Good morning, and welcome to the First Industrial Realty Trust, Inc. third quarter results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star, then one. Please note that this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President, Investor Relations and Marketing. Please go ahead, sir.
Thank you, Cole, and hello everybody, and welcome to our call. Before we discuss our third quarter 2022 results and our updated guidance for the year, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans, and estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, October 20th, 2022. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements, and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release.
The supplemental report, earnings release, and our SEC filings are available at firstindustrial.com under the Investors tab. Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer, and Scott Musil, our Chief Financial Officer. After that, we'll open it up for your questions. Also on the call today are Jojo Yap, our Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Senior Vice President of Operations, and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now let me turn the call over to Peter.
Thank you, Art, and thank you all for joining us today. Our team delivered another strong quarter, highlighted by continued leasing success in our portfolio, including the exceptional rental rate growth we are capturing on lease signings related to 2023 expirations, which I will discuss in more detail shortly. We also started several new developments, including three buildings at our Phoenix joint venture, where we continue to build upon our success in the 303 logistics corridor. Due to our strong operating results, we're increasing the midpoint of our full year FFO per share guidance for the third consecutive quarter. Scott will walk you through the details during his remarks. Fundamentals in the industrial real estate market continue to support further market rent growth. According to CBRE, industrial vacancy was just 2.9% at the end of the third quarter.
Third quarter net absorption was 81 million sq ft versus completions of 101 million sq ft. For the first nine months of 2022, net absorption was 319 million sq ft, exceeding completions of 255 million sq ft. In our core portfolio, we finished the quarter with an occupancy rate of 98.3% and cash Same-Store NOI growth of 8.5%. We continue to achieve strong overall rental rate increases on our new and renewal leasing. Through yesterday, we have taken care of approximately 98% of our 2022 rollovers, and when combined with our new leases signed with 2022 commencements, our overall cash rental rate change is 25%.
With just a handful of 2022 rollovers remaining, we are set to achieve an annual company rental rate growth record for the third time in four years. Given the strong fundamentals in our business, our regional teams continue to push rental rates on new and renewal leasing for 2023 expirations. As of last night, we have taken care of 38% of next year's lease expirations at a cash rental rate increase of 28%. Our current outlook for the remainder of the 2023 rollovers is even better. For the remaining 2023 lease expirations, approximately 36% of net rent is from Southern California, versus a 24% net rent weighting for SoCal in our overall portfolio. We'll give you an updated view of our projected 2023 cash rental rate change on our fourth quarter call when we have completed our budget review.
We have also been successful in pushing contractual rental rate escalators in our leases. Our new and renewal leases with 2023 commencements, our average annual escalator is 3.6%. With respect to new development leasing, our tenant at the 219,000 sq ft building one at First Park Miami is doubling their space and will occupy the entire building, which will deliver in the first quarter. We also pre-leased 43,000 sq ft at one of the four buildings at our 344,000 sq ft First Loop Logistics Park in Orlando. Moving to our new development investments. In the Inland Empire, we started the 155,000 sq ft First Wilson Logistics Center two, which is adjacent to our first development there that we successfully leased in advance of completion.
Our estimated investment for the sister building is $29 million, with a projected cash yield of 10.5%, reflecting our attractive basis and the extraordinary rent growth in Southern California since we sourced this site. Including this start, our developments in process total 3.7 million sq ft, with an investment of $571 million. The projected cash yield for these investments is 7.4%, which represents an expected overall development margin of approximately 78%. The margin calculation now reflects a cap rate adjustment of approximately 100 basis points relative to our assumptions prior to the end of Q1. As I mentioned in my opening remarks, we are launching a new project in our Camelback 303 joint venture in Phoenix.
This follows the land sale we completed last quarter that netted us north of $100 million in gain and promote. The JV is developing three speculative distribution facilities totaling 1.8 million sq ft. The total projected GAAP cost of all three buildings is approximately $210 million, and the targeted cash yield is approximately 5.7%. The venture is using construction financing for a portion of the total project cost, so our share of incremental cash out-of-pocket spend for these developments is only about $20 million. On the acquisition side, in the third quarter, we acquired a relatively even proportion of land sites and existing buildings totaling $84 million. All were in coastal markets, including Southern California, Miami, and Seattle.
