Thank you all, and welcome to First Industrial's Investor Day 2017. I'm Art Harmon, Vice President of Investor Relations. We thank you all for joining us here today live at the New York Stock Exchange, as well as those of you joining us on the web. One quick housekeeping. We ask that you turn off your cell phones to avoid any interruptions to the speakers. I point you to page two of the presentation, both on the web and here live, which contains our safe harbor. I won't read that, thankfully for everyone. We will move along. We just will caution you that we will be making some forward-looking statements and point you to that in our SEC filings. Without further ado, let me pass it over to Peter Baccile, our President and CEO.
Thank you, Art. Good afternoon, and welcome to the 2017 First Industrial Investor Day. I hope everybody's doing well. This is a heck of a room. This room's obviously been here a long time, and a lot has gone on here. A lot of good things have gone on here, and more good things are going to happen today. We're going to spend the next couple of hours talking about the greatest industrial market in memory and one heck of an investment opportunity in the real estate sector. Yes, it is a very exciting time to be in the shed business. My FR colleagues and I are happy because today we get to show you what you own and why your trust and investment dollars are very well placed.
With me today are 17 of our senior management team from Chicago, Atlanta, Los Angeles, Houston, Dallas, and the states of Pennsylvania, New Jersey, and Florida. They're here to show you how we're creating shareholder value every day. They're also here to show you that we can continue to replicate these successes for the foreseeable future. You all have the agenda for the day, so I won't go over that, but I'd like to point out to you the extended tenure and collective 260 years of real estate industry experience represented by the 10 FR executives you'll be hearing from today. The longevity and cohesiveness of the FR team are a huge asset to the company and one of the key reasons we believe we are well positioned to compete and to grow shareholder value through the cycle.
The U.S. is the largest consumer economy in the world. It's the result of ever-increasing standard of livings over many decades. Within this consumer economy are large consumption zones. It's in those consumption zones that we choose to locate our investment dollars because we know that's where values and cash flows will grow the most through the cycle. You'll hear a lot more about this from our team during the next couple of hours. There are three key takeaways we want to leave you with when your time with us today concludes. The first takeaway is that our portfolio transformation is now complete. We're often asked when we will be finished selling out the bottom of the portfolio, and we've always said we evaluate our investments on an asset-by-asset basis, less so by market, and our analysis is bottoms up.
The transformation efforts with our portfolio have been focused on, one, selling any asset that offers a limited opportunity for meaningful cash flow growth, and two, selling any asset that we believed was likely to do poorly in a soft market. While we will continue to actively manage the portfolio to create and enhance shareholder value, the transformational work is now complete. This is the result of an eight-year effort, during which time we've turned over two-thirds of our assets. The second takeaway is that we are firmly focused on responsible net asset growth. In addition to having completed the reconfiguration of our portfolio, we've also dramatically improved our balance sheet and our access to and cost of capital. You'll hear more about that from Scott a bit later.
We've also right-sized G&A. With the increase in the quality of our portfolio, we now also benefit from significantly lower leasing costs. With these changes, the fixing part is behind us, and we are now focused on profitably growing our asset base. The third takeaway is that we have an opportunity to grow AFFO significantly through 2020. Not only are we benefiting from the tailwinds of e-commerce, but space requirements from traditional sources of industrial demand continue to remain strong and continue to grow. In short, the demand side of the equation in industrial, we believe, has a lot of room to run. As you will hear more about later, our portfolio lines up really well with the growing needs of the industrial tenant base.
Combine continuing strong demand with lower leasing costs, lower turnover driven by our industry-leading customer service, development margins that have exceeded 35%, and our high-quality portfolio with built-in growth. That results in the opportunity for FR to drive 9% annualized AFFO growth through 2020. We brought a lot of our team members to New York today so that you can gain a better understanding of what we mean when we say it's all driven by the platform. Collectively, we have tremendous experience gained from working through many business cycles that is not only valuable but difficult to replicate. We're agile, tenacious, efficient, focused on the customer, and committed to driving shareholder value. I really hope that you will spend the afternoon with each one of us, getting to know us better.
At the end of the day, when you crunch all the math, you look into our eyes and see the depth of our commitment, and sprinkle in a little optimism, you'll see why the cap rate disconnect with our peer group represents a missed investment opportunity. It simply isn't warranted. Let's look where we have real estate today. The information on this page is based upon our September 30th results with pro forma adjustments for sales, major lease events, and announced developments in process. The pie chart on the left shows our portfolio type by property type. Today, 72% of our square footage is in bulk warehouse. In 2010, that number was 55%. Only 3% of our space is R&D flex. That's down from 7% in 2010. 14% of our square footage is in light industrial. That's down from 27% in 2010.
Regional warehouse is 11%, up slightly from 2010. As you can see from the map, 43% of our rental income now comes from coastal markets, which are represented by the green dots. The red dots represent exposure in the Southwest, the purple are exposure in the Southeast, and the blue are exposure in the Midwest. Our largest markets are Southern California, followed by Pennsylvania, Chicago, Dallas, Minneapolis, Denver, Houston, and Atlanta. For many of you, this isn't your first investor day with us. Some of you were here back in 2011 when we were in the throes of fixing the balance sheet, leasing up significant vacancies, and just beginning to make new selected investments. During the 2013 and 2015 investor day discussions, you saw that we were continuing to drive occupancy up and leasing costs down.
We expanded our asset sales. We made additional new investments funded through capital recycling. As I mentioned in my earlier remarks, today we are focused on portfolio management, driving AFFO and dividend growth, and generating responsible and profitable net asset growth. The results of our strategy and efforts to date are reflected in the growth we have achieved in FFO per share, 9-plus% compounded since 2013. Remember that this growth in FFO per share has been achieved despite and during a comprehensive remake of the balance sheet and our portfolio holdings. We've also significantly grown cash flow, which has funded a reinstatement of, and subsequently, a 25-plus% compound growth in the dividend. We've executed on our plan for cash flow growth and value creation. Our strategy has been a winner for all of our stakeholders. Over a 3 and 5-year basis, we've delivered market-leading total returns.
While we are lagging a bit this year, we think that's temporary. It's another reason we're happy you're here spending time with us today. As I said, the cap rate differential with our peer set is not warranted. There is great value in our shares today. For those of you who've been around a couple of decades, you will remember a time when industrial real estate wasn't considered real real estate. It was too easy to build with low to no barriers to entry. We've come a long way since those days. The impacts of globalization, urbanization, and the growth of the consumption economy changed all that. Add to that the growth in e-commerce and the reconfiguration of the supply chain. Demand for industrial has never been stronger. At the same time, the supply side of the equation has similarly evolved.
Global banking regulations have made construction financing more difficult for all but the most well-established players. The entitlement process has gotten more and more difficult as the focus has changed to NIMBY, the environment, and the overcrowding of our most popular destinations. Lastly, with much of the holdings and new supply managed by public companies who need to grow responsibly, there has been significantly more discipline throughout the business cycle. Now industrial real estate is indeed an institutional asset class, attracting strong capital inflows and with the ability to offer less volatile returns. Another reason we think there is so much value in our shares, platforms are scarce. It's not easy for institutional investors to deploy significant capital into our space. Let's briefly talk about the demand drivers for new space. As you know, you can't have a conversation about industrial real estate without discussing e-commerce.
According to JLL, you can see that of the primary demand drivers, 30% of the demand still comes from logistics, distribution, and 3PL tenants. About 15% from food and beverage, less than 10% from pure e-commerce side of retail sales, and 8% from manufacturing. That leaves about 37%, which is comprised of other traditional sources such as consumer durables, auto, tires, construction materials, building fixtures, and the like. Like many of you, we try to figure out what e-commerce really means for our business going forward. How will the needs of our tenants change? What will the impact be on location, functionality, and labor requirements? There are lots of people trying to project e-commerce sales and industrial space needs. As you can see from this chart, one study projects e-commerce sales increasing to over $560 billion in 2020.
This pace of growth implies a need for an additional 40 million sq ft of space per annum. I was talking to a couple of people who are engineers and who are the EVPs of supply chain for some major retailers recently. I asked them how much of their sales today are handled online, and how much do they expect will be done online in the future. What is their long-term run rate? They both gave the same answer. E-commerce currently represents 25% of all their retail sales, and they expect the long-term run rate to be 50%. It's difficult to project or predict, but whatever the outcome, the trend is certainly our friend. How does the FR portfolio align with the needs of e-commerce tenants? There's a lot said about last mile and even more said about how to define it.
Because our business is driven by consumption zones, we use the technique typically seen in the retail real estate business to better illustrate our portfolio relative to population. Much like the population density study one might do for a new mall, we applied population analysis to 10, 20, and 30-mile radius of all of our assets, and this is what we found. 17% of our portfolio is within 10 miles of one million people with a median household income of $67,000. 74% of our portfolio is within 20 miles of one million people with a median income of $68,000. 94% of our portfolio is within 30 miles of one million people, the average population of which is three and a half million, with a median household income of nearly $70,000.
This compares very favorably to the national median household income of $59,000. In the old days, if you were a mall developer and you were looking at these statistics, you'd build the mall. The FR portfolio is proximate to high incomes, strong consumption zones, and is a great fit for e-commerce tenant locations. As good as things are, we all know trees don't grow to the sky, and if you're going to run your business to perform well through the cycle, you have to be mindful that the future is unknown, and there's no guarantee that the future will replicate the past. This table shows the CBRE Econometric Advisors actual and projected completions and net absorption from 2004 to 2019. You will note they project that completions will exceed net absorption this year and even by a wider margin in 2018 and 2019.
Far this year, net absorption has totaled 157 million sq ft and new completions only 144 million sq ft. With these results, CBRE EA has very recently adjusted their forecast and now projects completions of just under 200 million sq ft with net absorption of about 191 million sq ft for the year. The charts on the bottom of the page illustrate just how difficult it is to project space needs. In their 2013 report, they projected that for 2014, the gap between net absorption and completions would be 32 million sq ft. It was actually 133 million sq ft. For 2015, they projected relative equilibrium, but the actual showed net absorption outstripping new supply by 108 million sq ft. In 2016, the results were much the same versus their projection of equilibrium with net absorption besting completions by 94 million sq ft.
All the while, market-wide vacancy dropped to below 5%. We are keeping a close eye on new supply for sure, but today, it looks like growing demand and a currently disciplined market approach to new supply will lead to strong markets for the foreseeable future. In my opening remarks, I said that one of the key takeaways today is that we feel we have the opportunity to grow AFFO at a 9% annualized rate through 2020. That would bring us to about $200 million in AFFO for 2020, and that does not include any new investments or acquisitions beyond investing excess cash flow. How do we get from $155 million in 2017 to $200 million in 2020? Embedded increase in rents, the so-called bumps, should generate $20 million. Lower leasing costs should save about $4 million.
Lease up of developments in process should generate $17 million in AFFO. Interest savings from debt refinancings should save another $7 million. You'll note that these items add up to north of $48 million. They don't include any possible upside for rent growth. I said at the outset that we're now a net asset growth company and will look to grow responsibly. Here is what responsible growth looks like to us as we allocate capital. First, are we enhancing the portfolio geographically, functionally, and from a cash flow standpoint? Second, are we or can we create shareholder value, either by taking below-market rents to market, enhancing or redeveloping the asset, and ultimately, is the asset in a high rent growth location? Third, are we making the most out of our platform?
That includes how we source new opportunities, leverage the expertise across the company and across geographies, and how we structure and execute on the opportunity. Fourth, most importantly, will the asset or assets perform well through the cycle? These principles are so important to us that you will hear them again later in the day from David Harker. In summary, we're really excited about the future prospects in the industrial space. The markets are strong. We will focus on maximizing the value of every lease and allocating capital to higher rent growth assets while reducing our allocation to low-barrier markets. Development offers substantial margins to existing market cap rates and as such, will continue to be our primary source of growth. We will continue to look for near-term developable land where we can build to satisfy existing demand.
Finally, we are respectful that what goes up eventually comes down. We intend to maintain strong balance sheet discipline through the business cycle. With that, I will turn it over to our CFO, Scott Musil, who will take you through our balance sheet and funding. Scott?
Thanks, Peter. Good afternoon, everyone. Today, I am going to cover three things in my presentation. One is our continual improvement in the balance sheet and our leverage metrics. Two is our continual improvement in our average cost of our indebtedness, and I would say more importantly, how can we improve it on a go-forward basis. Three is our AFFO report card. We put out a goal in our 2015 Investor Day. I am going to walk you through how we are doing against that goal. First, I want to walk through some successes we have had from a balance sheet point of view since last Investor Day. As you can see up here, first and foremost, we have had some traction with the rating agencies in that two-year period. Earlier in the year, we had Fitch upgrade our unsecured debt ratings to BBB flat.
