Good day, and welcome to First Industrial Realty Trust's first quarter results conference 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, Marliese. Hello, everybody, welcome to our call. Before we discuss our first quarter of 2023 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, April 20th, 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. 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 which, we'll open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Senior Vice President of Operations, and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now let me hand the call over to Peter.
Thank you, Art. Thank you all for joining us today. 2023 is off to an excellent start. Our team continues its strong track record of leasing success, maintaining high occupancy, capturing increasing rents on new and renewal leasing, and securing tenants for our new developments. As a result of our performance, we are raising our estimate for our 2023 cash rental rates and our full year FFO guidance. Moving now to the broader U.S. industrial market, fundamentals continue to drive high rates of occupancy, both nationally and within our target markets. There's a fair amount of new supply coming online this year as developers ramped up in 2022 to capture incremental demand. However, we expect new starts to decline throughout 2023 compared to last year due to higher capital costs, a constrained lending environment, and lower land acquisition volumes.
Given our primary focus on land-constrained coastal markets for our new developments, we continue to feel good about the positioning of our current projects as well as our land holdings, most of which are ready to go as market conditions warrant. Our portfolio performance continues to outpace the national market. We finished the first quarter with an occupancy rate of 98.7%, and our cash rental rate change for leases commencing in the first quarter was 58.3%, a new quarterly record for our company. On a straight line basis, rents were up 85% in the quarter. As of yesterday, approximately 63% of our 2023 lease expirations are in the books at a cash rental rate increase of 56%.
Given our leases signed to date and our expectations for the remaining 2023 expirations, we anticipate that our increase on rental rates on new and renewal leasing will now be in the range of 45%-55%. This new midpoint is five percentage points higher than the midpoint we provided on our February call. Moving on to development activity. Since our last earnings call, we signed full building leases for the 198,000 sq ft First Park Miami building 10, and the 105,000 sq ft First Lehigh Logistics Center in the Lehigh Valley market of Pennsylvania. We leased 50% of our 128,000 sq ft First Steel building in Seattle. We also inked a 27,000 sq ft lease at our four building, 347,000 sq ft First Loop Logistics Park in Orlando.
That newly completed project is now 56% leased. Given our development leasing progress and the favorable supply-demand dynamics in its submarket, we broke ground on First State Crossing in the infill Philadelphia metro market. The site is located just 12 miles from the Philadelphia Airport, with great access to both I-95 and I-495. First State Crossing will be a 358,000 sq ft facility with a total estimated investment of $61 million and a projected cash yield of 6.8%. Including the first quarter development start, our developments in process total 3.6 million sq ft with an investment of $569 million, which are currently 12% leased. The projected cash yield for these investments is 7.3%, which represents an expected overall development margin of approximately 65%.
In total, our balance sheet land today can support an additional 13.8 million sq ft. This represents approximately $2.1 billion of potential new investment based on today's estimated construction costs and the land at our book basis. These figures exclude our remaining share of the land and our Phoenix joint venture. Speaking of that venture, in the first quarter, we sold 31 acres to a data center user for a sales price of $50 million. Our share of the gain and incentive fee before tax was approximately $24 million. In conjunction with this sale, the venture entered into an agreement with the buyer, which provides them an option to purchase an additional 71 acres within the next 2 years.
As part of this agreement, the buyer is required to lease the ground for up to two years, and our share of the ground lease rent is approximately $200,000 a month. As you can see, with little over two months' time elapsed from our fourth quarter call, we've had some great results and activity across our entire platform. With that, I'll turn it over to Scott for his comments.
Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.59 per fully diluted share compared to $0.53 per share in 1Q 2022. Our first quarter results included income of $0.02 per share related to the accelerated recognition of a tenant improvement reimbursement associated with a departing tenant in Dallas. Excluding this $0.02 per share impact, first quarter 2023 FFO per share was $0.57. As an aside, we were successful in backfilling the Dallas space with no downtime for a gross cash rental rate increase of 54%. Our cash same-store NOI growth for the quarter, excluding termination fees, was 8.1%.
The results in the quarter were driven by increases in rental rates on new and renewal leasing, rent rate bumps embedded in our leases, and higher average occupancy, partially offset by higher free rent and increase in real estate taxes. As Peter noted, we finished the quarter with in-service occupancy of 98.7%, down 10 basis points compared to year-end and up 70 basis points compared to 1Q 2022. Our tenant retention by square footage was 63%, so maintaining our high occupancy level quarter to quarter demonstrates the great job by our team of backfilling move-outs. Summarizing our leasing activity during the quarter, approximately 4 million sq ft of leases commenced. Of these, 1.2 million were new, 2.4 million were renewals, and 300,000 were for developments and acquisitions with lease up.