With these new development site additions, we continue to be well-positioned to support future growth with land holdings that can accommodate an additional 14 million sq ft. This represents approximately $2 billion of potential new investments based on today's estimated construction costs and the land at our book basis. Lastly, consistent with our strategic objective to derive 95% of rental income from 15 key logistics markets by the end of 2023, we sold the remainder of our holdings in Cleveland. The sale price was $107 million, which equates to approximately a 6.4% in-place cap rate on the sale. With that, I'll turn it over to Scott to provide additional details on third quarter performance and update you on guidance.
Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.60 per fully diluted share compared to $0.51 per share in 3Q 2021. As Peter noted, we finished the quarter with in-service occupancy of 98.3%, which is up 120 basis points compared to the year-ago quarter. Our cash Same-Store NOI growth for the quarter, excluding termination fees, was 8.5%, primarily driven by higher average occupancy, increases in rental rates on new and renewal leasing, and rental rate bumps embedded in our leases. Summarizing our leasing activity during the quarter, approximately 3.3 million sq ft of leases commenced. Of these, 700,000 sq ft were new, 1.2 million sq ft were renewals, and 1.5 million sq ft were for developments and acquisitions with lease-up.
Tenant retention by square footage was 65%. Moving on to the capital side. In August, we announced the closing of a new $300 million delayed draw term loan with a tenor of three years plus two one-year extensions, the proceeds from which will approximate the remaining costs to complete our current developments. The delayed draw feature allows us to borrow on this facility for up to one year from the date of closing. The new term loan has an interest rate of SOFR plus a credit spread of 85 basis points, plus a SOFR adjustment of 10 or 15 basis points, depending on the tenor of the interest period. As of today, we have not drawn down any funds from this facility. Moving on to our updated 2022 guidance per our earnings release last evening.
Our guidance range for NAREIT FFO per share is now $2.21-$2.25, with a midpoint of $2.23. This is an increase of $0.04 per share at the midpoint compared to our prior guidance. The increase is primarily due to better portfolio performance and an increase in capitalized interest due to our developments. Key assumptions for guidance are as follows. In-service occupancy at year-end of 98%-98.5%. This implies a full year quarter end average in-service occupancy of 98.2%-98.3%. Our occupancy guidance now reflects our 644,000 sq ft Old Post Road building in Baltimore will be occupied in the first quarter of 2023 based on the conversations we are having with our leasing prospects.
Fourth quarter same-store NOI growth on a cash basis before termination fees of 5%-6.5%. This implies a quarterly average same-store NOI growth for the full year 2022 of 9.3%-9.7%, an increase of 75 basis points at the midpoint compared to our prior earnings call. Guidance includes the anticipated 2022 costs related to our completed and under construction developments at September 30th. For the full year 2022, we expect to capitalize about $0.12 per share of interest, $0.02 higher than our prior guidance. Our G&A expense guidance remains unchanged at $34 million-$35 million.
Other than previously discussed, our guidance does not reflect the impact of any other future sales, acquisitions, or new development starts, the impact of any future debt issuances, debt repurchases or repayments, and guidance also excludes the potential issuance of equity. Let me now turn it back over to Peter.
Thanks, Scott. Industrial fundamentals remain strong, supporting high occupancy and rent growth, even while the financial markets sort through rising interest rates, high inflation, and extreme volatility. Our team is working day and night to serve continuing tenant demand with new best-in-class projects and drive long-term cash flow growth and value for shareholders. Operator, with that, please open it up for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we'll pause momentarily for the first question. Our first question today will come from Ki Bin Kim with Truist. Please go ahead.
Thanks. Good morning. Scott, can you talk about the guidance and the implied 4Q FFO guidance of $0.54? If you can just help us bridge the gap between the $0.60 you reported and the $0.54 in 4Q that's expected.
Yeah. Hey, Ki Bin hope you're doing well. Absolutely, I'll provide that. There's three main areas that are impacting the drop of our FFO per share from 4Q to 3Q. $0.01 of that is due to one-time items that we recognized in the third quarter related to NOI, so that could be tax true-ups, tax rebates we received or easement income. 3Q has $0.01 of one-time items that we are not recognizing in 4Q. $0.02 has to do with the third quarter property sales. Those happened in late September. Another $0.02 of that has to do with an increase in interest expense, primarily on our line of credit. Those are the three main drivers for the drop of our FFO from 3Q to 4Q.