We have also had Moody's upgrade our outlook to a positive outlook. We definitely made some traction. S&P, we still have a little bit of work to do with them. They have us at a BBB minus rating and a stable outlook. We will continue to have dialogue with them. Number two, we grew our dividend 65%. I would say more importantly, we grew it by keeping our AFFO payout ratio around 70%. That tells you that that dividend growth came 100% from cash flow growth. It did not come from increasing our payout ratio. Three on the list is earlier this year, we accessed the unsecured bond market. This is the first time that we have done that since 2007. It was 10 years. In fact, we used the proceeds from that offering to pay off the debt that was coming due related to the last one that we did in 2007.
Very important for us to hit that market again. A very successful offering. We priced 20 or 25 basis points inside the public market, which was a very important statistic. Our 10-year tranche was five to six times oversubscribed. Very positive from that point of view. Three, in a two-year period, we reduced the average cost of our debt about 70 basis points. To put that in numerical amounts, that is about $0.08 per share on an annual run rate basis, and that is based upon our indebtedness outstanding of $1.4 billion. Made some progress in continuing to reduce our interest expense, which is a cash flow growth driver. Last, our debt to EBITDA. We have been at a sub six times debt to EBITDA the last year and a half. Since we have been operating there, we are going to change what our leverage goal is.
Our leverage goal has been debt and preferred stock to EBITDA of six to seven times. We rolled that out at our 2013 Investor Day. Our new leverage goal now is sub six times. Again, we made a lot of progress here, but let's dig in a little bit deeper. Speaking of lowering the cost of capital of the company, we closed on two transactions last week that were very important to the company. One is we closed on a new line of credit. We increased the capacity $100 million to $725 million. We also had a little bit of reduction in pricing of about five basis points. Once we get Moody's or S&P upgraded to Baa2 or BBB, we'll get another 10 basis point savings on that. We also refinanced our term loans. We had two term loans outstanding. Total amount was $460 million.
What did we change in those term loans with the amendment? We reduced the pricing. The maturity is the same date. The total amount outstanding of $460 million is the same, but we were able to reduce our interest rates about, on average, 45 basis points. When you put those two executions together on an annual run rate basis going forward, we're going to save about $2 million a year, which is about a penny and a half a share. Okay. Actually, I'm going to flip all these out here. I've gone through this slide since 2013 Investor Day. Every Investor Day, 2013, 2015, I said one thing in my concluding remarks on this slide. If we were able to capitalize on the cash flow growth opportunity, our leverage metrics will get better. I think these slides show that they are going to get better. They have gotten better.
If you look at our total leverage, we went from 38% in 2015 to 32% at the end of the third quarter. Keep in mind, these are under the old covenant definitions. If you were to look at the new covenant definitions under our line of credit and term loans, we'd be sub 30%. As I mentioned, on debt-to-EBITDA, we've been at 5.3 times. We've been sub six probably the last four to six quarters. Bottom left on the screen, secured leverage. Going into the downturn, having a balance sheet that was 98% unencumbered was very important. We want to get back to that level. We're doing so. If you look at third quarter, about 10.5%. As secured debt comes due, we'll continue to pay it down with unsecured indebtedness. We've got secured debt of about $160 million coming due in the first quarter.
Actually, we can prepay it early. If you were to pro forma that impact of that payoff, our secured debt as a percentage of total assets would be about 7%. We're sub 10%, which is a great goal for us. Then last is fixed charge coverage. If you look at last Investor Day, we were in the mid to high twos. We're now in the mid to high threes. These are calculated under, again, our term loan and line of credit. If you look at a pure interest coverage ratio, which is how I would compare us to our peers, we'd be at about four times. Very strong debt metrics. I'll conclude today, like I included in 2013 and 2015, Peter discussed some cash flow drivers, four or five of them, some levers that we have.
If we continue to push those levers, pull those levers, and keep the same indebtedness outstanding, these leverage metrics should get better. I am not going to spend too much time on this slide or the next slide. This is a deeper dissection of our indebtedness outstanding. As you can see by the graph, most of our debt is fixed rate debt. We have got 11% of it floating rate debt. That is our line of credit. Frankly, it has been a good move to have a line of credit balance of about $200 million. As we continue to improve our line of credit pricing with LIBOR staying low, that has been a good result for the company. If you look below it, this is another analysis of how we compared our indebtedness secured and unsecured.
If you look here, our secured indebtedness is about one-third of our total debt stack. That was about 38% since the last Investor Day. A little bit of improvement there. Once we pay off the $160 million of secured debt in the first quarter of next year, that goes down to 21%. Again, we are continuing to pay down secured debt, and that becomes a lower percentage of the total indebtedness of the company. Next up is our maturity schedule here. Two points I want to make. It is very staggered. I do not look at the line of credit on here because we usually renew that a year or two before expiration. The highest amount of indebtedness that you have coming due is in 2022, which is about $350 million. We got really pretty easy size chunks to refinance.
More importantly, what I would look at is look at the interest rates in 2017, 7.4%; 2018, 4.5%; 2019, 7.7%; and 2020, 6.9%. We all know that interest rates are way underneath those amounts. The other point I want to make is we are going to have future cash flow growth pick up once we refinance those. Which is a perfect segue to a slide that we have here. What we did is we listed out our maturities in 2018, 2019, and 2020, and you see the interest rates of the maturing debt right here. We use ranges of 4% to 5%, except for 2018. We assumed a 4% interest rate there. We have had discussions with some players in the private placement market, and we think we would be probably a little bit less than that, so we just use 4%.
If you do the math and add up that, your savings are about $4.6 million a year. Also add to that the savings from the term loan and the line of credit, that is about $6.7 million. That tied to Peter's slide of the interest savings that potentially we can take advantage over the next three years. We have got some opportunities there. I love this slide. This shows what we have been able to do as a company in reducing the amount of the interest rate on our indebtedness. As you can see, in 2011, we were at about 6.31%. Right now, we are at 4.31%. Those are third quarter numbers, but we did pro forma the impact of the new rates on the term loans and the line of credit. That is 200 basis points of saving. I am going to use the $1.4 billion of debt that we have outstanding.
We actually had a larger amount. We've saved about $0.23 a share in interest since that point in time. Some of it has to do with spreads in the debt markets coming down, but I think a lot of it has to do with the fact that the company's really improved its balance sheet metrics, and as a result, its cost of capital has decreased. We decided to put this slide in here today because I'm sure a couple of you probably would ask it regarding the report card of how we did with AFFO. Let's look at the couple of different pieces here. The opportunity, and we have to use gross dollars here, guys, because of the new SEC rules. We can't do AFFO per share unless you ask me. Here we had a goal of $167 million by the end of 2018.
We're at $155 million now. We're about $12 million short. How do we get there? Well, the path is, one, rent rate bumps. Peter talked about, he had $20 million over a three-year basis, which is about $6 million a year. That's pretty guaranteed that we're going to get that. We've got about $12 million of cash flow from the lease-up and completion of new developments. Let me go over the population of those developments. It's PV 303 Building A. It's First Park 94 Building 2. First 215 in The Ranch. Now, a couple of those deals have had lease-up this year, but we haven't had a full year of cash. The last two deals aren't leased up. Once those deals are fully leased up and they're 100% cash flow for a year's period, we'll pick up $12 million of cash flow related to those.
Last is lowering interest costs. I went through a slide a couple of slides ago that went through the math. We'll save $1 million with the refi in 2018, and with the term loan and line of credit amendments, that would be another $2 million as well. You add all those up, that's $21 million. What we don't have included, which could help us even more, is we don't have lower free rent, lower TIs, leasing commissions, and CapEx, and we don't have any rental rate increases in here as well. To be fair and balanced, we do have more shares and units outstanding now than we had two years ago. When you mix everything up, we're pretty much on top of what the goal that we laid out in our 2015 investor day. In conclusion, balance sheet's in great shape.
Metrics, we call it fortress-like. When you look at debt to EBITDA in the low fives and interest coverage ratios at fours, it's the strongest the company has been since we've been IPO in 1994. We continue to lower the amount of secured debt that we have outstanding as well. We have capacity to drive cash flow, and as importantly, you drive cash flow, you drive your dividend out. Again, the goal is to keep it at a reasonable payout ratio around that 70% or even less if we can, depending upon taxable income. Lastly, I showed you a slide which shows you some upside ranges of rates of 4%-5%. I would say from a credit spread point of view, we should continue to be able to lower our credit spread.
Talking to bankers, we think in a private placement market, we'd price around ±160 basis points on a 10-year deal. That's 20 basis points less than what we did in April. While we had an upgrade from Fitch at that point in time, we really do think once we get the upgrades from Moody's to Baa2 and S&P to BBB flat, we'll be able to lower our spreads even further. Good news from the balance sheet point of view. Again, we still have some more room for cash flow growth. With that, I'll turn it over to Bob Walter, and Bob's going to run through a deeper dive of the First Industrial portfolio. Thank you.
Good afternoon. As we've done in years past, we wanted to spend a couple minutes talking about the portfolio in a bit more detail, giving you some perspective on the progress that's been made and why, as Peter said, we think the transformation is complete. When I was preparing for today's remarks, I looked back at our 2011 Investor Day presentation. For those of you that were here then, we laid out a very detailed plan of what we had to accomplish. As Peter pointed out, at First Industrial, we do what we say, and I think you'll agree that after these remarks, we've definitely accomplished what we set out in 2011. With that, let's dive in. First of all, let's look at dispositions. Since 2010, we've sold about $972 million of product totaling just approximately [23.6 million square feet].
Perhaps most profoundly is look at where that product has been located. 52% has been in the Midwest. When you look at some of the markets that we're in, you may ask, why have you sold in the coastal markets? That theoretically, as Peter said, is where you want to be. Well, some of those, as Peter pointed out, asset-by-asset focus on where we want to sell assets. Those are some R&D flex assets where we felt future cash flow growth was limited. Let's contrast that to where the investment side was. We've invested about $1.36 billion, 19.4 million sq ft, 61% of which has been in the coastal markets, with a balance scattered in the Southwest, Southeast, as well as the Midwest. Clearly, a significant capital reallocation to the coastal markets.
When you look at the transformation of the portfolio from an investment perspective, we can break down how we've made the investments over the last eight years or so. That really speaks to the power of our platform. $78 million of land has been purchased but not yet put in development. Contrast that with about 76 that we've sold. By and large, our land inventory has stayed relatively flat. $193 million, 2.7 million sq ft of development's in process. Just under $600 million, or 9.3 million sq ft of developments that have been placed in service or are completed but not in service. Finally, about a half billion dollars of acquisitions or 7.4 million sq ft. The important things to take away from this slide are twofold.
First of all, if you look at the left-hand side of the slide, the cap rates, 7% for new investments, 6.2% for dispositions. These numbers don't capture the true AFFO impact, though, because a lot of the dispositions we've sold have been heavier users of TI, leasing commission, and CapEx. Conversely, the new investments are light users of that capital. The second thing to take away, Peter pointed this out as well, about 67% of the portfolio today is different than it was back in 2010. By dollars, about 45%. Truly, a significant change in how the portfolio is comprised. Let's dig in a little deeper, though. Let's talk about specifically what we've sold. Peter talked about the fact that we really have done an asset by asset dive into the portfolio, have focused on selling assets where we felt future cash flow growth was limited.
What does that really mean? If you peel it back a little bit further, it's primarily smaller, tenant-intensive, build-out intensive assets that are larger consumers of TIs, leasing commissions, and capital expenditure dollars. You can see that by the top of the chart on slide 31, for those of you on the web. Since beginning of 2010, the number of properties and the number of tenants has fallen by 34% and 28%, respectively. R&D flex, Peter pointed this out, we dropped the inventory of that in our portfolio by more than 50%. Via the metrics of average building size and average tenant size, you can see the focus on larger buildings, larger tenants. Let's look at geography. Back at the start of 2010, just under a third of the portfolio was focused on coastal markets, 42% in the Midwest.
As of 9/30, with the adjustments that Peter mentioned, that's reversed. About 43% on coastal markets, 28% in the Midwest. On each side, a change by about a third. Really, a very significant transformation via both sales and new investments. We touched on TI, and leasing commission, and CapEx. Again, when you look back at some of our previous investor days, we always spoke about how we felt the level of that spend could come down significantly. Indeed, if you look at 2013, 2015, and 2017, it truly has. Looking forward, we think we can bring that level down even more to about $34 million by 2020. From 2013, that's a 35% decline. The other thing to bear in mind here is that we're looking at that $34 million in today's dollars.
