first half of 2020, we had the burn-off of the free rent period of First Nandina, the big development in the Inland Empire. Also, the back half of 2020, we had a little bit more free rent offered. Again, these great lease transactions that Jojo and the Southern California team worked on. We had a little bit of free rent with that. There's also an impact due to the drop in occupancy, and then obviously Pier 1 is a big factor in that.
That building is going to be vacant for four months the back half of the year, where it was occupied 100% for the front half. Bad debt expense is going to be about 50 basis points of the EBITDA as well. Those are the three large drivers that are causing the decline of same-store NOI from the front half of the year to the back half of 2020.
Hey Eric, this is Chris. Go ahead.
Sure. Go ahead.
The occupancy, it's a big part of the drop. Keep in mind, in the fourth quarter, we're coming from a year ago at 97.8%, so a very high occupancy. Just to put it in perspective.
Yep. The 50 basis point bad debt expense, that's 50 basis points of bad debt higher than last year, correct? It's not the absolute number?
That 50 basis points is going to be more of a drag in the back half of the year compared to the front half of the year, and the big driver of that is our bad debt expense. I think it was like $400,000 on average for the first half, and then the back half of the year, I think we got $400,000 in the third quarter and $900,000 in the fourth quarter. The main driver of that is our guidance assumption in the fourth quarter, Eric.
Okay. We'll go through that. Maybe we'll go through that after the call. That'd be great.
Yeah.
Maybe Sorry, go ahead.
Yeah. I would say the bad debt expense triggered in 2019 was very small. That doesn't really have an impact on it. It's really more bad debt expense we're factoring in the back half of the year. Again, it's the guidance assumption that we put in in our fourth quarter.
Great. I appreciate the follow-up. Just geographically, maybe your team could provide some context of which markets are doing well, which others are not doing so well. It looks like from your comments and from what your peers have said, that Southern California's kind of recovered pretty quickly, and then it's a little bit, maybe a teeny bit slower elsewhere. Maybe you could provide some context.
Sure. If you just look at, Eric, kind of a lot of activity and leasing that we've done, of course, SoCal, and that basically includes L.A. all the way to Inland Empire, west and east. That's a big market. We're also seeing in Phoenix has been a big performer for us in terms of leasing. You see a lot of activity there. Dallas also continues to have large gross absorption, Eric. Moving on, Florida, South Florida overall has seen also pretty good absorption. Of course, Eastern P.A. has seen a lot of absorption as well. That comes to mind, Eric. I guess what's really kind of slowed down, kind of shut down second quarter and still has quite a supply to work through is Houston.
Right. The Midwest, how's that holding up?
In Midwest, it's kind of flat to positive, meaning that you're kind of in equilibrium. You do have supply, you do have demand. It's kind of treading water a bit.
Okay. Thank you. Final question. You set your disposition target roughly at the same level as prior years. Do you have a lot of properties under contract to sell, or you just have a lot of properties in the hopper that you think you can sell?
We've got a lot of assets underway and in various stages of the process. We feel pretty good about the guidance range. As last year, you may recall, we had a big flurry of closings at the end of the year, the guidance range feels pretty solid.
Okay, thanks. Look forward to your investor day.
Thank you.
Thanks, sir.
Thank you.
Again, that's star one to ask a question. The next question is from Dave Rodgers with Robert W. Baird & Co. Your line is open.
Yeah. I wanted to start with a follow-up maybe on the concessions as well as some of the movement in South Bay. It looked like, and I understand the concession comment you made earlier, that they haven't really changed that dramatically, but concessions in the quarter were up quite a bit from the trend. Did that have something to do with the activity that you saw in Southern California? Also, Scott, did you see any straight-line rent write-offs in the third quarter related to any of that activity?
Dave, no straight-line rent write-offs in the third quarter, and I'll turn it over to Chris on the concession question.
Yeah. Dave, as far as the actual dollar amount of concessions, certainly the Southern California transactions contribute to that. As far as Jojo's comment about where are concessions, again, very consistently we're at that a quarter to a half a month per year lease term.
Okay. Thanks for that. On the backfill of Pier 1, you guys talked about maybe a year or so that you're giving yourself. Does that asset need a lot of capital? Will you have to demise that at all? What are you thinking of today in terms of the ability to get out and lease that fairly quickly?
Peter Schultz, you want to take that?
Sure. Good morning, Dave. It's Peter Schultz. We have some make-ready work underway at the building, but it's what we would typically do. It's new energy-efficient lighting, some loading dock packages, and the like, and just a little bit of general cleanup, but nothing unusual. We're continuing to see pretty good activity in the market, particularly from larger users, where demand, I would say there and in other markets, has been most consistent. We thought it was simply appropriate to use that 12-month assumption, as Scott mentioned, similar to some of our other developments. We've already had a couple of tours and activity. We'll certainly keep you up to date on our progress there.
