morning. My name is Catherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Please note that today's conference is being recorded. Thank you. I'd now like to turn the call over to your host, Art Harmon, Vice President of Investor Relations. Sir, you may begin your conference.
Thanks a lot, Catherine. Hello, everybody, and welcome to our call. Before we discuss our Q1 2019 results and 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, Wednesday, April 24, 2019.
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 ks and other SEC filings. You can find a reconciliation of non GAAP financial measures discussed in call in our supplemental report and our earnings release. The supplemental 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, 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.
Thank you, Art. Good morning, everyone, and thank you for joining us. 2019 is off to a great start. The First Industrial team has done an excellent job of building upon last year's achievements by signing 1,800,000 square feet of new leases at 9 developments and value add investments year to date. Largely on the strength of this leasing, we have increased our FFO per share guidance, which Scott will detail for you in his remarks.
I will walk you through those leases shortly, but before I do that, let me provide you with a quick update on the state of the industrial market. On a national level, demand and supply were in equilibrium. In its recent flash publication, CBRE Econometric Advisors reported preliminary 1st quarter net absorption of 32,000,000 square feet and new completions of 33,000,000. Those figures are consistent with the activity we are seeing in our markets with new requirements across an array of businesses and size ranges. I would note that for the markets that are oversupplied, excess inventory is predominantly in larger facilities in specific submarkets, which speaks to the importance of building the right product in the right location at the right time.
Moving now to our portfolio results for the quarter. Occupancy at quarter end was 97.3%, down 120 basis points from year end. This is in line with what we laid out for you on our last call as we experienced the seasonality that is typical for the Q1 and the expiration of several shorter term leases. Cash same store NOI growth was 3.2% and cash rental rate growth was 8%. To update you on our rental rate change for the year, as of today, we have now signed approximately 70% of our 2019 rollovers at a cash rental rate change of 13%.
So with tenants still facing limited choices for space, the conditions remain favorable for significant rent growth. Our team is doing a good job of capturing that growth and optimizing our overall leasing economics to drive incremental cash flow. We continue to see broad based tenant activity across our markets as evidenced by our recently signed long term leases at our new developments and value add acquisitions. Let me begin with our biggest signing. Per our press release last night, I am pleased to tell you that just last week, we signed a long term lease for our 7 and 39,000 Square Foot First Logistics Center at I-seven thousand eight hundred and eighty one in Central Pennsylvania.
Our lease is with Ferrero USA Inc, the U. S. Arm of the 3rd largest confectionery company in the world. Ferrero is the maker of a number of well known brands, including Ferrero Rocher Chocolates, Tic Tac Mints and Nutella Hazelnut Spread. The lease will commence by the Q4.
Moving now to Southern California at our 6 building project we call The Ranch in the Inland Empire West submarket. There, we leased our 2 remaining buildings, the 221,000 and 137,000 Square Footers. These were leased by 2 different 3PLs, one which serves a food and beverage customer and another that serves a variety of industries. With the completion of our leasing efforts at the Ranch, our stabilized cash yield is 7.8% on our total investment of $86,400,000 for the entire park. This result significantly exceeded our original underwriting, which was in the low 6s.
Our performance on this project gives you a window into the level of rent growth in Southern California these past few years. We also pre leased 100 percent of our First Perry Logistics Center in the Inland Empire East submarket to a multi brand fashion company. The 240,000 square foot building is scheduled to be completed in the Q3 with lease commencement shortly thereafter. We also leased 67,000 square feet to a specialty tool company at our 171,000 square foot value add acquisition we completed last year in the LA market. Moving to Chicago, we were pleased to lease 207,000 of our 356,000 Square Foot First Joliet Development to a 3PL serving a consumer goods company.
In the I-eighty eight submarket, we leased 56 1,000 square feet of our 1st Orchard 88 Business Center, the 173,000 square foot development forward that we acquired in the Q1. Switching now to Texas. In Dallas, at First Park 121, we signed a 63,000 square foot lease with Triathlon Battery, bringing that 345,000 square foot 2 building project to 18% pre leased. Completion is slated for the Q3. Lastly, just last week in Houston, we signed an 80,000 square foot lease at our First 290 at Gunn Road Development to a logistics provider serving an automotive tenant.
That building is now 2 thirds leased. Turning now to new investments. We continue to source profitable opportunities in this very competitive environment. In addition to the 2 first quarter starts in Southern California and Dallas we told you about on our February earnings call, we are pleased to have broken ground on 3 new developments since then. The first is our 2 building, 371,000 Square Foot First Grand Parkway Commerce Center in Houston, with an estimated investment and cash yield of $28,500,000 7.7 percent, respectively.
