Good day, welcome to the First Industrial Realty Trust, Inc. fourth quarter results call. All participants will be in 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, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Art Harmon, Vice President of Investor Relations and Marketing. Please go ahead.
Thank you, Dave. Hello, everybody, and welcome to our call. Before we discuss our fourth quarter and full year 2022 results and our initial guidance for 2023, 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, February ninth, 2023. 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 GAAP non-GAAP financial measures discussed on 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 which, we'll open it up for your questions. Also on the call today are Johannson Yap, Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Senior Vice President of Operations, and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now let me turn the call over to Peter.
Thank you, Art. Thank you all for joining us today. The First Industrial team delivered another excellent performance in 2022. We ended the year with in-service occupancy of 98.8% and achieved an annual cash rental rate increase of 26.7% on our 2022 commencements, both our First Industrial records. The end result was an FR record-setting annual increase in cash same store NOI of 10.1% that Scott will discuss further in his remarks. Fundamentals in the industrial real estate market continue to support further market rent growth in our target markets and within our portfolio.
According to CBRE EA, industrial vacancy was 3% at year-end. Fourth quarter completion of 113 million sq ft exceeded net absorption of 91 million sq ft. For the full year, net absorption was 412 million sq ft versus completions of 370 million. Given this backdrop, we are off to a strong start signing leases that commence in 2023 at very healthy increases. As of last night, we are through 50% of this year's lease end, which is already ahead of our 2022 pace.
With four of the five largest remaining lease expirations by net rent in the Inland Empire, our current outlook for cash rental rate changes for the full year 2023 is 40%-50%. Moving to our new development activity. In Orlando, at our First Loop project, we signed two leases totaling 126,000 sq ft to bring that project to 49% leased. At First Park Miami, we also leased the remaining 66,000 sq ft at buildings nine and 11, bringing those two buildings totaling 333,000 sq ft to 100% occupied. We continue to see good activity in both of these Florida markets.
During the year, we placed in service 4.1 million sq ft of developments, representing a total investment of $448 million, all 100% leased at a cash yield of 6.6%. We have 1 new start to announce, our First Stockton Logistics Center in the Central Valley of Northern California, the prime location for large format buildings. There, we are building a 1 million sq ft distribution center to serve the San Francisco and East Bay markets, where the supply of large buildings is constrained. Our estimated investment is $126 million, with a projected cash yield of 6.3%.
Including this start, our developments in process total 3.6 million sq ft with an investment of $556 million. The projected cash yield for these investments is 7.3%, which represents an expected overall development margin of 75%. With respect to dispositions, in the fourth quarter, we sold a 581,000 sq ft facility in Minneapolis for $54 million at a stabilized cap rate of 5.3%. As part of our continual portfolio management efforts, our sales guidance for 2023 is $50 million-$150 million.
The guidance range is a bit wider than in the past, which reflects the continued price discovery dynamic in the investment sales market. Before turning it over to Scott, given our performance and outlook for growth, our board of directors has declared a dividend of $0.32 per share for the 1st quarter of 2023. This represents an 8.5% increase from the prior rate and a payout ratio of approximately 70% based on our anticipated AFFO for 2023, as defined in our supplemental. With that, I'll turn it over to Scott to provide additional details on our performance and our 2023 guidance.
Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.60 per fully diluted share, compared to $0.52 per share in the fourth quarter of 2021. For the full year, NAREIT FFO per share was $2.28 versus $1.97 in 2021. Our fourth quarter and full year 2022 results include income related to the final settlement of insurance claims for damaged properties. Excluding the approximate $0.01 per share impact related to these claims, fourth quarter and full year 2022 FFO per share was $0.59 and $2.27, respectively.
As Peter noted, we finished the quarter with in-service occupancy of 98.8%, up 70 basis points compared to the year ago quarter. Our cash same-store NOI growth for the quarter, excluding termination fees and the income related to the final settlement of insurance claims that I previously discussed, was 7.6%. This was driven by higher average occupancy, increases in rental rates and rental rate bumps, slightly offset by an increase in free rent. As Peter mentioned, our 10.1% cash same-store NOI growth for the full year, calculated under the same methodology, was a company record.