Moving on to our updated 2023 guidance per our earnings release last evening. Our guidance range for NAREIT FFO is now $2.35-$2.45 per share. Excluding the $0.02 per share income item I discussed earlier, our guidance range is $2.33-$2.43 per share with a midpoint of $2.38. This is a $0.04 per share increase at the midpoint, primarily due to our leasing performance and our share of the monthly ground lease rent we expect to receive from our joint venture that Peter mentioned. Key assumptions for guidance are as follows: Quarter end average in service occupancy of 97.75%-98.75%.
Same-Store NOI growth on a cash basis before termination fees of 7.75%-8.75%, an increase of 25 basis points at the midpoint compared to our prior earnings call. Note that the same-store calculation excludes $1.4 million of income related to insurance claim settlements recognized in the fourth quarter of 2022. Guidance includes $0.02 per share of FFO from joint ventures, primarily related to our share of the ground rent discussed earlier. Guidance includes the anticipated 2023 costs related to our completed and under construction developments at March 31st. For the full year of 2023, we expect to capitalize about $0.09 per share of interest. Our G&A expense guidance range is unchanged at $34 million-$35 million.
Guidance does not reflect the impact of any future sales, acquisitions, new development starts, debt issuances, debt repurchases or repayments, nor the potential issuance of equity after this call. Let me turn it back over to Peter.
Thanks, Scott. 2023 is off to a great start. Our portfolio results were outstanding and the FR team continues to drive long-term cash flow growth and value creation. We're also well-positioned to take advantage of new opportunities with a strong capital base and no debt maturities until 2026, assuming extension options. As a team, we are laser-focused on executing on our rent growth and development opportunities. Operator, with that, we're ready to open up for questions.
Marliese?
Yes. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, 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'll pause momentarily to assemble our roster. Thank you. Our first question comes from Ki Bin Kim from Truist. Ki, please go ahead.
Thanks. Good morning. Can you guys talk about the prospect activity that you're seeing in your development pipeline and how that might have changed over the past, you know, couple quarters?
Ki Bin, good morning. It's Peter. You know, generally, activity continues to be broad-based across all of the projects and sectors. We continue to see strong demand from 3PLs, from retailers, from food and beverage, automotive, e-commerce, medical, and that has been pretty consistent. I would say it's gotten broader over the last several months. In terms of our completed buildings not yet leased in Denver, Nashville, and Florida, we continue to see interest from full and partial building prospects on those assets. I would say the activity has been pretty consistent, not better or worse, than it's been since the beginning of the year. Jojo?
Sure. Just to add more detail on the activity, that includes responding to RFPs, request for proposals, inquiries and tours, including showings, on either existing product that's completed or under construction.
Yeah. Overall, Ki Bin, the activity is characteristic of 2018, 2019. We mentioned on the last call we see demand normalizing, you know, you'll recall those were very, very good years. We're coming off the kind of bubble created by COVID and prospect activity is pretty good.
Okay. You guys mentioned on the opening remarks that you do see, I guess everyone sees it, a decent amount of supply coming in, at least in the near term, although, like, the future supply might be a little bit less, right, given the start volumes. As we are trying to absorb the amount of supply coming in, you know, how do you think about potentially throttling your development pipeline, as we enter potentially a little bit of a soft patch in the economy?
Yeah. you know, there is significant space coming. We see in our 18 markets, and that includes the three that we're not investing in right now, about 4 million sq ft-450 million sq ft coming this year. About 20%-25% of that's pre-leased, so it's not all spec. we also see, Ki Bin. That'll bump vacancies up a little bit. we also see a pretty big slowdown in starts, probably down in the first quarter, 40%-50% this year so far, and we think it's gonna continue to decline. Probably toward the end of next year, you'll see vacancies kinda come back to where they are now, maybe even a little bit lower.
The market, we think the dynamic is going to remain where it's a landlord's market. We'll see a tick up in vacancy in the short term, but we don't see that changing the leasing dynamic at all. Again, we're obviously gonna keep an eye on it. It will impact the health of the markets will clearly impact what and when we decide to build. You'll note that if you look at our development pipeline, we have several projects that are ready to go, and they are primarily in California and Florida, two of the strongest markets right now in the country.
Okay. Thank you.
Our next question comes from Rob Stevenson from Janney. Rob, please go ahead.
Rob?
Fourth quarter, on average, was about 77% and 64% this quarter at the midpoint. Given that there's a good deal of overlapping projects, what's the difference there? Is that really high margins on the stuff that you completed? Lower margins on the First State Crossing project? Any sort of read-through on rent or construction cost pressures that you're seeing overall? How should we be thinking about that?
Really sorry, the first, I don't know, 15% of your question we didn't hear. Can you ask it again?