Over this time, the costs, the inflation capital costs, have gone up. In effect, that difference is even more significant. How do we stack up versus the peers? That's always a key question and a key consideration. Historically, we've looked at ourselves versus DCT and EastGroup. This is as of the end of the third quarter, and you could see everybody's enjoying great occupancies in excess of 96%. Portfolio vintage by book value, that's a topic a lot of people talk about. We're effectively on top of DCT and EastGroup. Look at the difference in implied cap rate. This is as of the end of October, still that difference is fairly dramatic. Let's look a little further now.
A couple of years ago, back in the dark days, if you will, an analyst said, "The only way I can really assess your portfolio versus your peers is by your metrics, because I can't look at every property of yours or those of your peers." In looking back at that statement, it was a fair way to look at the world. Peter talked about how our focus, Peter Schultz will talk more about this in a moment, we look to maximize the economics of every lease. Let's look at some metrics that measure that, if you will. First of all, let's look at cash rents. This is year to date through the third quarter. All of our peers, I'm on slide 34 for those of you on the web.
You can see at the top, and we try to align the bars going vertically down the page. Through the third quarter, year to date, we have the second highest cash rental rate increase in the peer set. When you look at maximizing the economics of every lease, cash rental rates are obviously very important, but they aren't the only thing you can look at. The second thing that we look at, and look at it very closely, is how much are we spending in each of our buildings to put tenants in place in terms of TI, leasing commission, and capital expenditures. In this situation, think about it as your golf score. Lower is better. How much are you spending to put in to gain $1 of NOI?
In this case, again, we're second in the peer group, sans Liberty and Duke, who, because of their portfolio composition during the year, don't report the statistic. We're first in cash rents. I'm sorry, second in cash rents, second in percentage of TI, leasing commission, and CapEx. Finally, let's look at retention. In this market, there's been a lot of discussion. Is higher retention good, or is higher retention not so good because you're missing some opportunities to increase rents? It's a fair debate, and we have it quite a bit on a lease-by-lease, space-by-space basis. But there are a couple things that are very true about retention, and the fact that if it's higher, it's better. First of all, it speaks directly to how your tenants view your portfolio. Your tenants aren't going to stay in a portfolio that doesn't work for them.
Secondly, it looks to how well you're taking care of your tenants. What is your customer service like? Peter Schultz will talk more about that in a moment. Secondly, the other truism to look at is the fact that retention minimizes cost. It costs probably 20%-25% to keep a tenant in place versus re-leasing a space. That excludes the cost of downtime. The third thing that's true is the best of all worlds is where you can have high rent growth, low TIs and leasing commissions, and high retention. If you look at this chart on slide 34, I think that's where we are. If you look back at what that analyst said a number of years ago, all you can do is look at the metrics. This shows pretty conclusively the progress that's been made with the portfolio.
Let's wrap it up. The portfolio transformation is complete. We've been able to reinvest our disposition proceeds with minimal dilution and with a very significant coastal orientation. The portfolio transformation is driving significant incremental savings in our level of TI, leasing commission, and CapEx spend, and that flows directly to the dividend. Finally, the key metrics really demonstrate unequivocally FR's portfolio quality versus our peers. With that, let me bring Peter Schultz up to talk about our operational excellence in more detail.
Thanks, Bob, and good afternoon, everyone. My colleagues covered a number of topics, including our AFFO growth opportunity, the strength of our balance sheet, our significant portfolio transformation, and the demonstrated asset quality relative to our peers. All of that is really made possible largely due to the strength of our platform, and the great people we have on the ground throughout the country. In the next few minutes, I'd like to highlight some of that performance for you in action. Starting on page 37, for those listening in. This is really a great time to be in our business. Platform has delivered strong and consistently improving operating results. As you can see on this page, with all arrows pointing in the right direction, including occupancy, cash rents, and same-store NOI.
The results really reflect the strong market fundamentals that we've seen and enjoyed, together with a pretty robust leasing environment. Importantly, the team has consistently delivered on our objectives. Focusing first on occupancy, this is the third time we've presented here at our Investor Day here at the New York Stock Exchange. Previously, we laid out some occupancy goals over the last several years in terms of where we needed to go and what our goals were. Some of those were met with skepticism. We delivered, as you can see, 96%-plus in 2015 and 2016, and 97.2% at the end of Q3 of this year. Again, really capitalizing on the strong fundamentals we're seeing in the market and our transformed portfolio that Bob spoke about. Importantly, occupancy was really broad-based across the country.
12 of our markets achieved 98% occupancy or better, including several of our largest. We're really pleased with that performance. Now our focus is really on maintaining the average occupancy at these levels and really driving incremental cash flow. Regarding rental rates, as you can see, that has been very strong, finishing at 8.8% up through the third quarter, and more on that in a moment. Our same-store NOI has been very strong for the last several years, finishing year-to-date Q3 at 4.6%. That's really been a combination of cash rents, rental bumps, and occupancy really all contributing to that metric. As we think about that going forward, the drivers are going to really be rent growth, rental bumps, and lower free rent, given the high occupancy levels that we're at. Drilling down on rental rates on slide 38.
The trends continue to be very positive, 15 consecutive quarters on a cash basis. As I said, the environment for landlords is very favorable today. We're seeing great demand diversified across markets, across industries, across space sizes. While supply is certainly increasing, it remains very disciplined overall, largely limited to the mid and large box segment in most markets, and virtually no new supply in the flex and the light industrial segment. On this chart, the blue bar represents the change in renewal cash rents, and the green bar represents the combined new and renewal leasing. As you can see, 2017 year-to-date, our renewal rents have achieved 6.8% on a cash basis, and new and renewal combined, 8.8%. We wanted to give you a window into 2018 activity. We've completed today about 30% of our expirations in 2018 at an average increase of roughly 5.4%.
New and renewal, that population today is about 3.2 million square feet of completed deals at roughly an average increase of about 7%. As Bob Walter mentioned, in this environment, we will take re-leasing risk. We really make that decision on a space-by-space and asset-by-asset basis, and that strategy has continued to prove true, given our results on new leasing. Turning to slide 39. This is the same information on a GAAP basis that we're frequently asked to touch on. In 2017, our overall new and renewal, 18.7%. Our 2018, I'm sorry, 2017 at 18.7%, and our 2018 commencements, again, what's signed to date, combined at 15.9%. We're really focused on the cash results here, which is really what's important to us.
Most importantly, though, while I said supply is certainly catching up with demand, we continue to feel that we have a significant opportunity to push rents given the lower overall vacancy rates. For some additional color on rental rates, on slide 40 is our lease expiration vintage. There are a couple of different points you should take away from this slide. First, in the black numbers across the top of the page, you'll see we have pretty well-balanced lease rollovers over the next three years. Those percentages are what's expiring in each of the next three years, 12.8% by net rent in 2018, 15% in 2019. The yellow on this page shows the percentage of leases signed prior to 2014. 53% of our lease expirations by rent in 2018 were signed prior to 2014.
The blue bar is the percentage of leases that were signed between 2015 and 2016. When you look at this, what you should take away is that 60%-80% of our leases expiring over the next three years were signed prior to 2016, giving us a good opportunity to push rents. Turning to another important element of growing our cash flow, I want to spend a minute talking about what we call our bumps or our contractual rental rate increases, which really provide embedded NOI growth for us. There are three key points I'd like to make for you here. First, the percentage of our leases with contractual rental increases continues to increase and now stands at 96% of all of our leases for a term of a year or more, and those are generating an average annualized increase of about 2.7%.
Second is the dollars of NOI generated on the bumps, and the run rate, and Scott touched on this a little bit earlier, is about $6.4 million over the next three years, and that's on leases that we've already signed. We continue to have an opportunity to increase that with leases that we sign over the next couple of years. Finally, what all that really means on a net basis is that we generate annual contractual NOI growth of 2.1% on a same-store basis. The good results don't happen without a great team, and I'd like to spend a minute on customer service.
At First Industrial, customer service is a pillar of our culture, and it really speaks to our philosophy as to how we service our tenants, respond to and resolve issues and concerns, maintain our assets and the needs of our customers, including our company commitment to return all calls within two hours. We conduct annual independent surveys of all of our tenants, and those are managed by Kingsley Associates, who's a well-regarded provider in the real estate industry. Our 2017 survey results, First Industrial was ranked first, and that's among institutional large owners that own 30 million square feet or more, and that was for the third time in a row and fourth time in the last five years.
We're very pleased once again with this best-in-class performance, where we scored, as you can see on the chart, a 4.59 on a scale out of one to five and significantly outperformed the Kingsley benchmark. As importantly, some of you will remember our presentation a couple of years ago, we continue to improve year-over-year. As we like to say, there's always room for improvement. Really, the consistent performance here in our results is a testament to the strength of the team, our platform, and our people. We really think about this deep through the organization. Our commitment to service is not just lip service. It's not just an idle phrase. It's really a philosophical DNA view that we have. It impacts compensation, it helps retention, it helps occupancy, and it helps cash flow growth, which are all important metrics for our success.
I'd like to send out a big thank you to our teammates around the country, as they're the ones that really make this happen. In conclusion, the team has delivered exceptional performance on our objectives, and we've done so in a very straightforward way, where we'll say what we do and do what we say. As I mentioned, the industrial landscape continues to be very good. While supply is increasing, tenants continue to have few options, which is a great environment to drive rent growth and an opportunity to optimize our lease economics while achieving annual rental rate increases, as we said, on roughly 96% of our leases as a key cash flow driver. Finally, our best-in-class customer service really is the foundation of our platform, and our commitment to serving our tenants really supports our strong overall results.
With that, I'd like to turn it over to David Harker, who's going to talk about our recent leased acquisitions.
Thanks, Peter. I get to talk about our property acquisitions in 2016 and the first three quarters of 2017. Many of you ask, how do we find anything to buy with current market pricing? I'm going to show you how we use our platform to buy high-quality properties at better-than-market-rate returns. I guess the one word I'd like you to take away from this presentation is discipline. As you'll see, we've been very selective, both in the markets that we go into, the quality of the properties that we buy, and also the returns that we're willing to accept. Peter went over this slide earlier, but it's worth repeating. On every acquisition, we ask ourself, are we enhancing the portfolio? Are we driving and creating value at the portfolio and at the property level? Are we utilizing our platform to find better-than-market-rate returns?
Finally, and most importantly, how is this asset going to perform in a good cycle? How is it going to perform in a bad cycle? This is all the properties that we bought in 2016 and the first three quarters of 2017. You can see an emphasis on coastal markets. You can also see we are most active in Florida, where we bought six properties. That's one of our primary target markets. Richard Prokup, our Senior Vice President, who's here with us today, has led our efforts in Florida over the last couple of years. Recently, we have moved one of our senior market leaders, Chris Willson. Where's Chris? There he is. To Miami to even further our growth there. In Southern California, we've bought three properties. Most of you have met Ryan McClean. He leads our efforts in Southern California.
Southern California is obviously another target market for us. Area where we're doing a substantial amount of development, but we're also trying to buy properties. We did a number of other properties in other markets where we saw opportunities to add to our existing portfolio. I'm going to go into detail now on six of the projects, just to give you a flavor of how we put these deals together. This first deal is a deal in New Jersey. John Hanlon, our market leader for New Jersey, put this deal together. Great property, 213,000 sq ft, brand new. 32-foot clear. Less than 3% office space. Right at Exit 7 of the New Jersey Turnpike. Leased to a Fortune 500 company for seven years. Kind of real estate that really demands a great price in today's market.
In this particular transaction, the building was owned by a private REIT, and they had potential tax issues if they sold the property. Fortunately, the property was structured at the time in a single-purpose entity, and we were able to work with the seller and structure a deal where we bought the entity rather than just fee title to the property. That allowed us to get a premium of 25-50 basis points over current market pricing. This next property, another newer property. 2014 vintage. Tilt wall construction, 30-foot clear. This is located just west of the airport in Orlando, kind of the heart of the Orlando industrial market. The seller was an affiliate of the user. They built the property for their own use, and they wound up leasing half and then leased the other half to a third party. They were not professional real estate owners.
We approached them with an unsolicited offer. This never hit the market. Because of that, we felt we were able to achieve a premium of 50-75 basis points over current market pricing by buying an off-market transaction. This next property, Pompano Business Center, is in Broward County, Florida, the highly competitive South Florida market. 2001 vintage. Rear load property. 24-foot clear. Leased to five different tenants. This property was complicated by a number of factors, and we really treated it as a redevelopment play. You had one tenant in it. It was 100% office that we underwrote them leaving at the end of their lease term and re-tenanting to three or four traditional office warehouse users. It also included some vacancy. It included an additional four acres of land that we plan to use to redevelop as either a trailer park or possibly another 50,000-square-foot building.