Great. Thanks for that. Last question from me, maybe for Jojo on the investment sales market. Where you guys have been selling assets, maybe more center of the country, let's call it. Can you give us an update on the activity level? Any bid ask spread, or are you still feeling pretty good about the ability to transact in the areas you want to sell most actively?
Yes. We feel very good, Dave, in terms of being able to sell because the market is really strong. There are actually more buyers today than even last year. Because a lot of investors are wanting to get into the industrial product space. A lot of them, we find, are under-allocated. Even the past, when the non-industrial buyers are now into the market because they like the fundamentals. Our users are active too. They're taking advantage of low interest rates to buy properties for their own account. Yeah. The selling market is a good market.
Great. Thanks, everyone.
The next question is from Caitlin Burrows with Goldman Sachs. Your line is open.
Hi, good morning. Maybe on the CapEx side we saw that recurring CapEx increased in the third quarter. It was 56% year-to-date, not quite as much, but still up. The non-leasing CapEx per sq ft also increased year-to-date. I was wondering if you could go through maybe what's behind these increases and if you expect them to continue.
Hey, Caitlin, it's Scott. Couple of things is we think our CapEx will be $38 million, $39 million this year, a little bit higher than what we anticipated at the beginning of the year. Really, it's pulling forward work. Couple of things. One is on the Pier 1 building that Peter Schultz talked about. We had some work to do, for instance, a roof replacement in a couple of years. Instead of doing that a couple of years out, we pushed it into 2020. That was work that we pulled forward. Also, with the additional leases that we did in Southern California that we talked about in our script, we incurred additional leasing costs with that as well.
Instead of paying those leasing costs at expiration, we paid them now when we were able to terminate the tenants, which was a absolutely fabulous move because we were able to raise those rents on those buildings quite considerably. I would say those are probably the two main drivers of the increase in CapEx.
Got it. Okay. It sounds like 2020 might be not a good go-by for future years in terms of that activity.
Absolutely correct. I wouldn't use that as a run rate for the future years. Correct.
Okay. Got it. Just in terms of dispositions in the third quarter, excluding the Phoenix sale, the cap rates were just over 9%, and year-to-date, they've been just under 9%. I guess going forward, do you expect the additional dispositions that you're talking about doing in the fourth quarter, and I guess into 2021, to have similar cap rates, or are those more reflective of the specific properties that have been sold so far this year and not necessarily representative of the future ones?
Absolutely. It's Jojo, by the way. Absolutely, more specific to this quarter. In the third quarter, we sold a portfolio in Minneapolis that had peak rents and then probably flattened or come down, and with significant CapEx. The AFFO that we're going to get from that, if we continue to own that, would be much lower than the nine cap rate. That was an outlier there, and that skewed the numbers quite a bit.
Yeah, we take that cash out of that building that's yielding less than 4% AFFO and put it into new developments at a 5.5%, 6% yield. New developments don't require capital for a long time, so that's a much better use for that capital.
Got it. Okay, thanks.
The next question is from Rich Anderson with SMBC Nikko Securities America. Your line is open.
Hey, thanks, and good morning. Thinking forward here in kind of a post-COVID-19 environment. In the present tense, you have had an unnaturally active leasing environment for e-commerce. Perhaps inventories have been building. Putting aside the dark realities of COVID-19, perhaps this has been a tailwind more than a headwind for your business. Can you envision a scenario where your business actually decelerates after we have some sort of medical treatment and some cure, and people get back to work? Are there offsets that come back to life that make you think you continue to accelerate things on a go-forward basis?
Yeah, good question. We think a lot about that. The jump in the trajectory of e-commerce obviously was caused by COVID. We used to say that the incremental demand from e-commerce was more like 25%, and now it's kind of 35%-40%. The trajectory of the growth should stay the same. It's just now a step function. It's stepped up. It's very possible if we have a vaccine, et cetera, and everyone's feeling a lot more safe and comfortable, that you might see a small lull in next summer when people go out to celebrate life. That will certainly happen. If they're buying product, that's also still somehow going through our spaces. We think that you've got millions of new adopters to e-commerce. They're not going to go away.
We think that's going to continue to be a very, very strong tailwind going forward for our business.
Okay, great. Thanks for that color. Second question is, when does excess supply matter in this business? We can all agree that we're developing more than absorbing at this point in time, and that spread might continue to widen. Where a rent payment exists in the capital stack or expense structure of your tenants is somewhat small. I'm wondering, price sensitivity, all those considerations. When do we get to a point where we've got to start paying attention to the fact that there's more supply in the market than there is demand?
I would say this. One of the things that we learned from the Great Recession, what you're really trying to figure out is where does the balance of power shift from the.
Right
The landlord to the tenant. It's really when the national vacancy rate is something like 8% or 9%. That's very much a generalization, right? Because if your portfolio is largely coastal and in high-barrier markets, the national vacancy rate of eight or nine might not really apply to you. Frankly, that's one of the reasons that's where we focus all our new capital. When you ask about when does new supply or excess supply matter, that would be a general and very high-level answer, but the specifics in the sub-markets and where you are and all that matters more.