The project is scheduled for completion in the Q4. The second is our 120,000 Square Foot First Park at Central Crossing 3 in Central New Jersey. When we complete this building by year end, we will have expanded our portfolio in the Burlington County submarket to 4 buildings totaling 1,000,000 square feet. Our total estimated investment for the new facility is $12,100,000 and our projected cash yield is 5.8%. The third is our 2 building, 402,000 Square Foot First Redwood Logistics Center in the Inland Empire West Submarket of Southern California.
The total estimated investment is $47,400,000 with a pro form a cash yield of 6%. We expect delivery in the Q1 of 2020. We also added 2 new development sites in the Q1. The first was the land site and subsequent 50,000 square foot build to suit in Phoenix outlined on our February call. That building will be completed and occupied in the Q3 and our total estimated investment is $7,700,000 with a cash yield of 5.7%.
The second was a 16 acre site in the Inland Empire East that we purchased for $4,200,000 on which we can build a 301,000 square footer when entitled. In the Q2 to date, we acquired 28 acres of additional land adjacent to our First Park 121 in Dallas for $7,400,000 on which we can build approximately 434,000 square feet. Summing up our development pipeline, we currently have $298,000,000 under construction comprised of 3,900,000 square feet with a projected cash yield of 6.4%, which is 49% leased as of today. At this cash return, our projected average margin on this batch of developments is approximately 37% based on prevailing market cap rates for comparable leased assets. Moving to dispositions, we sold 1 building in the quarter, a high finish 67,000 square foot facility in San Diego for $10,500,000 In the second quarter to date, we had a sale of 8,400 Square Feet in Miami for $1,100,000 As a reminder, our balance sheet sales target for the year is $125,000,000 to $175,000,000 which we expect to be back end loaded similar to prior years.
I would also like to note that our Phoenix joint venture sold 2 land sites year to date to corporate users. The first sale was a 55 acre parcel in the Q1. Our share of the sales price was 5,000,000 dollars Just last week, we closed on the sale of the second site. That site totaled 147 acres and our share of the sales price was $18,200,000 Post these sales, the venture now owns 309 of the 532 Acres originally acquired and has returned approximately 90% of our invested capital. In sum, tenants remain active with many seeking additional space opportunities to accommodate new growth.
Our team is working diligently to uncover profitable investments and we continue to execute on the sales side to refine our portfolio and provide capital for redeployment. With that, I'll turn it over to Scott.
Thanks, Peter. Let me start with our EPS and FFO for the quarter. Diluted EPS was $0.19 versus $0.30 1 year ago. Daybreak funds from operations were $0.41 per fully diluted share compared to $0.38 per share in 1Q 2018. Excluding the severance and impairment charge from a year ago, 1Q 2018 FFO was $0.40 per share.
As Peter noted, occupancy was 97.3 percent, down 120 basis points from the prior quarter and up 20 basis points from a year ago. Regarding leasing volume in the quarter, we commenced approximately 3,500,000 square feet of long term leases. Of these, 216,000 square feet were new, 3,100,000 were renewals and 212,000 Square Feet were for a redevelopment and acquisitions with lease up. Tenant retention by square footage was 86%. Same store NOI growth on a cash basis, excluding termination fees was 3.2%.
This was driven by rental rate bumps, increase in rental rates on leasing and lower free rent, which was partially offset by real estate tax true ups for markets paid in arrears, predominantly in Denver. First lease termination fees totaled $571,000 and including termination fees, cash same store NOI growth was 4%. Cash rental rates were up 8% overall with renewals up 7.8% and new leasing up 10.4%. On a straight line basis, overall rental rates were up 16.7% with renewals increasing 16% and new leasing up 24%. Moving now to the balance sheet.
During the Q1, we paid off $72,000,000 of mortgage loans at a weighted average interest rate of 7.8%, bringing our secured debt as a percentage of gross assets to less than 6%. Quickly moving on to
a few balance sheet metrics.
At the end of 1Q, our net debt plus preferred stock to adjusted EBITDA is 4.8 times. And at March 31, the weighted average maturity of our unsecured notes, term loans and secured financings was 5.8 years with a weighted average interest rate of 4%. These figures exclude our credit facility. Moving on to our 2019 guidance for our press release last evening. Our $5 to 1 $0.75 per share with a midpoint of $1.70 This is an increase of $0.01 from our initial 2019 guidance, primarily driven by our ability to outperform our underwritten leasing assumptions at our developments.