Summarizing our leasing activity during the fourth quarter, approximately 2.1 million square feet of leases commenced. Of these, 700,000 were new, 1.2 million were renewals, and 300,000 were for developments and acquisitions with lease up. Tenant retention by square footage was 81%. Moving on to the capital side. On November 1 st, we drew down all $300 million of the term loan that we closed in August. We were successful in putting in place swaps to fix the all-in interest rate at 4.88% beginning in December.
Once again, our only variable rate debt is our line of credit. Before I move on to our initial 2023 FFO guidance, I would like to comment on a topic that we have been asked about recently by the investor and analyst communities. The parent company of one of our tenants has been in the news recently. As of the fourth quarter, ADESA, a leading auto auction and related services provider, accounted for 1.8% of our rental income. ADESA was acquired by Carvana last year, and Carvana has been facing some challenges in its retail segment.
For those newer to the FR story, we did a sale leaseback transaction with ADESA about 14 years ago for seven valuable locations critical to their operations. These are leased until 2028, after which they have two additional 10-year renewal options. Let me also add that ADESA is current on its rent obligations. It is helpful for you to know that we believe that our basis in this land and current rents are both well below market and that the majority of these sites could be developed at significantly high margins. Moving on to our initial 2023 guidance per our earnings release last evening.
Our guidance range for NAREIT FFO per share is $2.29 - $2.39, with a midpoint of $2.34. Our 2023 FFO guidance is impacted by an additional $0.02 per share in real estate taxes in one of our markets that we will accrue in 2023, but will not be recoverable from our tenants until the taxes are paid in 2024. Without the impact of this item, our FFO midpoint guidance would be $2.36 per share. Key assumptions for guidance are as follows: Average quarter end in-service occupancy of 97.75%-98.75%. Cash same-store NOI growth before termination fees of 7.5%-8.5%.
Please note our cash same-store guidance excludes $1.4 million of income from 2022 related to the final settlement of insurance claims for damaged properties I discussed earlier. Annual bad debt expense of $1 million, which assumes that ADESA stays current on its rent obligation. Guidance includes the anticipated 2023 costs related to our completed and under construction developments at December 31st. For these projects, we expect to capitalize about $0.08 per share of interest.
Our G&A expense guidance range is $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. Guidance also excludes the potential issuance of equity. Let me now turn it back over to Peter.
Thank you, Scott, and thank you again to the First Industrial team for a job well done. Our sector continues to exhibit the best fundamentals in memory. However, we, like all of you, are keeping a watchful eye on the economic and geopolitical landscape, and we are prepared for whatever challenges or opportunities the immediate future may bring. As you've heard us say, we operate, acquire, build, and fund ourselves to outperform through the cycle. Our portfolio, land holdings, and balance sheet are well-positioned for cash flow and value generation across a range of operating environments. Operator, with that, please open it up for questions.
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 are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ki Bin Kim with Truist Securities. Please go ahead.
Thanks. Good morning. I guess, can we first start off with the development pipeline? Can you provide some just high-level commentary on what this total pipeline could look like in 2023 in terms of starts and maybe reasons why the capitalized interest is coming down?
Ki Bin, it's Peter. With respect to the development pipeline for 2023, clearly given that we are operating essentially, at the cap, it's going to be heavily dependent upon our new development lease up. Just as a reminder, we do assume in our underwriting 12 months of downtime. Yes, over the past few years, we've done better than that. We certainly hope it will continue on that pace. So I can't really give you, and, you know, we don't guide on starts anyway. But we do expect to have additional starts this year. We expect those starts would be certainly in high barrier markets on the East and West Coast. Scott, you want to talk about the capitalized interest?
Yeah. Ki Bin, it's Scott. I think Peter hit it right on the head. Our guidance assumes 12-month lease up on our respective elements. We've been doing better than that. I think we've been six months or better. To the extent we can do better than that and we have new starts, our capitalized interest number will go up. Again, I think it's just a function of how we guide, and that we don't include any new development starts in our guidance. That number could increase as the year goes on, if we lease up the portfolio quicker than 6 months and we start new developments.