Because of the complexity of the deal and the need to redevelop this, we felt we achieved a very substantial premium, 100 points or more over what current market rates are in South Florida. 2777 Loker. This is just an example of what having a local portfolio can do for you. We've had a lot of success with our San Diego portfolio, especially our recently completed Ocean Ranch development in San Diego that we leased up completely right around completion of construction. We recognized from our experience on that property and other properties in San Diego that the rents in this property were about 20% below market. We also realized that there was substantial demand in the market for those size spaces. It so happened that all of these leases roll in the next three years.
We're comfortable that we'll be able to roll these rates up significantly over the next three years on this property. This next property, also in Southern California. This is in the Western Inland Empire. 2013 vintage property. Single-tenant property. 30-foot clear. Built by a user who wound up never occupying. They outgrew it before they occupied. They were not professional real estate owners. They wound up doing a lease to a local credit at a rate that we felt was substantially below market. In fact, that lease expired in September of this year, and we were successful in re-leasing this to a national third-party logistics company at a rate significantly higher than the local tenant was paying. This is a property in Denver, 181,000 square feet. High-quality property, 32-foot clear. This is in the I-70 east submarket of Denver, where we own other things.
We knew this property, have kept track of it over years. It's owned by a wealthy family who are not professional real estate investors. This was their only asset in Denver. We approached them with an unsolicited offer. When we got into due diligence, we realized that the management of this property had really been neglected. There were annual rent rate increases that had not been billed in a number of years. There were expense pass-throughs that hadn't been passed through or charged to the tenant in a number of years. There were significant landlord obligations, but there was no clear record of what had been done or how much had been spent.
To complicate things further, the tenant had changed hands a number of times as the business had sold, and the current tenant was a Fortune 500 company that had bought the previous company, and they changed the use of the property from sort of quasi-manufacturing to distribution. We were able to come in during due diligence, sit down with the tenant, figure out what worked for them, and amend the lease to clarify the rent, the landlord obligations, and the other issues. Because of that ability to come in and amend the lease, we received a 50 to 75 basis point premium over market rates. For those of you on the web, I'm on page 53. These are all the properties that we built on 53 and 54. All the properties that we bought in 2016 and the first three quarters of 2017.
The cash yields, NOI yields, are on the far right-hand side. Most of you, or I'm sure all of you, know what current market rates are in most of these markets. As you can see, we've been very judicious in utilizing our platform to buy high-quality properties at better than market rate returns. With that, I'm going to turn it over to Jojo to talk about our developments.
Thanks, David. Good afternoon, everyone. What's our development strategy? Slide 56, please. It starts with identifying demand and supply imbalances, this intelligence comes from our top-down research and on-the-ground local market knowledge. We use this knowledge to employ our current and new land holdings. Simultaneously, when we do that, we use our construction and development platform and expertise to navigate through local entitlement and construction issues. We build to serve the current demand. As opposed to merchant developers, we build for the long term with the highest quality and functionality and flexibility. You will find that our developments in any market tend to have the most generous amount of ceiling heights, auto and trailer parking, and deep truck courts. Now, we implement the strategy with a strict financial criteria, always investing through a spread to create shareholder value.
What have we developed, leased, and placed in service in 2016 and through the third quarter of this year? Next slide. Our market leaders across the nation have sourced, developed, and leased 11 projects across Chicago, Eastern PA, South Jersey, Atlanta, Dallas, Phoenix, and Southern California. Let me give you some highlights. For people on the web, slide 58. First Florence Logistics Center in South Jersey, 577,000 sq ft, $38.6 million investment. John Hanlon, our market leader in New Jersey, saw the demand in the I-95 corridor in the area of exit 6A. Demand here is driven by companies moving south on 95 due to lack of availability in exit 8A and 7A, and also the widening of the turnpike from exits 9 and 6 from six lanes to 12 lanes. If you haven't driven this, you have to drive it. It's a great highway.
Saw the opportunity and tied up the piece of land and went through entitlements. Built a cross dock, leased it at completion to an omni-channel retailer to serve their stores and online sales. Yield 7.3% in a sub 5% market cap rate. Next slide. First Park McDonough build-to-suit in Atlanta. 409,000 sq ft, $20.5 million investment. We look for opportunities to grow our tenants in our portfolio. Corey Richardson, our market leader in Atlanta, saw an opportunity to grow our tenant. He looked for sites while negotiating a lease to triple the size of Distribution Cooperative. End result, found two parcels, combined them, and built a new home for DCI. Yield 9.4% in a market that these properties trade for a 5% cap. Slide 60. First Arlington Commerce Center in Dallas. So far, we've highlighted relatively large distribution centers, but demand is also strong in mid-size tenants.
This is the case in the great southwest market in Dallas, where mid-size tenants are typically underserved. Robert Allen, our market leader in Dallas, saw this opportunity and built two buildings to serve the demand in this sub-market. The one you see here is the second building. It got leased above pro forma and beat our one-year standard downtime. Yield 6.8% in a 5% cap rate market. Next slide. First Reyes Logistics Center in South Bay, L.A. We always look for opportunities to redevelop our properties to create more value. For example, we had this 170,000 sq ft building in South Bay, L.A., where we could have easily leased when the tenant left. But Ryan McClean, seeing that the market has strong leasing demand for buildings used for transloading, developed a different vision. We decided to invest additional investment.
We tore down the 170,000 sq ft building, designed a building that was smaller by 60%, but we were able to increase the rent by 160%. Result, it's currently the highest quality transload building in all of South Bay, L.A. $17 million investment, it yields 5.2%. The rents have significantly increased today, and if this property was vacant, we could have leased it at the higher rent that would yield us 7% in a market that's basically a 4 cap market. Slide 64. In summary, all this is a summary of all the developments placed in service, like I said, in 2016 and through the third quarter of 2017. When it comes down to it's all about value creation. The average cash yield is 7.4%. We estimate the profit margin to be 45%, as Peter mentioned, on $255 million of investment.
That's approximately $115 million of value creation or approximately a dollar per share. If you assume a $30 share price, this value creation is equivalent to about a 3% return without taking into account growth in cash flow. How about growth? What's our pipeline? Slide 64. Again, through our platform, we have completed or have in process six developments in the markets of Chicago, Pennsylvania, Phoenix, and Southern California, totaling $246 million in investment. Here are some highlights. First Logistics Center at I-78/81 in Pennsylvania. Significant demand continues in the I-78 and I-81 corridor. Jeff Thomas, our market leader in PA, tied up and then subsequently tied up a site to build a 738,000 sq ft with the ability to add another 250,000 sq ft or to provide a significant amenity in terms of additional trailer park or auto parking. This building is now under construction.
We expect the yield on this $48.2 million investment to approximate 6.9%, where the market cap rate is 5%. Next slide, 66. First Joliet Logistics Center in the Chicagoland market. The I-80 sub-market is one of the most active sub-markets in all of Chicago, when you look at it from the last couple of years. Of a particular note, there's a lack of buildings serving the 200,000 sq ft to 350,000 sq ft, that size range in this particular sub-market. Adam Moore, our market leader in Chicago, closed on an entitled site and started this 355,000 sq ft distribution center. This building, when completed, will have the highest functionality in a sub-market in terms of the number of docks and the number of trailer spots per sq ft of warehouse area. In those two statistics, none of the competition will beat this building.
Expected cash yield on this $21.2 million investment is 7.1%, where the market cap rates for a Class A build in Chicago is in the 4.5%-5% range. Next slide. First Park PV 303 Building 2. Based on the success of our leasing our recent 618,000 sq ft development in Phoenix, which we leased to UPS, we started the 640,000 sq ft building. In addition to the great location on this site, on the largest sub-market in Southwest Phoenix, this development benefits from offering a great amenity for e-commerce type tenants due to being so close to one of the nation's largest parcel delivery service, which is UPS. We expect the cash yield of this development at 7.4%, where the market cap rates are in the 5s. Next slide. The Ranch by First Industrial in Southern California.
The Chino sub-market of L.A. is one of the tightest sub-markets in the country, boasting a vacancy in the 1% range. There is strong demand and significant lack of supply across a wide range of spaces. That's why Ryan McClean, our market leader, when he found a site, sought to design six buildings comprising 936,000 sq ft, with size ranges ranging from 50,000 sq ft to 310,000 sq ft to meet that wide demand. We expect to complete the buildings next quarter, Q1 2018, and we're already getting a good amount of interest. Expected yield on this asset is 6.9%, when the market is sub-four. That's approximately 300 basis point spread. Next slide. Again, we're now on slide 69. Again, it's all about value creation.
Given the overall 6.9% cash yield of the development projects I just mentioned, we estimate the profit margin to be about 35% on $246 million of investment, approximately $86 million of value creation. What are the other avenues for growth for FR? Slide 70. This chart shows you our existing land holdings and where they're generally located. Our key sites allow us to develop 12.9 million sq ft of additional square footage. Next slide. These key sites are in Chicago, Pennsylvania, Nashville, Atlanta, Houston, Dallas, Phoenix, and multiple sites in Southern California. Let me highlight a few. First Park 94 in Chicago. Companies north of Chicago continue to migrate to Southeast Wisconsin. What makes it attractive for these companies is the lower cost of doing business and lower real estate taxes, and still having the great benefit of serving the large Chicago area consumption zone.
That is why Adam Moore, our market leader in Chicago, tied up an entitled and acquired approximately 300 acres in Southeast Wisconsin to serve the long-term demand. In addition, we acquired a site at a superior basis of approximately a buck per land foot. We subsequently built two buildings, one leased at completion, and the second building is already 50% leased. The remaining site allows us to build an additional 3.2 million sq ft. Obviously, we're excited about the prospects of this site. As you know, Foxconn, a major manufacturer, has picked Southeast Wisconsin as their location for their massive manufacturing plant. If this happens, the additional demand would just be icing on the cake. Slide 73. First I-20/35 Distribution Center in Dallas. Six o'clock on the dial on the beltway in Dallas is the intersection of I-20 and 35.
This intersection is an established sub-market with a lot of demand, especially under 500,000 sq ft. It's now not easy to find land here as this sub-market is basically built out. Robert Allen, our market leader for our Dallas region, bought this site off-market from a user and will allow us to build 420,000 sq ft. This complements our Mountain Creek site just east of this site, wherein we can meet tenant needs to up to 1.2 million sq ft. Slide 74. Inland Empire continues to rank in the nation as a top three in terms of net absorption. Inland Empire is also the home of the most amount of companies that occupy 1 million sq ft or more. They approximate 80. Given this demand, Ryan McClean, our market leader in SoCal, sought to buy land to meet the big box demand.
With the view of trying to maximize economics and not paying retail for entitled land, Ryan tied up 12 different sites with 10 different sellers and subsequently closed them simultaneously to acquire a 70-acre site that could accommodate approximately 1,450,000 sq ft. Our base is roughly 30%-35% of what land of this size and quality is going for in the market. This is now one of the best located sites in the market with very few competition who can satisfy a tenant need an over 1.4 million sq ft. In summary, we have our development strategy that commits us to understand demand on a sub-market by sub-market level. We meet that demand through building superior functional buildings executed by our national platform. Coupled with our strict financial criteria that are required to develop to a spread, we create value for shareholders.
Our plan, job, and commitment keep doing it again and again and again. At this point, I'll turn it over to Peter, our EVP of the East Region, who will basically moderate a panel with our market leaders. Thank you.
Thank you, Jojo. Is this on? Great. For this next section, we're going to take you for a little tour around the industrial markets around the country with some of our market leaders representing our largest markets with a broad cross-section of the country, and also markets that we're actively growing and deploying capital. I'd like to just make some brief introductions. Farthest to my right is John Hanlon, responsible for New Jersey, and parts of the Northeast. Adam Moore in Chicago, Robert Allen in Dallas, and Ryan McClean in Southern California. Gentlemen, thank you. Ryan, let's start with you. Southern California is our largest market and growing. What's our strategy there and how do you think about the sub-market focus?
Well, Peter, in Southern California, our focus for both acquisitions and developments is on the Inland Empire and the port-centric L.A. County sub-markets. From a product type perspective, we like traditional, institutional, low-finish industrial space with a focus on excess trailer parking and maximum dock-high loading. This gives us the flexibility with users ranging from traditional 3PLs, e-commerce companies, and even some manufacturing uses.
How do you think about the sub-market focus?
Sub-market focus would be Inland Empire and then the port-centric L.A. markets.
Great. John, in New Jersey and Central and Eastern Pennsylvania, tenants are very active today. Your view on the demand characteristics there and what's our strategy?