Sure. Peter, you were talking about the expected profit margin in the development pipelines is sort of mid-60s% on average. It was high 70s% last quarter. Given that there's a bunch of overlapping projects between fourth quarter and first quarter here, what's the difference there? Is that high margins on the stuff that you just completed, lower margins on the Philly project? Is it read-through on rent or construction cost pressures? How are you sort of framing that, and how should we be thinking about that?
I'll take a crack at that, and Jojo can jump in. That 65% relates to Philly, not the whole development pipeline. We have, just to note that we have adjusted our assumption on cap rates, in the last quarter. We bumped it up 25 basis points. If you go back to this time last year when we first started talking about cap rates, we have increased our cap rate assumption for our margin calculations, a little bit over 125 basis points. That will, that will, you know, obviously have an impact on the margins that we're talking about today. Jojo?
Yes. That is the primary reason for the movement in the profit margins. It's a roughly a 25 basis points increase from Q4 cap rate wise from Q4 2022 to date. There were slight tweaks, Rob, in terms of, you know, like of course we keep all the construction costs accurate, but that was so slight and there was no movement in rents really. The major contributor to that difference in margin is the self-imposed cap rate increase for the cap rates.
Okay. Are you seeing any real relief in material or labor costs on the construction side these days, or it's still relatively where it's been over the last few quarters?
Okay. Good question. The total construction costs actually are flat to slight decrease. When you compare Q4 to Q1 2022, steel prices actually came down. There were some components that also came up. Concrete, electrical, and dock doors came up a little bit. We think it's going to moderate. We already see the moderation. For 2023, our internal underwriting criteria will use a 5% cost escalation. We think there is some downside trend to that depending upon the number of construction starts. If construction starts continue to be at a low level, we should feel a little bit more moderate increase. Does that answer your question?
Absolutely. That's great. Thank you. Scott, what are you seeing today in terms of availability and pricing on debt financing? Where's your best cost of debt?
I would break it into two pieces. One, I would look at the bank loan, term loan market. As everyone knows, we closed on a $300 million term loan in August of last year. That market has changed quite a bit. Our maturity was a five-year deal. I would say what you're seeing in the market, if you have strong relationships with the banks, is probably two to three years of term. The pricing grid has not changed, the upfront fees have increased considerably. August compared to where we're at today at the bank term loan market, maturities aren't as long, and the total cost, including fees, is up. I would say the other option that we have is doing a public bond deal or a private placement.
If you were to look at spreads on a 10-year deal, I would say we're probably 2-210 basis points.
Okay. That's helpful. Then one last one for me. The Camelback 303 purchase option, is that at a fairly similar price to the $1.6 million an acre you did here in the first quarter? Is there anything different in terms of the quality or use of the land between the first 50 acres and the last 70?
Okay, Rob. Cannot comment on the pricing on the rest of the 71 acres for confidentiality and competitive reasons. I will tell you that it's land that the buyer wants. We disclose to you the ground lease numbers. In terms of use, I would say it would be a similar use with. The lot that they bought has frontage on two of their corners, and this one has frontage on the freeway. Maybe one less street frontage, but that's about it. Same use.
Okay. Perfect. Thanks, guys. Appreciate the time.
We have a question from Todd Thomas from KeyBanc Capital Markets. Todd, please go ahead.
Yeah. Hi. Thanks. Good morning. I just wanted to follow up a little bit on some of the, you know, development leasing. I think, you know, the guidance continues to assume 12 months of downtime from completion to lease up. Is that right? I know you've been running closer to six months on average, but, you know, how should we think about the pace from here? Do you see any risk, you know, that any of the projects delivered in 2022 might not be leased before that 12-month mark?
Yeah, you're right. We do continue to use the 12 months assumed downtime for lease-up on new completions. You know, the last couple of years it's been shorter. I would characterize the post, you know, 2020 timeframe as kind of being peaky in our business, and that's why we have not changed our 12-month downtime assumption. Doesn't mean that we don't have great confidence going forward. In fact, if we have markets like we had in 2018 and 2019 going forward, we'd all be just fine. That's the assumption there. With respect to leasing on the existing development pipeline and some of the projects that are completed, Peter and Jojo, you guys wanna talk about the projects in your region?
Sure, Todd. I commented on some of the projects before, but I would say two things to add to Peter's comments. One is we deliver all of our buildings move-in ready, so there's not a long lead time t o permit and outfit the building. To the extent we convert a deal, that can happen fairly quickly, which makes us feel pretty good about leasing within the 12 months. The second thing I would say is, the cadence of decision-making from smaller mid-size tenants, we continue to see as better. The larger tenants, are a little bit slower as they continue to assess the macro environment and the capital market environment, particularly given some of their investments that they would make in the building. In general, I would say we continue to feel good about leasing all of these within 12 months. And we'll see how some of the decision-making goes with some of the bigger tenants. Jojo, anything else you wanna add?