On the First Stockton development, how are you thinking about the total project? Is it a single user you're going after? Is it multi-tenant? What does the demand kind of profile look like, as of today?
Sure. Joe, you want to comment on that?
Yes. Thank you. There is significant demand for large users, that is the tightest sub-market right now. You know, Stockton is like the I.E. to L.A., you know, and it serves the Bay Area and the I-880 East Bay corridor. The demand right now is for large format buildings. You know, this is just right out of the interchange.
Okay. Thank you, guys.
The next question comes from Rob Stevenson with Janney. Please go ahead.
Good morning, guys. Scott, how much pressure are you seeing on the same store expense side, and what are you factoring into your 2023 guidance?
Yeah. Rob, we're not really seeing much pressure on there. You know, expenses, I know in the fourth quarter in the same store were up a little bit, but that was really seasonal. That was snow removal and some utility costs. All those costs are recoverable 100%.
Yeah. Actually, Rob, in 2023, you're seeing increases in taxes. We touched upon one of our markets, which was Denver, that's seeing increase of taxes. That's more of a timing difference. Keep in mind, the vast majority of our leases are net leases, so their expenses are recoverable. When you're at a 98.5%, 98.8% interest rate, even if expenses do rise, the leakage is pretty minimal at that occupancy rate.
Okay. All right. You guys did about $60 million of acquisitions in the second half of the year, right around a three cap rate, including this, fourth quarter one in the Inland Empire. Is there something incremental that you plan on doing there, or what's the rationale of spending, you know, a three cap rate on that type of money versus land or incremental development at this point?
Yeah. Let me address the, you know, the acquisition of the 47,000 sq ft building. That's a 5.5 acre parcel that we're going to, that's adjacent to roughly a 14 acre site that we own that has a building on it. Our plan here is actually more land-focused than building-focused. We're going to basically join those two parcels and develop a over 400,000 sq ft Class A building in I.E. That's the plan. It's not.
Okay. That's helpful.
We're getting paid to carry the land as opposed to the other way around.
Do you need to knock down the 47,000 foot building, or is this gonna be an addition to the 47,000 building?
No, we're going to basically to knock down our existing building plus this building and develop a 400,000 sq ft, really class A, high clear, nice building. Right now it is under entitlement.
what type of timeframe are you looking at there for potential start?
You know what, entitlement takes anywhere from 18 months - 24 months. You know what? We've been doing, you know, better than that. We'll let you know once we're ready to start that building.
Okay. Thanks, guys.
Our next question comes from Nick Yulico with Scotiabank. Please go ahead.
Hey, good morning. This is Greg McGinniss. I'm with Nick. Peter, in the opening remarks, you touched on the continued price discovery dynamic in the investment sales market. Could you expand on that a bit more? You know, what types of trends are you seeing in cap rates? How far apart are sellers from where you wanna buy? Are you starting to see land prices fall at all?
I'll give some thoughts on that, then I'll invite Peter and Jojo to comment. Certainly cap rates have moved. Again, as you know, last year we built in about a 100 basis point increase. There aren't a lot of data points, there aren't a lot of transactions to really set I can't go market by market and tell you cap rates. You really don't know what you're gonna get until you go to the market. Clearly, it's helpful when the buyers are motivated by 1031s or they're users. As, as we've said in the past, a lot of the sales that we execute on do go to users. The availability of debt is also gonna drive this and the cost of that debt.
That's why I comment the way I did, and we gave a bit wider range. We're just not gonna know until we get deep into these discussions. If we're gonna like the pricing, this is good real estate, it's 100% leased. We're gonna proceed based on what the market feedback is. Peter, you have anything to add?
Sure. On land values, we've seen them come in, depending upon the sub-market and location, 30%, 40%, 50% or so. Jojo?
Yes. Yeah. It's just a construct of, you know, increasing the pro forma returns. Of course, the variables, the land, construction cost is not a variable, so land takes the hit. We've adjusted our investment criteria to reflect that in terms of our increased return requirements.