The key assumptions for guidance are as follows: average quarter end occupancy of 96.75 percent to 97.75 percent, a same store NOI growth range of 1.5% to 3%.
Our G and
A guidance range is $27,500,000 to $28,500,000 and guidance includes the anticipated for the full year 2019, we expect to capitalize about $0.03 per share of interest related to our developments. Our guidance does not reflect the impact of any future sales, acquisitions or new development starts after this earnings call, the impact of any future debt issuances, debt repurchases or repayments other than the expected payoff of an approximately $33,000,000 secured debt maturity in the 3rd quarter and approximately $1,000,000 secured debt maturity in the 4th quarter. These payoffs carry a weighted average interest rate of 7.5%. The impact of any future gains related to the final settlement to insurance claims from damaged properties and guidance also excludes potential issuance of equity. With that, let me turn it back over to Peter.
Thanks, Scott. We're off to an excellent start in 2019 as our team investments. And with that, operator, would you please open it up for questions?
Your first question comes from the line of Craig Mailman with KeyBanc Capital Markets.
Hey, good morning guys. Nice job on the development leasing. Just on that, just curious if you could give us a little bit of color on kind of how deep the pool was of potential tenants there. And in the case of someone like a Ferrero, is that a consolidation from other facilities in the area or is that kind of pure expansion?
Hey, Craig, it's Peter Schultz. Relative to Ferrero, you've probably seen some press on them that they've done a couple of acquisitions. So this is growth for them. And we're certainly pleased to have that deal done. And there was a fair amount of activity in the market for that size space.
So for the rest of the leasing, I would say that we had multiple inquiries and multiple interested parties. And the ones we picked were the ones who fit the space the most and who had the best credit.
That's helpful. Then just on the rent spreads, the acceleration here on the deals you guys have done in 2Q, I mean, is there anything particular geographic wise or anything in particular that's driving that pure acceleration? And is that or is it the same dynamic where you're getting better spreads on new leases versus renewals? Kind of just give us some insight into that.
Craig, this is Chris. On the renewals, as we had mentioned in the script, we're looking at all our commencements for 2019 that are completed. We're about 13% for the year. So obviously, great results there. As far as where that's coming from, it's broad based, but the leading markets where we're seeing those rental rate spreads are Southern California, our Houston market, Dallas and Denver.
So we're seeing across the board.
Yes. Craig, this is Art. Just to be clear, that's signed year to date. The commencements will be in the following quarters of the year, not just limited to 2Q.
Right, right. It's stuff that you
guys have leased through April 2020. That's right,
through the date. Correct.
And do you think as you're looking at the mark to market for the balance of the year, is that 13% sustainable? Or did you guys kind of roll stuff that was well under market relative to what you kind of have left to do or what you can pull forward from 2020?
Yes. As far as sustainability, as we said, it's about 70% of our renewals have been taken care of. So, we look to be in that plus or minus range right around that 13% throughout the year.
Great, thank you.
Your next question comes from the line of Rob Stevenson with Janney.
Good morning, guys. Can you talk a little bit about what you're seeing in terms of potential inflationary pressures on labor and material costs on new developments? I mean, land is land, but I mean, on the stuff that's more controllable, how much pressure are you seeing there? And is it starting to impact underwriting?
This is Jojo, Rob. It's actually leveled off from last year, but it's still increasing. So we're looking it depends on market to market too, depending on building volume, because part of that is contractor margins. But we are underwriting anywhere from 4% to 7%, depending on the market increase year over year.
And how does that compare to last year or the year before?
Renting, rents have been growing faster overall in a number on the areas that we're redeveloping. So and what's affecting margins for us is more is on the competitive land prices. I think you said aside land price, but that has been escalating more than construction costs.
And I mean, how does that construction cost increase compared to 2018 2017?
2018 was larger and similar to 2017.
Okay. And from that standpoint, I mean, anything that you're seeing today out there either nationally or in any certain markets that would have you pause in terms of starting a new project in a market these days where you have land?
There are some submarkets where there is some excess supply. As I mentioned in our remarks, it's largely in the bigger spaces, call it 900,000 feet and up properties, and that would continue to be South Dallas, Northeast Atlanta, the I-eighty quarter and Chicago and Central PA. So we're watching those markets closely to see when and how the space there gets absorbed.