Okay, great. A macro question for you guys. We've seen some major banks, especially the bulge bracket, starting to pull back from commercial real estate lending, which has led to some chopping of banks' participation in some of the REIT credit facilities. Some of this might be due to the government stress test and how CRE loans are treated. I'm just curious from your take, especially, like, Scott, you've been a CFO at FR for a long time, and Peter, you had a great, interesting background in banking at JPMorgan. I'm curious about your take on all of this, what you're seeing and how this might all play out.
Want me to go first, Peter? Well, hey, Ki Bin, I would say that, you know, the bank term loan market is drying up. I think our deal that we inked in the middle of August is probably one of the last deals that you're gonna see for a while. I think you're right. A lot of it has to do with stress tests that banks are undergoing in the third or fourth quarter. My guess is that market's gonna be closed probably for the next couple of quarters. Maybe it opens up in early 2023. I have a feeling if I was a bank, I would probably increase the spreads a bit, though, compared to what our deal was that we closed in August. Peter, do you have anything to add?
I think at a macro level, if you were to ask the CEOs of these big banks, they would express significant frustration with how high the capital requirements are. It effectively takes them out of the market at a time when their customers need them most. That's a point of frustration after some conversations I've had with some of those people. Bob, do you wanna talk about the availability of construction finance too?
Yeah, I would say, you know, availability, frankly, is kind of the key right now. We're seeing a lot of banks clearly pull back, Ki Bin Kim, as you alluded to, through at least year-end on even looking at new business and heard a lot of stories of people of banks pulling term sheets that they had outstanding. Availability for construction financing is key and very difficult right now.
Got it. Thanks. I'll jump back in the queue.
Our next question will come from Rob Stevenson with Janney. Please go ahead.
Good morning, guys. Given those comments, how would you characterize the market for dispositions today? Presumably, the assets you sold in the third quarter were marketed a while back. What's the sort of pricing today, and what's your appetite to do more dispositions over the next few quarters in the current environment?
Sure. Yeah, I mean, we're very pleased with the execution we got on Cleveland. The team did a great job in what obviously is a rapidly changing investment sales market. We do have appetite for additional dispositions. It just depends on what we find when we go out with assets, in terms of pricing. This is good real estate at the end of the day. It's very solid. It's by and large, 100% leased. We're not gonna be, you know, letting the stuff go cheap. We'll see where the markets are. We do know that there are literally, $ billions of new funds coming into this space looking, to gain exposure. Funds are forming as we speak for this purpose.
I'm not sure if they're forming because they think there's going to be distress or not, but given the size of the dollars involved, I have to believe they expect regular way, what I would call regular way purchases. Yes, we have appetite for sales, and we think there's gonna be a lot of capital out there. We'll just have to see what the pricing looks like.
I guess the alternative here, the expected stabilized cap rate on the current development pipeline is 7.4%. When you factor in land costs today, current development costs and current rents, where do you think the projects that you're gonna start in the next six-12 months are gonna average out? About the same, a little bit skinnier on the yields, a little bit better on the yields? How's that likely to flesh out?
Jojo, you wanna comment on that?
Well, yeah. You know, thanks for quoting that number. We're very, very pleased about the profitability and the margins and the creativeness on those projects because they clearly are, you know, great sites as well. You know, the function of that is rising rates and our real good basis. We actually have not done mark-to-market, you know, kind of computation of that. What we report is what we as a company and shareholders are gonna get based on our, you know, our basis. You know what? I mean, the fair market values of the land today are, of course, higher than our basis, so the cap rates, you know, is going to be lower than 7.4%.
You know what? We haven't really done that math.
Okay. For stuff that you're gonna start, I mean, if we're sitting here a year from now, is the cap rate, you know, the expected stabilized cap rate on that development pipeline, you know, about the same, a little bit less, a little bit more? How do you characterize that when you're looking at where development costs are going and your ability to lock in pricing on materials and labor today, as well as what's whether or not there's been any, you know, increased softness on land or whether or not land is still, you know, very expensive, et cetera? How does that sort of play out?