Okay. Sorry, excuse me. Then in terms of, like, supply chain considerations, with construction and development, are you seeing alleviation there, in terms of getting materials and build time? Any color would be appreciated.
Peter, do you wanna take that?
Sure. Yes, we're seeing certain components improve. There's more certainty around delivery dates, and the delivery dates have come in some. The notable exceptions to that would be switchgear, electrical components, rooftop units, are still taking about a year or so, and that is certainly a critical element. On the costs, the trajectory of cost is coming down from where it's been. We're seeing costs come in on a couple of components. Others are still going up a little bit.
Okay. Thank you.
Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Hi. Thanks. Good morning. First question, I just wanted to see if, you know, you could talk a little bit about some of the moving pieces, I guess. You know, looking at same-store NOI growth and the FFO growth that, you know, contemplated with the guidance, which is expected to be a little bit more muted around 2% at the midpoint or I guess 3% excluding the insurance claims. That compares to the 7.5%-8.5% same-store NOI growth forecast. You know, realize there's some moving pieces, but just curious if you can help us bridge the gap there and talk about, you know, what else might be having an impact on FFO?
Sure, Todd. It's Scott. I think we're coming up with a 4% increase. We compare the $2.36, taking out the impact of the taxes compared to the $2.27 in 2022 before the insurance gain. I get your point, and I would say there could be a couple of pieces there. I would say one is on the development lease-up side. We talked about it earlier with Ki Bin's question. We're assuming 12 months lease-up on our spec development. Historically, we've been six months or less over the last three years. If we were to lease up the spec portfolio that we have in place now, we would pick up about $0.08 per share.
That's a big piece of it right there. We hope we can do better, but our underwriting is 12 months, and that's what we go with on guidance. I think the other thing, Todd, you should look at is interest expense. We did incur more indebtedness last year to fund the investments or developments. We're getting a full year impact of that this year. The last thing I think you need to look at is just the impact of rising interest rates. I'll give an example on our line of credit.
That's our only floating rate debt that we have outstanding. The weighted average rate on that last year was about 2.9%, and we're modeling high 5s% in our model this year. The interest rate is almost doubling on our line of credit borrowing. I think those are the couple of things that would impact that, your question.
Okay. Yeah. That's helpful. Then on the, you know, with regard to the development leasing, you know, and the 2.1 million sq ft that's completed, not yet in service, you know, how are, you know, leasing discussions progressing and, you know, for those assets. What are you seeing, you know, for the potential to kind of hit that six month target today? How are those conversations?
I'll just make a comment there, and then Peter and Jojo can discuss the various projects. You know, you look at those projects, they are just completing or have just completed. We haven't really had much time passed in terms of leasing discussions. Having said that, we are having very active discussions across a number of those projects. Peter, you can give a little color on what's going on with the.
Sure. Todd, the projects in Pennsylvania, Denver, Nashville, and Florida, that are in that population that you mentioned, active proposals, and prospects for all or portion of all of those buildings. I would say we've actually seen an increase in new prospects just in the last couple of weeks. It continues to be encouraging there. In most of these cases, tenants continue to have very few choices. Jojo?
For the buildings in Seattle and Chicago, they've been complete now for six weeks. We have active proposals and active interest from a broad range of users, 3PLs, consumer goods, and within beverage.
Okay. Great. That's helpful. Just one last one, and sorry if I, if I missed this. Any update on Old Post Road, that was previously expected to be leased in the first quarter? You know, is that, is that buttoned up, or is there any update that you can share and also, you know, talk about what's included in the guidance for that?
Sure, Todd, it's Peter Schultz. The update is this: our primary prospect for the full building is a third-party logistics company who's servicing a long-term contract with the federal government. That lease has been fully negotiated for a while. The contract was awarded to this group and protested by the runner-up, not once, but on two separate occasions, which has delayed that moving forward. You know, given that this is with the federal government, a little hard to handicap quite when that gets done, although it certainly feels, given it's been through a couple rounds, it's probably more when, not if.
We continue to engage with other prospects for the building. In terms of guidance, you know, given some of the uncertainty around that process and where we are with other interests, it's forecast to lease in the third quarter of this year.