Okay. And then, Scott, in terms of the balance sheet, I mean, it seems like the preferred markets come back strong. What's the company's thoughts on preferreds placing your capital stack? And where do you think you guys could issue today? And how is that sort of evolving in terms of your funding for the next couple of years?
Well, I'd have to say, just looking globally as far as capital needs for the rest of 2019, we really only have about $34,000,000 of debt payoffs that we're going to make in 2019. We've got plenty of room in the line of credit. As far as preferreds, I think the last time we had it in our capital stack might have been 2012 or 2013. We look at it every now and then. I'd have to go back to the banks to get a refresher rate on it.
But I'd say right now, our preference for capital is more than 10 or 12 year debt maturities.
Okay. Thanks guys.
Your next question comes from the line of John Guinee with Stifel.
Hi, good morning everyone. This is Joao Dempsey on the line for John. Could you provide some color on the straight line rent? Looks like it came in above just above 3,000,000 which seems a bit higher relative to prior quarters. Is most of that free rent?
Yes. I mean, typically, the spread with the straight line rent or the GAAP rents is the free rent. So that is the primary impact of that.
And I think one big driver of that is you got to remember we leased up the 1,400,000 Square Foot First Nandina Logistics Center at the end of last year. So that free rent is pushing through in the Q1 of 2019. So my guess that's probably one of the bigger drivers.
Got you. So that's probably most of it. Okay, great. And then just looking at the development completed in 2018 and not yet in service, could you maybe provide a little insight as to when we might see those assets move into service?
Well, when you look at that, I mean, the ranch is already leased, I mean, in an Inland Empire. And then we just spoke about our largest lease. So that's already leased. And the only other 3 buildings that are not fully leased are the 250,000 square foot First Logistics of 7,881, a portion of the unleased space for First Joliet and the portion of the first two 19 Gun Road. We are having inquiries and activity in all those.
As you know, we projected a 1 year downtime in those. We will announce when they're fully leased.
All right, great. Thanks for taking my questions. Nice quarter, guys. Thank you.
Your next question comes from the line of Eric Frankel with Green Street Advisors.
Thank you. I think per your guidance last quarter, you discussed property tax true ups kind of distorting your same store NOI growth. Can you provide the impact of that 1Q 2019 NOI growth?
Hey, Eric, it's Scott. It's about 80 basis points was the impact on 1Q, and that's what we were projecting the impact to be for the entire 2019 year.
So we should expect that 88 basis points consistently the rest of the for each quarter for the rest of the year?
Yes, absolutely, yes.
Okay. Thank you. And then with the First Nandina, the free rent, will there be continue to be free rent in the Q2 as well?
Jojo, when's the on Nandina, when's the are we able to say when the free rent period runs out?
No. No, I mean, I would we're subject to confidentiality there. I will just tell you, Eric, that its market the range of market ranges from half a month per year to a month per year. And so we're within that range. But I'm not at liberty to disclose the actual free rent.
Okay.
What was the term of the lease?
That, I cannot disclose as hell. I can tell you it's long term.
Okay, great. I appreciate that. Thank you. I understand your disposition program is usually back end loaded for the rest of the year. So maybe can you describe the assets your type of assets you're planning to sell for rest of the year as well as some additional details on the San Diego sale, obviously that looks a little bit funky?
I'll talk about the overall and Jojo will handle the San Diego topic. The profile of the assets that we're selling this year is very similar to the profile of the assets we've sold in the last couple of years. The profile of the buyer is also similar. So it's typically going to be users, 1031 buyers and high net worth individuals. So really that program continues as you've seen it in the last 2 years.
And yes, as you said, we expect it to be back end loaded. Jojo, you want to talk about?
Sure. So Eric, that building is a high finished building and it was leased with significant amortization with that current tenant. Now the tenant is moving out and actually by the end of next month, they'll be totally out. And the reason for that is that they're consolidating to another building they own. So we had an option to either redevelop it or sell it.
We looked at redevelopment and when we looked at the capital we would put in there and the end product, we felt that redevelopment did not make sense for us. And the reason is that we would not have ended up with a high quality building that we always look for when develop, meaning that it was not ultra high clear nor did it have very generous amounts of truck courts and parking. So given all that, we said that it's better for us to take the capital and reinvest somewhere else. So we sold it for $156 per foot to a flex property redeveloper in the market who had a 1031 exchange need.
Okay. And just the amortized rent, was that kind of included in NOI? Like was that is that really literally like a 17% cap rate on trailing NOI?
Or did it look or should we think about it a little bit?
Yes. Yes. It was in trailing NOI. That's correct. Yes.