Peter, Central Eastern PA, Lehigh Valley, and New Jersey, a lot of people are starting to look at it as, for lack of a better term, a super region. There are still, though, unique demand characteristics to Pennsylvania and New Jersey. New Jersey, it's very port-centric. Users want to be along the New Jersey Turnpike or have immediate access to it. It's having the benefit and the access to the greater New York metropolitan population and the densely concentrated labor base. Relative to Pennsylvania, you have a very efficient highway infrastructure. You have some Class 8 rail lines. You have very significant intermodal transfer yards. Historically, there's been land available. Pennsylvania is a little bit more spread out. It has a good labor base to handle the management and laborers in these warehouses.
Also relative to Pennsylvania, talking about the labor, there's actually some pockets there where it's starting to become some concern. There's a lot of 3PLs in Pennsylvania. Overall, the operating costs and characteristics in Pennsylvania are lower than New Jersey, and that benefits a lot. In New Jersey, you have access to 33% of the U.S. population in one day's drive for a trucker. In Central Pennsylvania and Lehigh Valley, you have 40% of the U.S. population and 60% of the Canadian population. These are relatively high-income households. It's a great landscape to distribute from. Our strategy in both of these markets, in New Jersey, buy all along the entire New Jersey corridor of the turnpike. Everything is turnpike-centric and port-centric. Pennsylvania, along 78 and 81. As far as acquisitions, David mentioned some of this in the past
It's about being creative and leveraging our relationships. The deal we did last quarter in Bordentown, it was off-market, unsolicited. We knew the principals on the sales side well. They knew us well. We had the terms agreed to while the building was still under construction. Relative to development, it's a lot of discipline. It's repurposing. In addition to raw land, it's also redevelopment. The First Florence project that Jojo mentioned, we demoed 184,000 sq ft functionally obsolete building. We dealt with a blighted site relative to soil remediation, and we built a beautiful 577,000 sq ft building there.
Thank you, John. Robert, our peers and others talk about South Dallas and their concerns there. Can you give us your thoughts on South Dallas and the health of the Dallas market overall?
Overall, the Dallas market is the healthiest it's ever been. Demand has been extremely strong. Last year, we absorbed about 25 million sq ft. Year-to-date through the third quarter, we've absorbed 16 million sq ft. On the supply side, excluding kind of the North Fort Worth and South Dallas, the more infill established sub-markets, it's becoming more and more difficult to find good land sites. We're having to now deal with environmentally challenged sites, flood plain, topo. In order to meet the demand in the more infill sub-markets, having to look to redevelopment more. South Dallas is a little bit of a different story. As our peers have pointed out, there's a little bit of an imbalance. There's about 8 million sq ft that's currently vacant, represents about 12% vacancy.
When you get to that double-digit vacancy range, and it's due to new construction, I think it's safe to say that there's a little bit of an imbalance and it's overbuilt. I guess I would temper the concern a little bit because South Dallas has had the highest absorption of any sub-market in DFW over the past couple of years, absorbing about 5 million sq ft per year. That's really where the bulk distribution tenants, the e-commerce tenants, that's where they're having to go. One other thing I'd point out about South Dallas is that not all parts of the market are performing the same. Tenants have shown time and again that there's a significant preference to be in the Mountain Creek area or 2035 area, as opposed to down the 45 corridor. Mostly what we're hearing, it's major labor concerns.
Just provide an example, Amazon was in the market recently for about 450,000 sq ft. They were looking at two buildings, one at 20/35, one over on I-45. The building on I-45 was functionally superior in every way, better clear height, truck courts, trailer parking, additional land. Also, was asking a lower rate, Amazon still went to lease this building over in 20/35. It's a strong differentiation between parts of the market. As far as my view of South Dallas, I think overall, it's positive. It's where the market's going to go. It's where the larger users are going to go. You just need to be a little more sensitive to location and timing.
Thank you. Adam, your view on the health of the overall market in Chicago, how you think about active sub-markets, and how does our portfolio really meet the market today?
Well, Peter, overall, the Chicago market's pretty well-balanced between new construction and demand. There's a couple of pocket sub-markets that have seen a drop-down in demand over the past four or five quarters, but we're starting to see that pick up. I-55 is certainly a sub-market where we saw demand drop off first half of the year. Starting to pick up in the third quarter, we're seeing that pick up continue into the fourth quarter. As far as overall, the most active markets are now I-55, O'Hare, I-80, Kenosha is a close second, Southeast Wisconsin. As far as our existing portfolio goes, our portfolio quality is very high. We've been adding Class A to our portfolio in Chicago for the past five years or so. The tenants have really shown us great demand for our product type and our locations.
It's really evidenced by our 98% occupancy rate in Chicago right now.
I'll give you an opportunity to plug your occupancy in your market. What is it?
98%.
That's great. Thank you. Ryan, we've been very active on the spec development front in Southern California. Where is land pricing and how do you think about development yields today?
Well, cap rates for development deals have compressed to the low 5% range. This is really for three reasons. One, there's just more capital chasing development deals. Two, the near elimination of leasing premium risk in the pro formas due to the overall strength of the leasing market. thirdly, there's increased demand for land for merchant buyers, developers buying product for sales to tenants as opposed to leasing. Land values have really increased. We think for infill sites, $40-$70 per land sq ft. For the Inland Empire, $15-$30, depending on the location in Inland Empire. We've seen about a 20%-30% increase in land prices.
Do you see that stopping anytime soon?
Based on rent growth, no. It's driven by rent growth. We seem to be slightly demand-favored right now still.
Staying in California for a minute, the Panama Canal expansion's been open for a year now. Any impact you've seen on port volume or demand for industrial space resulting from that?
No. As widely predicted, it hasn't had any effect on the West Coast ports. Year-over-year container traffic at the ports of L.A. and Long Beach are up 8% from one year ago, 9% from two years ago. I think what it's really doing is just alleviating the pressure and not reallocating between the coasts.
Great. John, same question to you. New York, New Jersey, biggest port on the East Coast. Anything to add from what Ryan said? Any impact on demand or port traffic there?
The Panama Canal expansion, it's going to help all the East Coast ports up and down. Relative to New York and New Jersey, what's more relevant is
The raising of the Bayonne Bridge, which just was completed two months ago, and deepening the harbor to 50 feet. There's four terminals, Elizabeth and Newark, that can bring in what are called the mega ships. They can bring in 18,000 TEU containers. A TEU is a 20-foot equivalent unit. They couldn't handle these size ships before. They've been coming in through the Suez Canal for years. Granted, the higher container vessels in Panama will help, but what's more relevant to this port has been the raising of the Bayonne Bridge and the deepening of the harbor. Year to date, most recent numbers, we have 7.6% increase in cargo volume coming into the ports. In addition, we have also have product inbound, outbound to Canada, Europe, and Asia. There's another $500 million of improvements in expansion going to Port Newark.
Port Newark alone is going to be able to double the amount of containers it can handle in the next 12 years. The way we see it is more containers, more warehouse. This is going to be more efficient, fewer vessels, but more containers. We just see exponential growth over the next decade.
Robert, staying on the demand theme, what are you seeing from a tenant demand standpoint in Dallas? How does our portfolio meet the market there?
There's a number of significant demand drivers in the Dallas market. Probably the biggest one, most obvious, is just the consumption zone, the population. We're the fourth largest metro area in the country. There's just under 400 people a day that move into the metroplex. Population is projected to grow to close to nine million people within the next 10 years. You have central location, very good access to the interstate system. I-20 is a major east-west corridor. I-35 is a major north-south. Good access to air freight with DFW Airport, Alliance. Probably the most important is just the access to rail and intermodals. Very good access. UP has an intermodal, BNSF, KCS. That's really what's driving a lot of the bulk distribution demand.
Really, from a demand standpoint, we see good demand from 10,000 square feet all the way up to 1 million square feet. As far as where our portfolio sits in that, I view our portfolio as really in the more infill parts of the market. It's really meeting the demand well, and we're currently 98.4% leased.
Adam, in Chicago. Jo jo mentioned two of our developments, opposite corners of the market. First Park 94 up north, Joliet out west. How are you thinking about developments and activity overall, and how do you think about sub-market focus?
Well, like anybody, Peter, we look at the fundamental supply and demand, market quality, market velocity. In addition, we look at the entitlement process. We look at the municipal environment, the access to labor, and barriers to entry in the market. That's what both these developments have in common. They're both in markets that have good demand, good velocity, and are slightly supply-constrained. What we've done, Jo jo mentioned a little bit about Joliet. We went into the market. It's a great market. There's a lot of velocity. There's a lot of development going on, but we saw great demand and a lack of supply in that 200,000 to 400,000 square foot range. We found a site, very nice site, that supports a 355,000 square foot building. Probably one of the best locations in the entire market.
We had to figure out some issues with the site as far as getting the site up to a developable standard, which we've done. We're very pleased with that process and the way we've managed through it. We're going to have one of the best buildings in the market. If we look at Southeast Wisconsin, we've been very happy with the demand we've seen, both for the remaining 300,000 square feet we have in our spec building, as well as the demand we've seen on build-to-suits for the acreage we have.
Great. Thank you. Ryan, Southern California is certainly one of the more difficult places to obtain entitlements. What are you seeing there? How are we dealing with it? Is that acting as a governor on new supply?
Yeah, sure. Entitlements are becoming ever more difficult, both on a state and local level. On a state level, we're seeing challenges from the different labor unions. To combat that, we are proactive and don't wait for the challenges. We reach out ahead of time. On a local level, cities just aren't as favorable as industrial as they used to be. They'd rather have something sexier like R&D or office or retail because it generates more tax revenue. We focus on cities where we have relationships, where we know the city, where they're very industrial friendly. We keep in contact. There's some cities we're in there two or three times a week, meeting with economic development and planning.
Furthermore, we're active in organizations such as NAIOP, the National Association for Industrial and Office Parks, which is a lobbying organization, so we stay upfront and center with the various happenings in the development world.
Do you see all this acting as a governor on supply?
Absolutely. It's tough to not only find the sites, but once you find them, to get them entitled. As the market gets better and there's less land, the entities become more difficult to work with and a little bit more selective, if you will.
John, same question to you. New Jersey is probably one of the toughest places in the country to get things entitled. What are you seeing there?
It's not just New Jersey, Peter. It's Pennsylvania. Pennsylvania is kind of an anomaly to a lot of people because they think it's expansive and there's a lot of land and whatnot. In Pennsylvania, it can take two to three years on industrial zone land to get the entitlements. In New Jersey, it can take a year and a half to eight years, depending upon the infrastructure. There isn't a site in New Jersey that doesn't have some kind of environmental impact that you have to contend with. Relative to.
a governor over what we see. It definitely is a governor. What you have to do with these is leverage our in-house expertise. We have a phenomenal due diligence team, an excellent environmental team, a great construction management team, a great development team. You can't just go in and understand the markets and be successful with development in Pennsylvania, New Jersey. There's so many nuances at the municipal level for approvals, the county. Every site is different. It's topo, it's soil conditions, it's environmental situation. You have to be so prepared and leverage every aspect of our in-house team before you step into a property. You have to be so prepared, or you can get bitten hard. It's a lot of experience. You can't just flow into these markets and have a successful project. You have to have a deep bench of past experience.
John, Jojo talked about the widening of the New Jersey Turnpike, you mentioned that turnpike-centric area as a focus for ours. What are you seeing along the turnpike, and what's happening with land values in New Jersey?
The beautiful road that Jojo said we almost travel on. This happened in the past three years. Historically, everything was around the port. Everything pushed down to Exit 10 on the Jersey Turnpike in Edison. Everything pushed down to Exit 8A, as you have more land constraints. You just don't have the infrastructure to handle what we build. Now, with the widening to 12 lanes, you used to get a log jam at Exit 8A heading south. Now it's wide open south of Exit 6 on the turnpike. That's the connection to the Pennsylvania Turnpike. We've seen demand go south as well. A couple case in points. The development we did in First Florence at Exit 6A, B&H Photo leased it in their entirety. The majority of what they're relocating out of is Brooklyn warehouse down to Exit 6A.
They were the bridesmaid, not the bride, on a couple other properties they pursued more in northern New Jersey, they didn't have any options, they were looking far afield. They couldn't be happier now down there. Another good example is kind of the growth down there. The building we just acquired last quarter, Owens & Minor, a tenant we have elsewhere. That is their sole location to source a contract with the hospital systems in Manhattan, they only do it out of that facility down at Exit 7. We're seeing a lot of growth going down there. Some people have concerns for additional drayage costs, running containers back and forth from the port, that's offset because you have lower operating expenses, lower rent, and you have basically lower cost of labor.
Briefly on land values along the turnpike?