Okay, great. Thank you very much.
Again, if you have a question, please press star then one. Our next question comes from Anthony Powell with Barclays. Please go ahead.
Hi, good morning. I guess another question on the leasing environment. You mentioned that you're in active discussions with tenants on the development pipeline. Has the kind of the tenor of the conversations changed the past few weeks or since last quarter? Are tenants just being a bit more cautious about taking space, or do they continue to be kind of optimistic and aggressive in taking space? Any changes in the types of tenants you're seeing coming through the door of spaces?
Yeah. Hi, it's Peter. The number of prospects for new space is down a little bit. I would say we're looking at what I call a normalization of demand, probably back to 2019 days. You recall that 2017, 2018, and 2019 were the best of times back then. We're coming off of, call it, some disruption in 2020 and 2021 from COVID and inflation, et cetera. I think what's happening here is that those who are responsible in the C-suite are taking some time to absorb everything they're seeing, to figure out what exactly their needs are going to be. For sure, they have growth needs.
They have to catch up. Many of them did not invest in their supply chains in 2020 and 2021. The demand is there. We're hearing also from the brokerage community that there's going to be significant demand. We're bullish on what's gonna happen. We think it's gonna be a pretty active market. I would say in terms of sense of urgency, you're seeing more of a normalization. Peter, you have anything else you wanna add?
Sure. The other thing I would add to that is the smaller spaces continue to move a little faster. To Peter's comments about some of the users, being more deliberate in certain respect in their decision-making, that's where we're seeing it take a little bit longer. We continue to see solid and broad-based demand across the country. As I said a couple of minutes ago, activity is up in the last several weeks from where it was in the fourth quarter.
Got it. Thanks. I guess on development starts. If you have some more room under the cap, if you get some of these development projects leased up, what are the sources of financing outside of dispositions? How are you looking at debt and equity to fund potential new starts, if you have the ability to do more?
Sure. This is Scott. We're in really good shape from a liquidity point of view. Let's just talk about what we have in process as far as development. It's about $225 million. That will be funded by excess cash flow after our dividend is $75 million. Peter talked about some sales we're gonna do this year. Big point is $100 million. Then we have $600 million of liquidity on our line of cr edit. We're set up pretty good. Let me say If you give us credit for extension options in our line of credit and $300 million term loan, we don't have any maturities until 2026.
We're set up from a good standpoint there. If we start new development starts, I think the benefit that we have is we already own the land. It's not like we have to go out and buy it and expend dollars. My take is that if we do additional development starts, most likely that's just gonna be funded on the line of credit or potentially could be new sales as well.
You know, the new starts just by the dynamic that we have now of needing now to lease up these newly completed assets, it's gonna be largely back-ended. The dollars that we will have to put out this year are not that significant.
Yeah. Under a development, you're probably paying over a 12-14-month term. Probably not paying your first draw till 2-3 months after the start date. If you start... As Peter mentioned, if you put in place new starts in the back half of the year, you're probably not putting out a lot of additional cash flow.
Thank you.
Our next question comes from Vikram Malhotra with Mizuho. Please go ahead.
Morning. Thanks so much for taking the questions. Just, first one, you talked about the 40% to 50% rent spreads you're anticipating. Can you just maybe walk us through your expectations of forecast for market rent growth across the portfolio, in particular, maybe call out where you're seeing accelerating trends versus decelerating trends in market rent growth?
Joe, do you wanna talk about market rent growth?
Yeah. Thank you. Yeah. You know, our house view right now is about 5%-10%.
That's national rent.
National, 5%-10% across the nation. The higher end towards the 10% would be the coastal markets. On the lower end of 5%, we just feel good, it's more of the Midwest markets.
Just on the, on the bad debt that you've built in, you know, maybe two specific questions around that. One, any impacts you're seeing from, you know, housing-related tenants you may have, particularly in some of the Sun Belt markets like, you know, Phoenix. Second, is there any other tenants on the watchlist that you're monitoring? One in particular, you know, I've been reading about, I think it's one of your top second or third tenant, Boohoo PLC. They appear to be having some operational issues. I'm not saying that means they're warehouse implications, but just wondering if they're on a watchlist.