Yeah. Well, it's really hard to forecast yields. You know, we'll report to you once we are ready to start development what our projected yields are. I think that's a more accurate way because you know, there's various variables, like you mentioned, you know, building costs, and you know, where the rents are. You know, one thing I'll tell you is that if you look at our land holdings, you know, in almost every market, rents have increased and are increasing faster than construction costs. You know, if it actually stays the same, then the yields would be very attractive. You know, we'll give you a sense when we start new projects.
Yeah. Don't forget, Rob, we've got about $2 billion of investment opportunity in our current land holdings. The yields, as Jojo points out, are difficult to project right now. With rents growing the way they are, we certainly like our prospects.
Okay. One last one for Scott. The term loan basically removes the need for you to access the debt markets in the foreseeable future, or, are you gonna be looking to do anything, over the next six months until things sort of calm down?
Rob, I would say a couple of things. From a debt maturity point of view, we have nothing coming due to 2026, assuming you give us credit for the options, extension options we have in our line. The development spend that we need to complete our developments is about $350 million. When you look at the liquidity we have in our line of credit, the term loan, which is $300 million undrawn and cash flow and earnings next year, it's about $700 million. It's about double of what the requirements are needed to complete the developments, and that doesn't even include any sales proceeds. I think we're in very good shape from a liquidity point of view.
More than enough to fund any sort of first half of 2023 development starts.
Absolutely.
Okay. Thanks, guys. Appreciate the time.
Our next question will come from David Manthey with Baird. Go ahead.
Yeah, good morning, everybody. Wanted to follow up, Peter, on your comment in your opening remarks about just kind of the financial market sorting out inflation and higher interest rates. I guess I wanted to get your thoughts maybe on just the overall economic environment and positioning potentially for any type of recession. You obviously have the speculative leasing cap, which is good, or the investment cap, but can you talk about kind of how you wanna position the company for potential slowdown in activity, whether that cap gets reduced further or whether you might wanna just have more slack in that, or even taking that to the next step, are you seeing any reasons to be more cautious as you look forward?
Right now, all of the markets that we're targeting are pretty tight. There's unmet demand, so the fundamentals remain strong. Clearly, we're keeping a close eye on what's going on with the rest of the economy. You know, we're juggling like everyone else, what we think is coming in the way of consumption on the consumer side as well as the volatility in the capital markets. With respect to our cap, you know, we're really not focused on the cap. Remember, the cap is just that, a cap and not a target. Our geographic functionality and risk-adjusted return requirements drive our investment decisions, not the level of the cap. You know, we're very pleased that we have this great growth opportunity on the balance sheet today.
Of course, we're going to be driven primarily by that risk-adjusted return opportunity and what happens in the broader market. In terms of positioning the company, we have a rock-solid balance sheet. We're going to maintain that rock-solid balance sheet, and we're gonna fund ourselves properly and adjust our growth as the market requires.
Maybe to the second point of that, are you seeing any reasons that you would wanna slow down development or be more cautious, whether that's kinda gestation time of leases or just fewer people showing up for, you know, for those leasing negotiations than maybe a year ago?
Well, the number of prospects that we have looking at our new opportunities is significant. You know, comparing it to, say, six or nine months ago would clearly be a tough comp. Those were the best days probably in the history of this business. We don't really see any reason right now to slow down per se. We're excited about what we have in the way of prospects and the opportunities that are out there to capture this tremendous rent growth in the coastal markets and the value creation that comes from it.
Great. Maybe just last for me and going back to Old Post Road, looks like it was delayed to the first quarter. Is there more clarity around the first quarter, or is that just not happening in the fourth quarter?
Sure, David. It's Peter Schultz. Good morning. Our discussions with our prospects continue. As we talked about on our last call, our expectation was occupancy would happen in the fourth quarter. The primary prospects are both third-party logistics providers, and their discussions with their customers are simply taking longer. There's certainly the possibility that it happens in this quarter, but we think it's more likely at this point that it's the first quarter. Our estimation was prudent to make that adjustment. Now, having said all that, the building's positioned for immediate occupancy, and tenants continue to have very few choices in that sub-market. It's on us to get this done, and the team's very focused on it.
Thanks, everybody.