Good point. Land values in Pennsylvania and New Jersey have grown in the last year and a half to two years, anywhere from 20%-35%. Give you a couple examples. Lehigh Valley, a year and a half ago, you could buy land roughly valued around $18-$20 an FAR. Now it's $25, mid-20s an FAR. Exit 8A in New Jersey, to give you another example. A year and a half ago, I was looking at a site at $28.50 an FAR. It was a home run value all day long. I couldn't touch that site today for less than $35 bucks an FAR, and some are pushing $40. Now, the scale from Central P.A. and Lehigh Valley isn't as dramatic as far as the lower end of land costs to the high end. The scale in New Jersey is a great perspective to have.
Up and down the New Jersey Turnpike in all the markets we operate in, I'm looking at sites anywhere from $16 an FAR up to $70 an FAR, depending upon where we are in relative to proximity to Manhattan and the ports. It's a big differentiator. I'm also looking at rents anywhere from $4.50 up to $12 net.
Robert, touch on the investment environment in Dallas, both for existing buildings and spec, and why don't you briefly comment on our plans for our two development sites that Jojo mentioned?
The Dallas market always seems to make it towards the top of every list for target markets for real estate investors, it's made the environment in Dallas extremely competitive for acquisitions. Just to provide a couple examples, near our land sites in South Dallas, there's a package supposed to come out just north of our land site, 1.5 million sq ft, two buildings, Class A stabilized. It's projected to trade in the high 4s. There's a building that's under contract right now to an investor just west of our Danieldale building, that's projected to trade around what would be a stabilized yield in the low 5s. Acquisition market is extremely competitive. We continue to pursue acquisitions, we probably spend more of our time on the development front because we think we can add more value there.
As far as the two land sites we have in South Dallas, we feel great about them. We feel like they're in the right part of the market. We continue to monitor the market conditions, we'll move forward when we feel like the supply and demand dynamics are favorable.
Thanks. Adam, Jojo mentioned Foxconn and the announcement in Southeast Wisconsin. Why don't you tell everybody what that means and how you think it's going to impact our development velocity in our First Park project?
Certainly. Let me start by saying we've been very, very pleased with the activity and the dynamics in Southeast Wisconsin since long before Foxconn started looking at the area. Foxconn, for those of you who aren't familiar with them, is a Taiwanese contract electronics manufacturer. They make everything from contract manufacturer for the iPhone. They specialize in screens, so televisions up to jumbotron-sized screens. They've announced that they've identified Southeast Wisconsin for a U.S. manufacturing campus. They are currently working with the state of Wisconsin to finalize some governmental incentives to help them come to town. We think it's going to be great for the market, it's going to be great for demand in the market, it's going to be great for First Park 94. First Park 94 is located about four miles south of the site that they've identified for their new campus.
We feel that not only is it going to bring additional people into town, it's mainly going to bring in suppliers to Foxconn, as they want to locate close to the campus. We've looked at this in other markets, what we see happening is kind of a rush of demand and a rush of people trying to get into the market and establish buildings. What we've found is our site is ready to go. We have done mass grading on the northern portion of our site
We have about 3.2 million sq ft of building pads ready to go. What that allows us to do is deliver We did a study on a 500,000 sq ft building. We can deliver that building 6 to 12 months faster than anybody else in the market. We feel that that's really going to give us an advantage when these suppliers start to come into the area.
Thanks. Gentlemen, let's wrap up with our lightning round. This is brief, particularly for you, Johannson. First question is supply-demand. When do you think it'll get to equilibrium? 2017, 2018, 2019, when? Ryan?
Maybe 2019.
Robert?
18.
Adam?
I think we're there now in Chicago.
John?
Probably 2019.
What's a market cap rate on a long-term leased asset in your markets, Adam?
4.75%.
John?
Central Northern Jersey, it's 4.25%-4.5%. Lehigh Valley, you're 5%-5.25%.
Robert?
4.75.
Ryan?
By high threes, low four.
What are developers solving to for yields on new spec product today, John?
Northern Jersey, 5.5%-5.75%. Lehigh Valley, 6%, 6.5%.
Adam?
5.75.
Robert?
6%.
Ryan?
5%.
Rents in 2018, up, same, down, and by how much, Robert?
Up 3%-5%.
Adam?
Up 3%-5%.
Ryan?
Up 5%-15%.
John?
Up 5%.
Do you feel better, same, or worse about our business and growth opportunities today versus 9-12 months ago, John?
Better.
Adam?
Better.
Robert?
Better.
Ryan?
Better.
Gentlemen, thank you. With that, we'll turn to the next section of our program.
This past summer, we had an internal meeting for about a third of the company from around the country, and one of the things we did is we took a play on a ESPN favorite. For those of you that watch ESPN, "Pardon the Interruption," which is Tony Kornheiser and Michael Wilbon, they debate the world according to sports. We're going to forego the ding, ding after two minutes. We're going to keep it a little shorter. We'll do about two dozen questions, a minute each. Our panelists are a little bit more deferential than Kornheiser and Wilbon, I think there won't be a lot of interruptions, hopefully-
We'll see
you'll find it informative.
We'll see.
Yeah. Right. With that, can we Perfect. Our first category we're going to cover is investment. General feelings on supply and demand. I want to go around the horn and hit everybody here. Peter, what are you seeing?
Demand continues to be strong across the country, as I mentioned earlier in my comments. Space sizes, markets, industries, we feel really good about demand. Certainly, there are pockets of softness, overall, it continues to be very good.
In the markets I cover, demand, Atlanta, Houston, and the Florida markets will all have record demand. Dallas probably won't have a record, it'll still be over 20 million feet. They had 24 million feet last year. Chicago will be down slightly. They have not had a robust first half. It's still positive, and I expect it to be somewhere in the teens.
Jojo?
In the west, the severe entitlement issues, vacancy rates are very low. As you can see, the rental rate growth is huge. That just is a sign for strong demand-supply fundamentals.
Supply, as we talked about, is up, generally. Overall, from all of us, we continue to feel demand is exceeding supply.
Perfect. Our panelists just talked about where they saw cap rates very competitive. How can we buy in some of these markets? What are we seeing as a differential between A and B markets? Peter?
We continue to use our platform to source opportunities, whether that's leveraging a principal relationship, dislocation in some aspect of the deal. David covered a number of these properties. The deal that John Hanlon just talked about in New Jersey was a great opportunity from that. We're very sensitive to replacement costs. It's really looking for the opportunities with our platform to add value.
David?
Say, in most of my markets, 4.75 for the really good stuff. The exception would be South Florida, where there was a trade at 4.
Jojo?
In our markets, it's very, like Ryan had mentioned, we're trading it in the fours for well leased products. We're looking for properties where we've got advantage there. Lease-up opportunity, some vacancy to lease, some to redevelop and off-market.
Jojo, when you look at the FR portfolio, you go around the country, we've got a number of markets where our presence just isn't that big from a square footage or an income perspective. What's your thought on, do we just exit some of those markets? Do we stay in? What's the thought there?
Well, first of all, we're very pleased. We're about 97% occupied, 97.2% occupied. All the markets have strengthened. Some markets, though, are stronger, Bob, those are markets we'll continue to invest in. We don't have any plans. We have a platform that covers all our markets, we don't have plans to exit any market. We'll continue to do our portfolio management as much as we've done it a couple of years.
David, what do you think?
A good example would be like Orlando, where we had a fairly small presence. We've added significantly to it with four properties bought in Orlando in the last 24 months. We really like the fundamentals there, we'll continue to grow it. I think like Jojo said, we have some markets that are more income markets than they are growth markets. Right now, I don't see any of them that we need to get out of.
Okay, great. You look around the country, Peter touched on this earlier. Do you develop? Do you buy? How do we look at that dynamic, and what should we be doing?
The simple answer is we do some of both. Clearly our bias is to develop today. As Peter talked about, the proof in that are the great margins that we've delivered. We really do it for two reasons. One is the opportunity for better risk-adjusted returns, and Jojo certainly covered a lot of examples of that. Second, from a qualitative and a functional standpoint, we are very focused as long-term owners on building the high-quality, high-functional assets that are going to last through cycles. Whereas some of what you buy is by definition going to have some issues. We've certainly been disciplined on the acquisition side. We are replacement cost aware, so we're not big buyers of a lot of these assets that are trading at big premiums to replacement cost.
As you saw from some of our earlier slides, our teams across the country have been effective, buying in a disciplined manner, looking for those opportunities, and that's what we're going to continue to do.
Great. David, you think about investment. You look at buildings that are built 10 years ago, buildings that were built two years ago. What's changed? What's different? How do we look at them?
Significant changes. I'd say the biggest would be car parks. Industrial buildings didn't used to need that many. Now, with e-commerce, 300, even 800 car parks is not unheard of. Going along with that, trailer parks. Most of the retailers have gone to a one truck per store model, which means you got to have a lot more trailer parks. Clear height, obviously, is clearly different. Even five years ago, nobody was really building anything over 32. Now, everything over 400 is going to be 36, and I'd say in every market I'm in, somebody's gone 40, certainly for 1 million sq ft. The last thing I would mention is power. 5,000, even 9,000 amps is not unheard of because most of these tenants have fairly sophisticated materials handling equipment. That takes a lot of power.
Perfect. We're going to move to our next category, kind of staying on this theme. We're going to talk about development. Peter, phenomenon of a million-square-foot building is relatively new. What kind of legs does that phenomenon have? How long could this go?
There is a lot of demand for large buildings. We're seeing it in Southern California. Jo jo said 80 occupants of over a million feet. We're seeing it in Pennsylvania, New Jersey, Dallas. This is The Home Depot, Lowe's, Kohler, Ace Hardware, Walmart, Amazon, Wayfair, Kellogg's, Georgia-Pacific, Apple, Verizon, Starbucks. There's a lot of companies that are looking for efficiencies in their supply chain. Certainly, we're helped by the strong tailwind from e-commerce and direct fulfillment. Everybody sees Amazon leasing a lot of buildings, it's much, much broader than that. We tend to think Walmart.com is probably just at the front end of their build-out of their infrastructure. We continue to see a lot of interest and a lot of activity for larger buildings, primarily and particularly in the larger markets.
Jo jo, Peter touched on e-commerce, those tailwinds. What kind of buildings fit e-commerce?
Well, a couple of things. First of all, you got to determine what kind of part of the supply chain that e-commerce building is serving. Let's talk about last leg, last mile. That building, if you give them a box, basically a room for Uber Flash types drivers to drive through and some dock doors, they can service the last leg, last delivery. If you're talking about high sortation goods with a lot of SKUs, you go back to what David had mentioned, all this high clear, lot of trailer parking, lot of auto parking. In between, you've got parcel delivery companies needing a different kind of space. Across the spectrum, what you see is that a common need for aerospace, the e-commerce design is somewhat different depending on what part of the supply chain they're serving.
David, in the development cycle we're in, what are you seeing in construction costs? What's going on? What things are driving costs?
Construction costs are clearly up, but not as much as rents are up. The actual hard costs of construction aren't increasing as much as land values. The biggest impediment to development right now is increasing land values.
The other thing I would add to the cost conversation, it's not just cost, but clearly subcontractor margins are up. There's also capacity issues that we're seeing around the country where subcontractors and general contractors are committed. There's a lack of capacity, which is certainly impacting pricing. Also, there are some material limitations. As an example, in the Northeast, there's only so much precast panel capacity. Our new building that we're building at 78 and 81, and we got in line early for that slot, if you will. If you don't get in line, that can be a constraint as well, that in the end will impact costs.
David, I'm going to come back to you. A lot of conversation about big buildings, big bulk buildings. Is anybody building anything other than big bulk buildings?
Yes. It doesn't get the headlines because it's not as exciting. One of the reasons people would rather build a big building is it takes probably more work to build a 100,000 sq ft building than it does to build a 1 million sq ft building because you're more of a greenfield type site. Big box does not really work everywhere. Houston is not a big box market. It's a 200,000 sq ft market at the most. We really like the 50,000-100,000 sq ft market in Houston. I would say the same thing for South Florida. Some people have gotten hurt building 300,000 sq ft buildings that couldn't be broken up, and it's really a sub-100,000 sq ft market. Yes, people are building things that meet the market, and that's not always a big box.
Perfect. We touched on it before. Peter touched on it. You heard it from Ryan. Entitlements, NIMBY, "not in my backyard." Big issues there. Jojo, what are you seeing across the country with respect to entitlements?
It's getting tougher and tougher, and it's getting more expensive, and there's more challenges as well. In terms of NIMBY, more and more municipalities don't really think industrial is the best use for the area. Number 1, you've got traffic issues, and Number 2, you don't have sales tax dollars unless you've got an e-commerce company where they can tax direct sales from that facility. More and more industrial is not the most favored asset. That's actually putting a damper or slowing down supply.
David?