This is Scott. I would say no material tenants on the watchlist other than our comments regarding ADESA that we spoke about earlier. Boohoo is, you know, they're timely on their payments as well. Peter will talk a little bit about the lease structure that we entered into them with in 2022.
Yeah, the Boohoo lease has been in effect since August, September of last year. They're getting ready to start operating in the building after completing their work. We did structure a credit enhancement on that deal that we have, and we were comfortable with that. As Scott said, all good at the moment.
In terms of Phoenix, the economy's been doing pretty well. The absorption levels have actually been record absorption. Couple of things happening in Phoenix. You know, they got the huge investment from TSMC. You know, not that, not that it's gonna affect the whole economy there, but it's gonna be a positive because that's gonna generate a lot of jobs. Also there's a lot of data center investment in the Phoenix area, one of the biggest investments in the country. That should add more good economic growth to the market.
Great. Thanks so much.
Our next question comes from Dave Rodgers with Baird. Please go ahead.
Yeah. Good morning, everybody. Maybe Jojo, for you, on the rent growth. I guess I wanted to talk about new supply as well. Obviously, this is the year of new supply we've been waiting for, maybe not waiting for, depending on your perspective. I think that, you know, you talked about 5%-10% market rent growth. How does that trend throughout the year, and when do you get hit with the most amount of competitive supply, do you think? I guess I'm worried about market rent growth kind of really slowing maybe in third and fourth quarter when we see that supply. How do you see that playing out?
Sure. Sure. right now, you know, the whole market's about 3% vacancy, and we see continued demand. Landlord still has the pricing power here. in terms of what could affect that, in terms of under construction, if you look at where we've developed, you know, most of the construction are coming into the sub-markets we're not invested in. For example, on the developments under construction, 85% of our developments under construction are either in Florida, Northern California, or Southern California, which I would deem is the one of the top 5 markets in the U.S., where we expect further rent growth because of its infill nature and kinda the lack of supply.
You know, we feel good about in terms of our competitive positioning and our development. You know, we feel, like I've said, you know, because of 3% vacancy, and we don't see the demand falling off, that we'd still be, as landlords, you know, be in the driver's seat in terms of rent pricing.
Appreciate that color. Maybe this goes to Peter next, is that I think you had a 550,000 square foot tenant move out end of the year. Have you commented on kind of backfill for that downtime, et cetera?
Dave, I'm not sure which tenant you're talking about? Nobody that in that size range moved out at the end of the year.
Okay, that's fair. Last question, Scott, for you. You mentioned an answer earlier, $0.08 per share of development income, and it sounded like that could be maybe upside to the guidance, or maybe that was what was embedded in guidance. Can you clarify that comment around the development, relative to kinda, I guess, leasing and how that could progress throughout the year?
Yeah. David, we assume 12 months lease up in the guidance. What I was just illustrating there is if we were to cut that in half, if we were to get you know, superior execution and that came in at 6 months, just to give people an idea, that would be an additional $0.08 per share. That's not in guidance. I would say that's aspirational if we're able to do better. Again, over the last several years, we've been leasing up 6 months or less. Peter.
I was just gonna add, Dave, of the projects we've completed, with our 12-month down time assumption, only 3 of those projects would generate some revenue this year, and it wouldn't be until the fourth quarter. There's not a lot there. When you back that assumption from 12 to 6 months, which perhaps some people do, we don't, then you introduce the opportunity to generate a lot more revenue this year from those completions, and that's why you have the difference of $0.08.
That's helpful. Sorry if I misunderstood earlier. Appreciate it, guys.
Our next question comes from Mike Mueller with J.P. Morgan.
Yeah, hi. Two quick ones. First on the projected 40%-50% leasing spreads. Can you just, you know, stripping out some of the outliers, just what's the general band we should be thinking of in terms of, coastal versus more of the Midwest markets, just how those spreads can range? Then, on the leasing for last year, what was the average escalator that you baked into the leases?