Thanks.
Our next question will come from Nicholas Yulico with Scotiabank. Please go ahead.
Hey, good morning. This is Greg McGinnis. I'm with Nick. Just looking at the dispositions, there was a 60 basis points increase in cap rates in Q3 versus 2021. How much of this increase reflects Cleveland versus just general market rate increases? If you could also comment on potential cap rate expansion more broadly, that'd be appreciated.
I'll start this, and Jojo and Peter can jump in. In terms of cap rate movements more broadly, as we mentioned in the opening remarks, we, for our own purposes in terms of looking at margins, have increased our cap rate assumption by about 100 basis points. When it comes to a discussion of cap rates, it's really a sub-market by sub-market conversation. Certainly in the fastest-growing sub-markets, i.e., fastest-growing rents in, say, Southern California, cap rates haven't moved a whole lot, and in other markets, they've moved more. Jojo, you wanna comment on that?
Yeah. I mean, you know what? It's a different mix, so it's really kinda like Peter said, you know, you can't really compare quarter to quarter because there's a mix of different product and different weighted average lease terms, you know, different occupancies and different sub-markets. You know, I wouldn't compare quarter to quarter because, you know, in fact, it's not really that efficient. You know, again, you know, we're very pleased with the execution we did in Cleveland. And we'll be able to reallocate that to higher rent growth markets.
Okay. Thanks. Just touching on those margins in the development pipeline, has underwriting been adjusted in any other way besides that, you know, kind of a 100 basis point increase that you spoke about? Also, if you could just touch on what cap rates you're actually using, you know, I'm especially thinking Inland Empire versus elsewhere, that'd be appreciated.
Our underwriting hasn't really changed. We're still using the same conservative, or at least what we think is conservative inputs in terms of 12-month leasing downtime and moderated rent growth versus what we're seeing in the markets. Cap rates.
Yeah, basically, absolutely the same underwriting. If you just do the math, I mean, it's there, right there in terms of our investment and our reported margin. It imputes to a low 4 cap rate. I just wanna emphasize, and you probably know this already because it's right there, about 62%-63% of the development pipeline you're seeing is Florida and SoCal, which has both, one of the lowest cap rates in the nation. We're very pleased with this pipeline. You know, we've not had this high of a concentration in two of the most active markets, in the U.S.
All right. Just to make sure I understand, you're basically saying that, like, I think it calculates as a 4.2 cap rate, would be the exit cap rate in kind of Florida. Sorry, South Florida and Inland Empire?
Yeah. It would be lower because that's only comprised 62%. The 62% in Florida and SoCal is a component of that low 4.15 cap rate, you know. SoCal and Florida would be lower, and the rest of the 32% or 33% would be a little bit higher.
Oh, okay. I mean, it seems, honestly, it seems a bit low based on debt costs, but I'm sure you guys know the market much better than I do. Thank you for the clarity.
Yeah. Well, yeah, a couple points on that. You know, a lot of investors, especially the most active ones, today, are the lower leverage investors, and they're looking at total return.
Right.
You know, they're looking, the market's looking for a total return of maybe 6.5%-7.5%. Clearly, given the rent growth you can in these markets that I mentioned, you can exceed those with those cap rates.
Great. Thank you.
Our next question will come from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Hi, thanks. Good morning. I just wanted to touch on the 2023 expirations where, you know, you made significant progress and mentioned that the cash rent spreads bumped up to 28% from 20% on the last update last quarter for what's been signed. You know, and you indicated that the spreads would actually get better. You know, any sense of what you're projecting for the balance of the expirations, what you're seeing in the Southern California portfolio there and sort of what you're projecting for the year in terms of rent change, if you could maybe sort of bookend it a little bit?
The potential uplift there is pretty significant. We haven't finished our budgets, and that's why we're not gonna put numbers out there. I think what would give you a pretty good indication is for Jojo to talk about the last few leases that we signed so that you can see what we're achieving.
Yeah. Thanks, Peter. The most recent leases in L.A. IE that we've done, there's three leases, two in South Bay and one in IE. The square footage range from 40,000 sq ft to 140,000 sq ft. The rent change on those leases, the range was 90% to over 200%. Rent change. Cash.