Okay. Okay. I appreciate that. Final question, just on the land sales in Phoenix. It seems like you're cycling through that pretty efficiently.
Do you actually plan on developing anything on that big joint venture
property? Yes. The strategy all along has been to execute on spec development, build to suits and land sales. We've been very, very pleased with the activity there and the opportunities to achieve pretty high pricing on the land that we've sold. And we are continuing to evaluate development opportunities there.
And as soon as we have something that's ready to go, we will let you
know. Your
next question comes from
Your next question comes from the line of Rich Anderson with SMBC. Early on
in the call, you described the now in theory that what happens before oversupply is equilibrium. I'm curious as to why you're not maybe a little bit more cautious in your approach? And second to that, if you described 4 markets or a list of 4 markets where you see some risk, are there other markets that would perhaps be on a secondary list that have absorption outpacing supply, but you see the gap between those two metrics is shrinking?
Let me go at the first part of your question. So, our entire business plan is meant to perform well through the cycle. And one of the ways we manage or mitigate risk is through our self imposed development cap, which today is $475,000,000 And so as we look at these markets, as you know, we have about 16 offices across the country, and we're evaluating the risk in each market on a continual basis. Where there are submarkets, as I outlined earlier, where there's excess supply, of course, we're not going to go into those markets and start new projects. But there are other markets in the country that are continuing to grow at a very, very rapid pace where land values are appreciating significantly.
It won't surprise you that most of those markets are on the coasts. On the other hand, Denver and Houston and Dallas are doing pretty well as well. So, we're constantly evaluating the risk assessment there and looking for reward. And as I've said in the past, the cap is not a target, it's a risk mitigant. And we're always looking to be profitable in our activities.
We're not a volume shop. Also, I
just want to note that we actually only started 3 buildings, which we certainly feel that it's kind of slow. I mean, we would have wanted to start more, but that shows this shows our discipline. There's under 200,000 square feet in North Fort Worth market that is definitely not overbuilt. In the pocket that we have in Northwest Houston, again, this is multi tenant. We've got a front load and rear load that is not oversupplied.
And we don't even have one building right now that's not leased in the Holy One Empire. So we wish we had, but it's tough to buy land, it's tough to start. So we're looking for a lot more.
I'm sorry, what was the second part of your question?
Yes. So you listed those 4 markets, Dallas, Atlanta, Chicago, Central PA, where you have oversupplied. But is there a secondary list where the conditions are good, but the spread between demand and supply is starting to shrink?
Not really. When you look at the markets where we are focused, that wouldn't be the case. I can't speak to other markets where we don't have targeted for new investment. But the national vacancy rate still hovers in the 4%, 5% area. So even though deliveries and net absorption are in balance, it's still a landlord's market and it will be for some time.
And to
add to what Peter said, to be clear, those 4 markets or those 4 submarkets rather, it's predominantly larger buildings, 900,000,000 square feet or up, that's feeling oversupplied. So that doesn't mean that there aren't opportunities in submarkets within those broader markets that we continue to feel bullish about. As Jojo mentioned, some of our starts in Dallas as an example. Yes.
Building the
product at the right time in the right place is really the answer here and size matters depending on the submarket.
Okay. Which leads me to my second question, a segue. A lot of talk about even Amazon moving into smaller facilities closer in, last mile all that stuff. Are you seeing that within your sort of circle of activity where tenants perhaps are paying bigger rents, but taking or interested in smaller spaces. Is that sort of starting to materialize as you see it?
We continue to see really broad based demand across a range of sizes. If you look at the development leasing that we signed, several in the 50 to 80, several in the 100 to 250 and obviously the largest one, the 739. But we continue to see activity across all those size ranges. And I would add that from a rent spread standpoint, we're definitely seeing more traction on under 200,000 square foot spaces than we are on some of the larger spaces.
And to add to what Peter said, one of the reasons for that is that there's building in the under 200,000 square foot spaces. And therefore, supply is more limited. And so tenants have fewer choices, and they view pretty much a limited choice but to pay higher rents.
Right. And so is that a palpable change that you've noticed in the past year, that sub-two 100,000 sort of number that you just described?
Yes. If you look at even the Q1 results, under 200,000 square feet, we saw rental rate increase of about 9%, over 200,000 square feet was about 7%, so about a 200 basis point spread in the smaller
spaces. Thanks very much.
Your next question comes from the line of Ki Bin Kim with SunTrust.
Thanks. So did I hear you guys right that you got most of the invested capital back in your land in Phoenix already? And on top of that, you already have $300,000,000 land that's already left? Yes. 300 acres, sorry.