Chris, you wanna take that?
Yeah. Your two questions on the, you know, the 40%-50% rental rate increase, certainly on, you know, our Southern California markets, you know, that number is higher. If you look at our remaining 2023 rollovers, about 40% is from Southern California, so we're certainly gonna get higher rental rate increases there. As far as our escalators, you know, right now, currently in the entire portfolio, in place is about 2.9%. If you look at our 2023 commencements signed to date, you know, that number is about 3.6%, That number is certainly trending upwards.
Got it. Okay, thank you.
If you have a question, please press star then one. Our next question comes from Rich Anderson with SMBC. Please go ahead.
Hey, thanks, good morning. Can you hear me okay?
Yep.
All good.
Okay, great. My headset's been on and off. Jojo, can you repeat what you said about land values being down earlier in the call? I think I misheard you, but I just wanna make sure before I ask the question.
Sure. Peter answered a part of the question. Basically, in terms of land values, they've come down year-over-year. The reason for it, you know, everyone, including us, increased our pro forma returns. Like Peter Baccile said, you know, it's about 100 basis points change cap rate. We've increased our returns 150 basis points.
When you do that, what happens is the construction costs pretty remain the same with escalations and the variable is land. If you look at the range of changes, they're in the 20%-45% decline. The decline is more in the Midwest cities because land there represents a bigger component of the total investment. Therefore, if that's a variable, it takes a bigger hit.
How do you look at your own land bank of $1.6 billion on your balance sheet as of December? How has it changed relative to market in terms of its, you know, value relatively?
Sure. Sure. We've looked at it. We've actually provided, you know, FMVs for those land sites. Basically, what you've seen is there's overall, less, very little change. That's a function of the great basis. We've acquired a lot of our properties in the coastal cities and then offset a little bit by the adjustment of the cities in the interior, Midwest, and non-coastal markets. When you put it all in, it's a minor adjustment.
Okay.
Now, look, there haven't been a lot of trades to evidence this. Clearly, with debt costs being up a couple of hundred basis points, construction debt in particular being very difficult to come by, that strong bid by the merchant builders now weakened or gone away. Land values have come down for lack of that opportunity there. The land that we own, you're referring to values, it's in some of the best submarkets in the country, Dade County, Broward County, Lehigh Valley, Inland Empire. I can go on and on. It's. Our holdings are very, very strongly located, so we're excited about the opportunity.
Remember, a lot of our, a big portion of the land value is in the IE, where we've acquired a lot of those on assemblages and unentitled land. We've created a lot of value through entitlement. It's what you have is reflected.
Let me just clarify one item. I think you said the fair value of our land was $1.6 billion, if I'm not... It's $840 million roughly. That's page 25 of the supplemental. You can get that information.
I guess I was just looking at the balance sheet. I was back of the envelope or back of the hand look. Sorry about that. On ADESA, you mentioned your rents and land are well below market. I was curious, you mentioned land being below market. Is that an asset that if you got it back, it would be something you would redevelop or completely tear down and start over? I'm just curious with the quality of the asset.
Yeah. If we, basically, if we got them back, we would develop on the majority of the portfolio. We would look at developing in those assets in Seattle, in Northern California and Tracy, in Houston, and in Atlanta. We believe Given our view of FMV, that would comprise about 86% of our currently leased, you know, portfolio to ADESA.
Okay. Last question-
Ben, can I just add something here? You know, there's minimal build-out on those sites. You know, there's no infrastructure. There's really no associated square footage in our portfolio. They're pretty raw, ready to work. They're storing cars and running auctions on infrastructures and improvements they've made over time.
Understood. I understand better now. Last question is on Old Post. You mentioned, you're expecting third quarter for it to be leased. What's the sensitivity to earnings if that gets pushed back, a couple of quarters? Is there any material impact on earnings as a result of that?
One month of rent is about, or rental wise, about $350,000.
Okay. That's all I got. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Peter Baccile for any closing remarks.
Thank you, operator. Thanks everyone for participating on our call today. We look forward to connecting with many of you in person during the year. Be well.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.