Mm-hmm. Okay. Is that, you know, sort of indicative of what we should think about for that portion of the expirations, which I think you said Southern California represents about 36%. Is that right?
Well, we're not gonna.
Those are just three examples. You'll have to, you know, come up with your own thoughts on what it's gonna look like. We can't really guide on that.
Okay. Got it. Scott, tenant recoveries were up meaningfully in the quarter. Your expense reimbursement ratio was up almost, I think, 500 or 600 basis points, around 89%. I think you mentioned there were some tax true-ups in the quarter. Was the increase, you know, solely related to those true-ups or is, you know, is that going to revert back to, you know, call it 83%-84%, or is some of that increase perhaps sustainable?
Yeah, when you looked at three months and nine months, same-store expenses were up. What I would say, Todd, is due to the fact that we're highly occupied at over 98%, pretty much almost dollar for dollar we recovered back, so there hasn't been much leakage on that. As far as next year is concerned, you know, you're probably gonna see some pressure in real estate taxes like we have the last couple of years in the way up. You know, we'll have a better idea of that in our fourth quarter call. I think the one point you wanna take away is that the increase in expenses, again, was pretty much recovered dollar for dollar from our tenants because of the net lease structure.
Okay, got it. Then, just sticking with NOI, or same store NOI growth, you know, I realize you have a difficult comp in the fourth quarter. You know, you have a couple of difficult comps coming up. You know, can you talk about that a little bit? You know, I realize you're not providing 2023 guidance, but maybe some insight around the trajectory, you know, of same store NOI growth here as we, you know, sort of think about the next few quarters and sort of how the year starts out, maybe. You know, I guess Old Post Road is maybe a factor. You know, I'm really curious, just given the volatility in that metric for you and sort of what you're seeing potentially.
This is Chris. I think you're first referring to kind of the deceleration from 3Q to 4Q. If you look at, you know, 4Q, our midpoint is 5.75%, which represents about 275 basis points decrease. It's really due to 150 basis points due to some free rent burn off on some our free rent given on some larger new leases. Then the other 100 basis points is really a swing on. Scott kind of mentioned about some real estate tax refunds and true-ups that happened in the third quarter. That swing from 3Q to 4Q is about 100 basis points difference.
Yeah. Then, Todd, when you look at 2023, this is not guidance because we gotta still go through our budgets, but I'm not gonna comment about occupancy, so we still have to go through that. We talked about the Old Post Road that we, you know, gonna lease that up by the first quarter. Free rent, we'll have to see how that burnout works out. If you look at the other two main components of rental rate bumps and rental rate increases on new and renewal leases, and I'm just using roughly a 30% increase next year of cash rental rates, which we talked about in our script. We think it's gonna be higher than that. You're at least gonna have a six handle just from those two components for same store.
We'll update you on a fuller number that takes into account occupancy and free rent burn off on our fourth quarter call.
Okay, great. That's helpful. Thank you.
Once again, if you would like to ask a question, please press star then one. Our next question will come from Rich Anderson with SMBC. Please go ahead.
Line is open.
Sorry about that. I guess my headphone's not working. Can you hear me now?
We can.
Okay. Thank you. Get back to the capital raising question. You did the delayed draw, and I know you ran through the math, the debt maturities are or non-existent for a while, and you went through the development spend. Are you sort of lining up some options, say six, 12 months from now, assuming the world does indeed come to an end? You know, these forms of capital start to become you know lesser elements to the story. Is joint venture partnerships more in the way of dispositions sort of on the horizon, at least thinking about it now to be prepared for whatever might come our way six, 12 months from now?
Certainly, we're gonna be opportunistic and consider all forms of potential capital raising across the spectrum. Obviously, if the world comes to an end, we won't be investing anyway.
We have liquidity problems.
You know, thinking about a darker scenario, we have spent the last dozen years creating a rock solid portfolio. From a credit standpoint, I think 2020 was reflective of how strong that is in terms of the fact that we collected all of our rents during COVID, that COVID year, and I'm not sure anybody else did. We've got this rock solid balance sheet with plenty of debt service coverage, access to all forms of capital. For us, it's trying to arbitrage those forms of capital to make sure we're funding ourselves as cheaply as possible. That's really the game plan.
and/or slowing down the development starts business obviously would be.