Yes. The venture has 90% of its invested capital back and we continue to own the 3 9 acres. Yes.
We're about 60%. We still own about 60 percent.
That's pretty impressive. So does that mean anything for percentage wise, if you want to develop versus selling more parcels?
No. I think, again, we have had an idea of what we wanted the mix to be. We knew that execution on that mix was not going to be even, I guess, is the word I'm looking for. And the fact that we're now getting through the land component of it on a pretty quick timeframe, it thrills us because now we can focus on the rest.
And then our focus is, again, like we said, initial plan is maximization of value, creation of value and then spread over land sales spec development and build to suits.
Yes, we're not in the land speculation business. We came into this project because we had an opportunity to have a very strong position in what we think is the best submarket there in Phoenix, and it's all working according to plan.
And now you're playing with house money, right? So second question, a little bit bigger picture. Obviously, industrials has done really well. Everyone knows that. How do you guys go about trying to be better trying to do better in the market where you're located?
And how does that direct your attention to investing more in systems, processes or people to do better than the market? And things like if you get a 20% spread in a certain market, how do you try to inform yourself little better so that maybe you have conviction that you can get 25%? Things like that.
Yes. You're really talking about the strength of the platform and the breadth of our platform, Ki Bin. There's a lot of things that go into the mix. Our customer service certainly goes into the mix. Being in constant contact with our tenants is very, very important.
It allows us to see down the road a bit and to try to anticipate what's coming in terms of not only supply and demand, but their needs. And you mentioned technology, and we're obviously focused on that as well. We are obviously, but the other components are also important. Okay. And then, obviously, but the other components are also important.
All right. Thank you.
Your next question comes from the line of Michael Mueller with JPMorgan.
Hi. Just two questions here. I think you said the development cap was 4.75%. I guess the first question is, has that number gone up? I seem to recall I thought it was a little bit lower.
And the second question is, can you remind us what do you typically underwrite for development lease up and say over the course of the past year or so, where has it been actually running relative to that?
Okay. So, I'll handle the first part on the cap. So, the cap is $475,000,000 We did raise that from $325,000,000 in January of 'eighteen, so a little bit over a year ago. And today, we've got about 240 $5,000,000 of capacity under the cap.
And in terms of lease up time, we continue to underwrite a 1 year downtime from substantial completion of construction. And on average, we've released it well before that.
Okay. Is well before that 9 months, 6 months? I mean, just rough ballpark?
6 months to a year, that will be the range. I can't give you the exact number.
Got it. Okay. That was it. Thank you.
Your next question comes from the line of Bill Crow with Raymond James.
Hey, good morning guys. Just a quick question for me. When you set aside the industrial REITs and you look at the other developers out there, any change in pace in development? Are you seeing new merchant builders or new parties come to the table given the success that everybody is having in industrial?
Yes, sure. I'll start and then I'll turn it over to Jojo for more color. But the amount of capital that is looking for a home in industrial continues to grow significantly. There are some new players in terms of merchant builders, but the large the predominance of the growth is in demand for capital to come into this space. And that definitely impacts the market, it impacts land values, it impacts transaction pricing, and ultimately, it impacts the margins that we can all earn on the projects that we pursue.
Jojo?
Yes. And just to add Peter, foreign capital and the foreign acquisitions of entities and the expansion of those entities through additional investment. So let's say over the past couple of years, there's been acceleration of that.
Yes. And that's pushed cap rates down. And as you said, Peter, it's pushed margins on development up and too much of a good thing can be a problem. You're just not seeing that yet, I guess, not that many new developers coming on that might threaten to overbuild the market?
Well, I think, again, it's a very submarket oriented analysis. There are markets where it's easier to get entitlements. We don't happen to participate in those markets now. And in the markets where it's tougher, that really does put a governor on the pace with which that money can get invested. So when you look at the prospect or the potential of overbuilding, again, in the higher barrier markets, that's a tougher thing to do just by definition, higher barrier.
There's less land, it costs more, entitlements take longer, etcetera. So it's I call it a tale of 2 cities, but it's very much submarket by submarket based.
Okay. I appreciate it. That's it for me. Thanks,
Bill. And there are no further questions at this time. I'd like to turn the call back over to Peter Pacilli for any closing comments.
Thank you, operator, and thank you all for joining us today. Please feel free to reach out to Scott, Art, or me with any follow-up questions, and we look forward to seeing many of you at NAREIT in early June. Have a great one.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.