I would add to that the good sites, the e-commerce guys, Amazon, somebody like that, they want to be right next to the rooftops for distribution, and then everybody wants to be right next to the rooftops for labor. You can't just throw up a 1 million sq ft footer in a cornfield. You've got to get closer to the rooftops, and as you get closer to the rooftops, you get more and more opposition from both neighbors and from the city.
Peter, as you look at the development arena today, what competitive threats do you see? What keeps you up at night?
We have a lot of great competitors in our space for sure. I would say there are two things. One, on the entitlement issue that David and Jojo just talked about, it's getting much, much harder. It's taking much longer. It's not just the local land development approvals. It's the utilities. It's the stormwater permits. It's the Department of Transportation road improvements. Municipalities are starting to differentiate between a distribution user and an e-commerce user because, as David said, there's so much incremental traffic. It's getting more and more complicated all the time. I would say also from a supply standpoint, we've certainly seen an increase in new spec product from the merchant developers. We keep a close eye on that because some of them don't have a lot of risk that they're taking in those transactions.
Lastly, I would say the thing we always worry about is some kind of external shock to demand is probably what keeps us up at night most, given all the crazy things that are going on in our world.
Great. Jojo, Peter touched on merchant development. What are margins like for both spec product and build-to-suit product, and how do they differ?
They range a lot, Bob. There are some spec developers. If they've got an institutional partner, they might just do it for a fee. Basically very low to no margin for them, but for a fee. All the way to more opportunistic-type developers. We consider ourselves on that end. I would say it ranges from 25 basis points to maybe 150 basis points. So far, we've been fortunate. The rent's also been growing. In terms of the investments that we've made, we've averaged anywhere from 35 to 45. That's roughly 175 to about 200 basis points spread. Build-to-suit margins are low. The developers will do it for 25 to 50 basis points spread. That's about a 7%-10% profit margin.
Great segue. Want to ask all three of you the same question. We've been in a great development run. When's the party over? Peter?
We don't see any indications of demand slowing, but I would have to say that if national vacancies get north of 10%, which is going to take, I think, several years to get there. Even as supply increases, we still have a pretty good runway to push rents and as I said, a lot of demand. I think it's going to be a couple more years.
David?
I would say the same. You got to keep a close eye on supply and demand, and so far it's been an anomaly where supply has outpaced demand in any market. That has to happen for a couple of years before things really get tough.
Jojo?
The only thing I'll add is that just to be exact, supply has to exceed demand in multiple years to get us to 10%. Right now, we're roughly 5% vacancy across the market. That will take a lot. In five years, you have to have supply exceed net absorption by 100 basis points, and that's not in our forecast at all. It'll take a long time.
Great segue, Jojo. Thank you. When you look at development, let's look at the users. That's a big part of what's driving this market. What are you all seeing in trends with respect to logistics and supply chain management? Peter?
We're definitely seeing the e-commerce companies, but not only on the direct fulfillment side, but the return side, which is generally separate. That's been an incremental demand driver. A lot of automation from the companies, which is in part to combat labor and in part to improve efficiencies. Overall, robust demand from users of space. Everybody's networks are full. They need more space.
David?
I would just add more and more 3PLs. More and more people are going to 3PLs to do their distribution. Sometimes that complicates things because they don't always have long-term contracts.
Jojo?
Just watch investments making by the largest companies, the railroad companies. They invest in the railroad intermodal because they want to get more cargo. Look at the parcel companies, which we'll discuss later. Look for a big investment, and that's going to impact the trend as well.
Turning to one source of demand rather that was very prevalent pre-Great Financial Crisis, housing. David, what are we seeing from the housing-related users?
Well, the housing starts are still down, we have not had the great upswell of housing-related users in industrial yet. That may still come if housing starts ever rise. What you always have is the home improvement stores, Home Depot, Lowe's, whoever, and they're actually very active.
We've seen that, as I mentioned, with a couple of larger users. Kohler just took 1 million feet. Ace Hardware. When we talk about housing demand, we've seen carpet and tile and shower doors and windows and those sorts of things. We've seen a little bit of that, but not nearly as much as it was pre-recession. There's probably going to be some ups for that.
I'm just going to add, if you look at the do-it-yourself market and the one-off general contractor market for renovation, that's big. It's busy. Try to get one person to renovate your home right now. It's hard. There's just so much demand for that.
Peter, when you look around the country and in your markets, what are you seeing as the most active industries and then conversely, the least active industries?
It continues to be broad-based. We see a lot of 3PL activity, some of which is servicing e-commerce, some of which just traditional users. We're seeing food and beverage. We're seeing automotive. We're seeing apparel. We're seeing some of the home improvement companies that we mentioned, some of the traditional consumer products companies. I would say the telling thing is that all of this activity continues to focus on net growth. It's not just musical chairs. It's not just moving from 100 or 500,000 square foot building to another. I'd also say that we've not seen really any change in tone or tenor from prospect activity. Everybody continues to focus on growth and getting deals done. Some deals move quicker than others. We'd always like to see them move faster. It's pretty broad-based, and we haven't really seen any falloff anywhere.
David, as you look around the country and you look at the requirements, anything unusual that you're seeing from tenants in terms of what they're requesting or requiring in a building?
Not really. I think I went over it earlier. One thing we're seeing now, in addition to the car parks and the trailer parks, we're getting asked to do 70-foot speed bays rather than the 60-foot, which we did. I'd say that's a new phenomenon in the last 12 months. What we talked about earlier, the clear height, the power, the car parks, the trailer parks.
Jojo or Peter, anything to add?
We've had discussions with queuing lanes, meaning that how long the trucks would have to stay on a public road versus in your site. The cities are looking at that because if you get high distribution, they don't want trailers all along a mile of street. Discussion goes into when they go to planning, then how much of that can you queue on your site. That's a design consideration when you look at your building. Also, we're looking at free base, meaning no K-bracing , just free span base, which requires a different kind of construction.
For anybody that doesn't know what a speed bay is, it's the first bay from the loading dock wall to the first column line where all the product is moved and staged. 70 feet gives them more flexibility.
Speaking of moving product, let's talk about the parcel companies, UPS, FedEx. What are we seeing out of them? Anything new or different, or how are they reacting to the e-commerce phenomenon? Peter?
FedEx and UPS have been ample consumers of space the last couple of years, and we would expect that to continue. We've done three deals with UPS in the last couple of years, and Jojo will talk about the deal in Phoenix. They are very active. As a byproduct of e-commerce and the parcel carriers, the other thing we're seeing is there's a much bigger demand for corrugated and packaging material. Those users are growing and active as well. There's a big FedEx hub under construction in Lehigh Valley right next to the airport. Tenants, particularly e-commerce companies, like to be close to those, but it's a very significant part of demand. Jojo?
Jojo. Yeah. Voracious appetite. UPS, for example, voracious appetite for space. They said that they're going to invest $180 million giving expansion, high-level sophisticated sortation equipment, a spot for alternative fuels, and basically adding a lot of brown delivery trucks to our site that they just leased. Just to give you a sense on capital spending.
Okay, last question under users, the 800-pound gorilla in e-commerce, Amazon. What are we seeing? What are they thinking about with Whole Foods? What's their grand strategy? Peter?
We continue to see Amazon in almost every market around the country. They continue to have very active requirements of various sizes. They're really smart people. I'm sure they have a great plan for Whole Foods. I don't think we can speculate on that other than it seems to reinforce that bricks and mortar is a necessary complement to the online commerce.
Peter? I'm sorry, David.
One of the Whole Foods suppliers is actively out looking in several markets right now. Whether that's related to Amazon, I don't know. They are active. Amazon is active everywhere. In Atlanta, they took down three buildings in the last 18 months. Similar situation in Dallas. They've taken down multiple buildings. We don't always understand what it's for and how it fits into the master plan, but they're very active.
Okay, let's move to our last category, A. Bunch of different topics here. The first one, Jojo C-mall redevelopment. A lot of people are talking about it. Is there a play here for industrial?
First of all, we haven't seen a lot of it. There are some C-mall sites that basically have gone to the side, that have turned industrial, but not a lot of it. There's so many issues turning a C-mall to development. You've got NIMBY issues, you got entitlement issues. You've got existing leases by existing retailers. In a lot of C-malls, you don't have simultaneously expiring leases to try to get it and release it from those to turn into redevelopment. Also, municipalities, actually, industrial's the last use they would like to see in a C-mall. At the end of the day, they like to see higher and better uses. Office, retail, medical. In those cases, those three that I just mentioned to you, actually pay higher rent, too. Even the C-mall owners would like to see that.
David?
I've seen it done in both Atlanta and Dallas now. It is sort of a unique situation. Not every C-mall is going to be able to be redeveloped into an industrial building, but it has happened.
We say redevelopment, it's effectively level it and start over.
It's, yeah, leveled.
Just so we're clear. Next category, Houston. Houston had a big victory with the Astros recently, but it had Harvey, had oil prices. What's the outlook? What are you seeing?
Houston is doing amazingly well. Those of us who are old enough to have lived through the '80s oil crisis, this is not a repeat. Houston has still got job growth. Houston still has population growth. They've done 6 million feet of industrial absorption year to date. Last year, they did 6 million all year. I think they're going to hit a record this year. Our own portfolio in Houston, we're 99.6% leased. We've got very good rental rate increases. The last couple spaces that have come available have leased up in a matter of weeks. I'm very bullish on Houston. I think oil has stabilized, and we've been very fortunate in the Houston market, and I think it's going to continue to be a good market for years to come.
How did we get hurt in the flooding from Harvey?
We had no insurance claims. I don't think any industrial buildings really suffered because you remember everything that's dock high, the whole truck court's got to flood first. I don't know of any buildings that have long-term damage from the flooding.
Okay. We touched on Panama Canal, Peter, in your section. Jo jo, Peter, what are you guys seeing from it?
Ryan and John both touched on this earlier. We continue to see port traffic up on the West Coast and the East Coast. Certainly, the balance in port traffic has shifted a little bit more to the East Coast. When you look at consumption around the country, and demand for warehouse space, you need look no farther than Southern California or New Jersey and Pennsylvania, you see record low vacancy rates and very strong demand. We think it continues to be a positive across the country. Joj o?
Joj o?
Any time you have shipping that is more efficient before, that's only good for the consumer. When you go from a 5,000 TEU to a 14,000 TEU max at Panama Canal, you actually reduce the cost. When you reduce the cost, the American consumer can spend more. When an American consumer can buy more, it means more warehouses. It's good for the business.
Next question, David, a lot of conversation about driverless vehicles, driverless trucks. What are our thoughts on that? How do we view it? What are the impediments to it?
Well, it's a huge issue, and it's going to affect a lot more than just industrial real estate, depending upon how quick it comes and what the nature of it is. I think in our business, from what I've seen, the first thing that's going to come is driverless interstate trucking. The technology's there right now. You've probably seen some of the things about different people have delivered with driverless trucks. It really works well on the interstate. In the cities, not nearly as well. You've got the technology there already, and then you also have the biggest demand. You've probably all read there's a shortage of 100,000 over-the-road drivers, and nowhere to replace that. I think we'll see that first. How that's going to affect our business, it's really too soon to say.
Okay. Next question, we touched on it before, labor availability, both for users and for construction. How does that get resolved, if it gets resolved, and how are people reacting to it? Jojo?
A lot of users look at it. Again, labor is tight, and a lot of the users go to a market and do their labor study. Everything being the same, they'd like to locate where there's good labor. We have not, across the nation, have not seen any requirement not fulfilled because of labor. At the end of the day, distribution, labor is just a part of their cost structure, which includes transportation and includes real estate. We think it's an issue that we have to watch out for in terms of our underwriting when we go out there and look at it, but it hasn't really stopped absorption.
David?
It's a huge issue. It comes up on every deal. We get asked about the availability of labor. Robert mentioned it. It's especially prevalent in our South Dallas market. A lot of the stuff in South Dallas is getting built further east and further south, where there are no rooftops whatsoever, and you see users continuing to go further west and further north because of the availability of labor.
Our last question, it's fitting, it's the last mile. Jojo, what does the last mile mean? Does anybody really know?
In our local building acquisition earlier this year, we have a tenant that is one of the largest online service companies, they do have a last mile facility. We'll just share with you what we asked them. We asked them what's last mile? He said anything he covers up to 30 miles. His [specific asset] is 30 miles because he can deliver product in a couple of hours. For them, that's the last touch, last leg, and his site controls it. That may mean a lot of people, but in terms of this facility, it's up to 30 miles or the last shipment within a couple of hours.
Peter, David, anything to add?
I would simply say is, as you think about what we own and what we're building, as I mentioned earlier, features and benefits for the long term. Our view is whether it's last mile, first mile, anywhere in between, quality real estate that's flexible to service and accommodate a range of tenants is how we think about our business.