Correct.
the option.
We don't feel that's the case now, but certainly that would happen if, as you point out, darker days come.
Right. Second question. I think it was Johannson Yap who mentioned something like 100% rent change on, you know, some areas of the country, which is great, but also a vestige of what has happened over the past few years. I mean, how are you monitoring this in terms of it just kind of flushing itself out of the system with each passing, you know, renegotiation, re-leasing event?
Do you see that you have multiple years ahead of you of well ahead-of-trend type of cash leasing spreads or is this something that maybe has a shorter sort of shelf life to it at this point, and may, you know, start to think about guiding the communication down a little bit so that people aren't, you know, over their skis from an expectation standpoint?
I think cash run rate increase, he's asking about cash run rate increases in 2024 and 2025.
Well, you know, our job is to, you know, with our quality properties is really to, you know, get the best economics from each deal. You know, a lot of the rent growth is really a function of, you know, supply and demand. You know, so for example, if you go to the Inland Empire in L.A., demand is very, very strong and continues to be forecast to be strong. Then, you know, you have that, and you then juxtapose that with the lowest vacancy rate in the whole U.S. at 0.5%, in some markets 0.2% or 1%, then, you know, what you have is, you know, tenants don't have options really, and then, you know, they have to pay the rent.
Also remember, long term, today, real estate really only comprises anywhere from 5%-6% of total logistics costs.
Yeah.
If a third-party logistics provider or e-commerce company, all the other users need the service, you know, our costs pale in comparison to transportation costs and labor, but they still need the real estate. Of course, that varies market by market, but that's what we're charged to do. We always monitor or keep an eye on supply and demand.
Don't forget, where we start today is completely different from where we started as an industry, say, before the Great Recession. We're at 2.9% vacant. Back then, we were closer to 8%. Everybody's portfolio today is much better than their portfolios were back then. We have recurring cash flow, which back then it was really cash flow in quotes from the sales of assets. You know, we're in a much better position right now to weather any kind of a storm. As Jojo pointed out, tenants don't have alternatives still today. There's unmet demand, especially in the coastal markets, and that's where we're focused.
I mean, I guess I would say, you know, using that history lesson, there's the potential that vacancy rates can go up substantially as you just pointed out, you know, 8 versus 3. You know, using that history, are you stress testing the model at all about obviously things were different? There was much more spec development back then. Do you look at how FR performed, you know, 10, 12 years ago and try to sort of draw some conclusions of where things could go now? Is it just apples to oranges in your opinion?
It is apples to oranges, but a couple of thoughts on that. One of the things that we saw back then, so this is 2008, 2009, is that the vacancy rate had to get pretty high before the balance of power, if you will, between landlord and tenant changed. That's kind of low 90s. That would be in a specific portfolio.
We're obviously a long way from that. That gives us confidence that this rent growth that we're seeing is gonna continue for some time. Don't forget, e-commerce today is a much, much bigger component of the equation than it was back then, and that is a bit of an economy within the economy, if you will.
Yep. Fair enough. Thanks very much.
Our next question will come from Anthony Powell with Barclays. Please go ahead.
Hi. Good morning. I have a couple questions on the developments that are completed but not in service, that's in Colorado and Tennessee, that aren't leased yet. How are your conversations with tenants around those assets? Generally, in the development pipeline, should we expect a bit more downtime between completion and leasing, given kind of the environment here?
This is Peter. I would first say that overall demand continues to be very good across our development pipeline, both completed and under construction. As Jojo commented earlier, multiple prospects on most of our spaces. To your specific questions on the buildings that are completed. In Nashville, we're trading paper with a prospect there. In Denver, that's in our park. Our experience in Denver is activity picks up as the building is completed, and we've seen exactly that, a couple of fresh RFPs and proposals out there. Then lastly, in Miami, at our first park, Miami, we have only 66,000 sq ft remaining in what's completed, and we have a lease out on that space as well. Jojo, you wanna talk about Seattle?
Sure. Yes. In Seattle, we're responding to proposals back and forth with multiple prospects. In your comment on downtime, you know, we've not changed our underwriting to one year. On average, you know, we've been beating that. We're well inside of one year, you know, closer to half of that. In terms of adjusting, you know what? We will not forecast, you know, where we'll end up, but we have comfort in terms of our underwriting of giving it a year. I will mention to you in terms of the development pipeline, you'll see about 64% of that in dollar volume is not scheduled to be completed until 2023.