Yeah. Okay, great. Thanks very much.
The next question is from Tayo Okusanya with Mizuho. Your line is open.
Yes, good morning. I was just curious if you could talk a little bit about how you expect the level of spec development to either increase or hold steady going forward given the amount of demand that you're seeing?
Yeah. As you know, we don't really guide on starts. I would say that going back to my earlier remarks, in a pre-COVID world or a COVID-free world, certainly development volumes, we would expect development volumes across the sector to go back to kind of where they were pre-COVID, and there wouldn't be any specific reason why we wouldn't do the same.
Got you. For clients that are, or tenants, I am sorry, that are now on the watch list, including the new ones. Are some of the new ones, are they kind of tenants in the industry you kind of earmarked during 2Q earnings as industries that are particularly challenged at this point?
I would say one of them is in an industry like that, and the other one, again, their business seems to be doing really well when we drive by. I would call that tenant more of a bad actor.
Yeah, the larger one is there's very robust business activity in the space. Sometimes you find a bad apple.
Understood. Appreciate it. Thank you.
The next question is from Mike Mueller with JPMorgan. Your line is open.
Yeah, hi. For the JV with Diamond Realty Investments, the new one, you referenced the Phoenix exposure. If that project would've been outside of Phoenix, do you think you would've done it on the balance sheet? As a follow-up, how should we think about future transactions with Diamond?
Right. How do I want to answer that question? We love Diamond, for starters, and we would absolutely like to do more transactions with them. They have been a great partner, and the chemistry that we have with them, our interests are absolutely aligned. That answers that part. As far as other ventures and outside of Phoenix, look, there are certain markets where we're not going to want to venture because frankly we want the additional exposure and we like the risk-reward trade-off. While we really, really like Phoenix, taking down over 500 acres by ourselves in that one place on both occasions didn't seem like the right thing for us to do. It really depends on the market. Yes, we would certainly consider ventures with Diamond Realty Investments elsewhere.
The probabilities of that happening in some of the other coastal markets are lower just because of our appetite for growth in those markets.
Got it. That's good color. That was it. Thank you.
The next question is from Bill Crow with Raymond James Financial . Your line is open.
Thanks. Good morning, guys. Two questions. On Houston, is it a supply issue or a demand issue?
Bill, hi, this is Jojo. It's a little bit of both, although the demand or interest in RFPs increase have started to pick up. 2Q was really slow. It kind of shut down. Now we're seeing more demand. It's also, compared to other markets, a little bit more of a supply issue too, because a lot of completions came in well above net absorption, Bill.
Thanks, Jojo. My other question is really on development leasing, and if you go back historically, I think it's always been kind of completion of construction plus one year was the goal, and I think it sounds like you're there again on at least one of your projects. It seems like the last few years we've gone to lease up within a few months and maybe even before construction completion. Are we seeing that stretch out again, and if so, is that a COVID issue? Is that a supply-demand issue? Any comments there would be great.
Yeah. Our track record is clearly leasing kind of zero-six months after completion. We always build in 12 months into our underwriting. This year has been a different year, a special year, thanks to the virus. You're seeing what I would call aberrations. You're seeing some things happen that haven't happened. Now, this is great real estate. We love the real estate, we love the markets. We're not worried about it. The real answer to the question is I wouldn't use 2020 as any indication of any big change in the leasing velocity and what we're building.
Okay. That's it for me. Thanks.
The next question is from Eric Frankel with Green Street. Your line is open.
Thank you. Just a follow-up question. Is there a particular reason why you projected occupancies to decline further in the fourth quarter? I'm not sure if I heard an explanation. Thank you.
Hey, Eric, it's Scott. I'll walk through that. There's three spaces. Two of them are developments that we're placing in service in the fourth quarter. One is in Dallas, one is in Houston. Love the product, Class A. Due to COVID, we lost about four months in the market, where folks really weren't looking at space. That's going to get pushed to 2021. We also discussed on our call, on our script, a new lease in Southern California with an e-commerce provider. That lease starts in January, and that's about 45 basis points. Those three spaces are causing the drop. I would say the good news is, if you want to get back from 95- 96.3, the new lease in SoCal, it's done. It's signed. The tenant is going to take occupancy in January.
The two new developments that we all have been talking about on the call are great located developments, Class A product. They'll get leased up. It's just going to take a little bit longer to lease them up because of COVID. We think that's more of a 2021 event. That's it. Those are the three drivers.
Perfect. Appreciate the color.
There are no further questions at this time. I'll turn the call over to Peter Baccile.
Thank you, operator, and thanks to everyone for participating on our call today. As always, please feel free to reach out to me, Scott, or Art with any follow-up questions. Take care.