I just want to add one thing. Based on our research, to give you example, Amazon controls 104 million square feet. Only 9 million feet is last mile, last leg. Just to give you context of what they have and what they're growing.
Okay. That wraps it up. Peter, you want to come back up?
Can we stay in there a second?
Good job, gang. For the last 2 hours and 15 minutes, we've put a lot of information in front of you. It's a lot to digest. It also demonstrates that what we mean, again, when we say it's all about the platform. We have presented today and demonstrated very high energy, everyone that's been up here today. They've demonstrated energy. They've demonstrated knowledge, in-depth knowledge, not only about the markets, but how to compete and how to win. That's what we're all about, and that's our platform today. Just to remind you, as we said at the outset, the three takeaways for today, the portfolio transformation is complete. You heard a lot about what that means. You heard a lot about what our focus is going to be going forward. The change in the perspective from fixing to growing. The fixing is behind us.
We're all about net asset growth, responsible and profitable net asset growth. We're going to maintain discipline as we go about this, too. We have not forgotten the lessons of the past. Expense management, customer service, and taking care of business in the right way. We also showed you how we have the opportunity to drive 9% annualized AFFO growth through 2020. This is all made possible by the people that you've met with today and seen present today. Hopefully, when we're finished with the Q&A, you'll step aside individually and have a further conversation. We talked about the cap rate gap not being warranted. This information, I mean, information changes quickly, of course. This information is as of 10/30/2017. In fact, today, while we've been in the room, we crossed the new post-crash high for our stock, $31.91.
This is as of 10/30/2017, you can see the cap rates via Wall Street estimates and the gap that we think is unwarranted in our valuation. Lastly, again, with the platform, customer service. People laugh about it sometimes, but it really makes a big difference to us. The survey that we take, we get a lot of detailed survey from Kingsley Associates on the survey, and getting a 4.59 out of five requires you get very high scores from most respondents. We had one respondent that went down from a five to a two. In case you're worried about us pushing rents, they gave us a two because we raised their rent 54%. They didn't think that was very nice of us. On the other hand, they're in the building, and they like being in the building. Responsible growth and value creation.
That's what we're about now going forward. Again, we're constantly going to be looking to improve the portfolio, whether it's tenants or assets or locations. There's always something we can do to improve our portfolio. With respect to the balance sheet, the days of the past are forever gone. We're going to remain conservative with our balance sheet with solid access to capital at a competitive cost. With that, I will open it up for your questions and invite the senior team up on the stage. Thank you very much for spending so much time with us today. We hope we've inspired you. We hope we've inspired you to go be ambassadors for our story. We think it's an exciting one. Questions?
We have a microphone.
Hello? You guys have the chart of the declining TIs, and you touched on that a couple of times. I was wondering if you could talk a little more about what's driving that. How much of that is improved portfolio quality? How much of that is more the market being a little more landlord favorable, and you're able to push those costs onto the customers?
I think the way we look at it is the primary driver is going to be our portfolio reconfiguration. As we said, we've been very focused on selling smaller assets with higher office build-outs, which just by definition, are going to demand more of those dollars. Has the market helped the number? Yeah, it definitely has.
The other thing to think about too is that our higher occupancy level, there's less new leasing. As we said earlier, it costs us four or five times as much to put a new tenant in as renew a tenant. With higher retention and less new leasing, that's helping that as well.
I always want to add that The change in TI, market TI, has not changed that dramatically. Tenants expect a market TI per square foot, and it varies across markets. John, it has decreased slightly over time. Emphasizing Bob's point, major result that came from the portfolio reconfiguration.
Hi. For the 9% growth from 2017 to 2020, two questions. Is that on a per share basis, number one, and what's the embedded same store NOI assumption on an annualized basis?
I've got to do the disclosure about AFFO per share with the SEC. It's calculated. The growth rate's same per share as well, Mike, as far as the growth rate is concerned. Same store numbers, my guess is you're probably 3.5%-4% same store growth embedded in those numbers.
Should the U.S. walk out of NAFTA, which of your markets would cause you most concern?
I'm sorry, I couldn't hear the question.
If the U.S. walks out of NAFTA, which of your markets would cause you most concern?
Virgil, you want to talk? In terms of your duties, it's all about when you go on about NAFTA, it's just duties applied to goods. Overall, we have not seen any of our customers change their supply chain or change their future needs based on NAFTA. I will tell you right now that if you look at the export-import trade before U.S. and Mexico, right now, I don't see much effect as much as because we have been a bigger importer of actually a lot of stuff from Asia. The impact, we don't see that happening yet. If it does happen, then we'll see, but we're not seeing it from our tenants. From the Canadian point of view as well, if you look at the import activity, we're a bigger exporter, the import activity actually from Canada is pretty small.
The growth that you're projecting for AFFO, is that more front-end weighted versus later?
Well, Kevin, if you look at the pieces, I'm on page 15 of the slide book. Bumps are going to be ratable over the three years. TIs and CapEx will be ratable over the three years. Interest savings, I would say, are somewhat ratable. We've got that slide that supports that. Developments in process, that's probably going to be more front-ended, just because the developments will be completed sometime next year.
What's your estimate for mark-to-market fair for your whole portfolio?
Mark-to-market.
Give that-
We don't have your question.
Mark to market or increases in market rents.
Mark to market for the whole portfolio.
Kevin, we don't provide that.
Today's a special day.
We don't track it.
I would guide you to where rents are directionally. We continue to see pretty strong rent growth. As we all said throughout the day, given that demand continues to exceed supply, we feel good about the opportunity to push rents.
Kevin, if you look at market leaders gave us an idea, 3%-5% in most markets. Except SoCal, it's 5%-15%.
Any updates from the Quincy lease that's coming due? I think it's 2018.
Right. The Quincy lease, for those of you who aren't aware, is a lease we have expiring in Northeast Pennsylvania the end of March of 2018. That tenant is now owned by Amazon. We continue our discussions with them. We certainly expect them to stay. Can't give you any details given the confidentiality that that agreement has. Certainly, we look forward to updating everybody on the status of that as it develops.
Two-part question. New markets, thinking there are a couple of places that a lot of folks are that you may be assessing, New York, Miami, Bay Area, Seattle. Obviously, a lot of distribution going on in those markets. Secondly, who's your greatest competition to date? Is it other REITs? Is it private equity firms like Blackstone? Is it private users? Where's the competition coming from in those markets?
The answer to the second question is yes. The competition is coming from all over. Private investors, REITs, institutionals tied up with local developers, some wealthy families even. It's a pretty broad-based competitive set. In terms of markets, we are in the Miami market. We like South Florida. We'll invest more there for sure. You may have seen that we've hired somebody recently in San Francisco, so we're focused there and in Seattle. Northern California and the Seattle market are high in our hit parade. We're in those markets now. We hope to grow in those markets in proportion. Absolutely.
Could you give us any comments on the tenant quality, tenant credit, I should say, across the portfolio? How much of that was a discussion with the rating agencies over the last year or two?
Yeah. The tenant quality has been very, very strong. I get asked this question every quarter on the call. Craig Mailman's not here. He's probably dialed in. He's the one that usually asks it. Bad debt expense for the first 3 quarters of the year is probably $200,000-$300,000, and our revenues will be probably $390 million ± this year. That trend's been very strong over the last 2 or 3 years. The credit quality of the portfolio from a tenant point of view is very high.
It's also very.
To be honest with you, I don't think that's been a focus on any of the reports.
Our portfolio is also very, very granular. No tenant is a meaningful component of our.
Right. It's high 2%, is our largest tenant. It really hasn't been a focus on any of the reports the last several years. Maybe it was in eight, nine, and 10 with the great financial crisis, over the last several years, it really hasn't.
Thank you. I thought the comment on your portfolio transformation being complete, being interesting. Can you comment on asset sales? I can't assume that every asset is of super high quality that you want to keep for the very long term. Maybe you can talk about your pace of expected dispositions and how you would fund investments going forward.
As I mentioned, we're going to continue to focus on portfolio management. That's going to be a forever thing. That's never going to end. We're going to continue to reallocate capital away from assets that we think offer a lesser growth opportunity and redeploy into higher growth assets. In terms of sales and what we think we'll do next year, we'll give you that when we give our guidance. We're still looking at that.
Moving from that, can you talk about the ideal size of your platform? You have an equity market cap of $4 billion. Can you talk about what the ideal size is relative to the efficiencies you can gain from being a better landlord provider for your tenants than just maybe from a technology standpoint and just from, as you said, it's really tough to have a scalable platform, it seems like it'll be easier for you to get to a larger size than somebody starting from scratch.
We certainly don't feel disadvantaged by our $4 billion market cap. We can compete with anybody in the markets that we want to compete in. In terms of G&A, for example, we think we're pretty lean, but at the same time, we've got a lot of growth capacity within the number that we have today, so we can continue to grow. We have significantly strong access to capital, equity, debt, bank debt, bond debt, private placement. We think the opportunity for us, and as you've seen, we take a very granular approach. We're not a big volume shop. We don't need to be. If you are, you can't generate the kinds of yields on acquisitions and developments that we are. That's really the focus for us.
With the passage of time, that strategy may evolve, but right now it's working really well, so we're not going to change it.
Yeah. Scott, again. How similar should FFO growth be to AFFO? If you start with your mid-150s estimate for this year, it's out there, you apply 9% CAGR to it, you're north of $2 in 2020?
Yeah. Mike, what I would do is our midpoint FFO before one-time items this year is $1.55. Those items that Peter talked about are about $0.36 a share. There's going to be plus and minuses differences between AFFO and FFO, like straight line rent. You can use that as a guide to figure out where we'll be three years out. The growth will be less just because the FFO number's greater. If you apply the cash flow growth strategies to the FFO number, you'll get to the pretty close number of where we should be.
John. Yeah.
Yeah, John.
On the debt maturities, is there any opportunity to do some of those quarters or years in advance? Is there any thought to maybe paying the penalty just to lower interest expense in the near term?
No, the yield maintenance on Well, let me just say this, the loan that we're paying off, we're planning to pay off the first quarter of next year. We're paying it off three months in advance, there really aren't any opportunities to pay off loans years in advance unless you really want to pay a stiff penalty, which we're not going to do.
Okay.
Hey, guys. Question for David. When you look at the acquisition market, just given how strong it is, what kind of exuberance do you think exists in some of the underwriting assumptions, if any?
For us, there's no exuberance. We're perfectly rational. For others, yeah. Certainly. People are stretching rates beyond where we're comfortable. People are minimizing lease-up times. We see where other people report transactions, where they think they traded at, and yeah. People do what they always do when the market gets tight. They're getting aggressive in their underwriting assumptions.
Some investors look at the math that we showed today, they assign a zero risk value to vacancy. We're not doing that. We'll see. We'll see which strategy works better as we go through the cycle.
Among some of the things that you mentioned, what assumptions do you think are most sustainable, and which ones are the least sustainable? It seems like with the mark-to-market and strong market rent growth that a buyer would maybe have to trend rents 25% or more on a portfolio to win a deal. I'm thinking of where there's most.
Well, when we look at rent growth, we always use a historical average over a 20-year average. If in these hot markets you use the last three years, you will be up to 8%, something like that. If you use a 20-year historical average, you will rarely get above three, more like two and a quarter usually. Lease-up times can be something, too. If you think it is going to lease up in three months, obviously that is a lot of carry you do not have to have in your deal. We look at every deal, no matter how hot the market, that we are going to have at least 12 months of carry.
Yeah. We have a standard underwriting, 12 months downtime, historical renewal retention ratio of 70, 75%, market TIs, market leasing commissions, and rent growth, like David mentioned, based on historical, which may be more conservative than the current rent growth.
Thanks. A final question from me. I am not sure if you mentioned this in your presentation, you previously had that risk hurdle-
Yep
of $325 million. Is that right?
Yeah.
Do you foresee that changing in any form as you modestly grow, it sounds like, in the near future?
Right at $325 million. It was established a number of years ago, it was triangulated to be that number based on what it represented relative to the size of the company, as well as to the overall health of the balance sheet. It's a number that we constantly evaluate. We had a board meeting this week. We had another chat about it with the board. Right now it's $325, we'll see where we go with that.
On dividend growth, I think the copy you threw out there was 65%-70% by AFFO. Is that a reasonable number to go forward for the foreseeable future in terms of your payout ratio?
Look, I would say the dividend is determined by the board. We'd like to keep that payout ratio at that level or less. We have to manage the taxable income piece of it. Our goal is to invest as much of our excess cash flow into investments that we can. I think it's probably a pretty reasonable percentage to be at that ±70%.
Anybody else? Well, it's time to have a drink. Thank you very much for coming and spending so much time with us today. Again, please hang around for the next hour if you can, or two hours, and we'd love to continue the conversation. Thanks again for coming.