We have plenty of time, and already we're getting inquiries on that. Remember, again, like I've mentioned. Well, we've mentioned, our team have mentioned, about 62% of that pipeline is in the tight markets of Florida and I&E.
Yeah. Thanks for that. Maybe just generally, obviously, you're pretty positive on the demand outlook. Has anything changed over the past three months in terms of tenant demand, tours, just commentary around your tenants? It seems like things haven't, but you know, just maybe you know, a broader just discussion about that and how you think that may evolve the next several weeks. I know you can't predict the future a hundred percent, but it sounds like things are still pretty good.
You're getting into pretty micro timeframe given the long life assets that we have here. I know what you're trying to get at. No, the mood or the tone hasn't changed. By the way, big companies take a long time to make decisions. That's just the way it is. That hasn't changed either, and but we haven't seen a change in the tone or the mood. There's still a sense of urgency on the part of anyone who didn't grow in 2020 and 2021 to grow now. I mean, to grow the supply chain and their footprint now. You know, the conversations are robust.
The other thing I'd add to that, Anthony, is as you think about tenants that have moved out of our portfolio, it's in many cases because they need more space that we're not able to accommodate, given our high occupancy level. We've for the most part backfilled those spaces very, very quickly at much higher rents.
Right. Thank you.
Our next question will come from Michael Mueller with JP Morgan. Please go ahead.
Yeah. Hi. I think you mentioned you were getting about 3.6% rent bumps on the 2023 lease signings. How does that compare to what you achieved on your 2022 signings? Where does that put the overall portfolio kind of today?
Yeah. If you compare 2022, we got 3.3%, so that's up about 30 basis points to 2023. If you look at the in-place on the overall portfolio, we're right now at about 2.9%. Obviously, those numbers are definitely increasing and going up.
Okay. That was it. Thank you.
Our next question will come from Bill Crow with Raymond James. Go ahead.
Hey. Thanks. Good morning, guys. Any changes to the watch list on the tenant side? Thoughts about bad debt reserve for next year?
Hey, Bill, it's Scott. The bad debt expense for the third quarter was $188,000, so very low. Year to date, it's $25,000. That was aided by a $250,000 payment for a prior reserve balance. No material tenants on the watch list. As far as next year is concerned, we're going through our plans and our budgets. All depends on the economy. But where we stand today, no material issues of credit concern.
Thanks. You've talked a lot, and for good reason, about Southern California, Florida, some of those markets, Seattle. What about markets like Phoenix and Texas as we look to next year in terms of the supply-demand balance? How do you see those markets playing out?
Jojo, you wanna take that?
Sure, Bill . Hi, it's Jojo Yap. In terms of Dallas and Phoenix, they've actually performed really, really well this year, you know. They're actually the top four and five markets in terms of year-to-date net absorption. Dallas, 19 million sq ft net absorption year-to-date. Phoenix, 21 million sq ft. Vacancy in Dallas is record low. You know, in my 30 years of being in the business, never been this low, 3.8%. In the last 30 years, Phoenix has never been this low at a vacancy rate of 2.7% Phoenix, okay. You have two markets right now that have robust in-migration and with low vacancy rates. You know, that's the reason why Dallas and Phoenix have continued to, you know, have robust rent growth.
There is supply coming in, and you know, one note on our building, you know, that we're building in Phoenix, we think we have the best product out there, bar none. The most active market is 303 corridor. If you go out there and ask everyone who has the best project out there, it's the three buildings that First Industrial's building. We're very proud of it from a highway exposure point of view, from a space plan point of view, and access to how close it is to 10 and 303 interchange. By and large, you know, we'll be keeping an eye on the supply, but right now, the demand and the supply and the vacancy rate are all favorable for Dallas and Phoenix.
Great. Thanks for the comments. That's it for me.
There are no further questions at this time. I'd like to turn the conference back over to Peter Baccile for any closing remarks.
Thank you, operator, and thanks to everyone for participating on our call today. We look forward to connecting with many of you in person in the coming months. Be well.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.