Yes. Yeah. I just wanna add that, you know, we're really, you know, excited about the projects this year under construction and already completed. In terms of the under construction, I mean, about 73% of them are in super infill markets and coastal markets, primarily in California, NorCal, SoCal, and South Florida. If you look at all the designs of these projects, you know, I would say they're top tier, and not only top tier, but they're in very constrained markets. We're really very happy with this pipeline. Of course, you know, our job is to beat that 12-month downtime.
Okay, that's helpful. Then, in terms of rent change going forward, you know, you previously had highlighted the opportunity that you had in Southern California this year with sort of an outsized percentage of roll during the year. Are you through that now with this quarter's results, or is there still some roll in SoCal to be worked through in that, you know, I guess 37% portion of this year's roll that has not been addressed yet?
Yeah. This is Chris. Actually, if you look at our three largest remaining rollovers, they range from 225,000 sq ft up to 300,000 sq ft. All those rollovers are in the Inland Empire market.
Okay. And then just a last question around the guidance and, I guess, the occupancy assumption. You know, does the guidance still assume that Old Post Road is leased up, you know, that you have an executed lease in the third quarter?
Yeah. Todd, this is Scott. That's correct.
Okay. In terms of the occupancy assumption, underlying guidance, I guess that would add a little over 100 basis points of occupancy by year-end. I guess, you know, in terms of the occupancy assumption, then that's, you know. That would imply, I guess, an even greater decrease in occupancy throughout the balance of the portfolio. Is that the right way to think about the trajectory for occupancy, outside of that?
Well, we gave a range of occupancy quarter end average, that was 98.25%. you know, we're higher than that as we stand today. Yes, as the quarters go on, we see a slight decline in quarter end occupancy, but we're still very, very happy with having an occupancy rate above 98%.
Okay. The guidance, though, assumes that 100 basis points or a little over 100 basis points, about to be on the way back.
It assumed that Old Post gets leased up in third quarter. It only impacts the quarter end average by 50 basis points because it's only in place for two quarters. Yes, it's assumed in our occupancy guidance to lease up in 3 Q, Todd.
Got it. All right. That's helpful. Thank you.
We will follow with a question from Rich Anderson from SMBC. Rich, just hang on a second while I unmute you.
Hello. Can you hear me?
Okay, Rich. Go ahead, please.
Can you hear me?
We can, Rich.
Oh, my goodness. It worked. Okay.
Now you can join us, Rich.
That's how we feel. This nearly 60% cash releasing spread is, you know, is bananas and congratulations to you. To what degree is the sort of second generation or even first generation CapEx influencing that? In other words, like if you did nothing, what would the number be? I'm just curious, what are the building blocks to get you to that 58% number in terms of the money you spend to attract tenants into the space?
Wanna go over that, Chris, the leasing costs on average, and they really haven't changed materially.
Yeah. You know, one statistic we really look at is kind of our percentage of of TI and leasing costs as a percentage of the net rent over the entire lease term. If you look at that number, that number for the of the ones signed already is actually a little bit lower than where we were in 2022. We're not spending any more money, you know, to get those higher rents.
Another way of saying it, we're not buying increases in rents through above market tenant improvements, Todd. These are standard allowances that are included in our results.
No additional concessions. In fact, there are some deals, in California where the renewals were as is.
Okay, good. Thanks for that. It's a pretty pure number.
Yes.
On the development side, Scott, you and I had a quick chat last night about tenant commitment to their space. You talked about larger tenants moving a bit slower in their decision process. What about the commitment they're making financially to the interior space and the build-out that's on their dime? Are you guys seeing anything to suggest that, you know, perhaps they're not, you know, making as much of a financial commitment on top of the fact that they're maybe moving slower to making the commitment in general? Can you just talk about that decision tree for me?
Yeah, Rich, this is Peter Schultz. We're not seeing any real degradation in the level of their commitment. What we are seeing is they're just taking longer to make the decisions because the commitments are large, no change in their program, or what they're anticipating, particularly in the larger buildings, given the sophistication of material handling equipment, and how tenants operate in the buildings. We continue to see probably that growing, not shrinking.
Could you quantify how much, you know, a typical tenant that does, you know, beyond the just basic racking system, but, you know, more of the higher tech type of investment, how much is that as a percentage of something? You know, can you quantify how much of an investment tenants are willing to make, which really makes...
We-
them sort of sticky?
Right. It's Peter again. We don't really see those costs. In general, the tenants contract for that work directly, so we're not really involved in that activity for the most part. Joe, do you have anything you wanna add to that?
No. I mean, in addition to the racking, that Todd mentioned, I mean, they invest in forklifts, invest in charging stations and then sometimes, dock packages. Overall, there's really not, you know, I mean, we're not open to all of the expenditures, but these are standard expenditures and you know, nothing materially has changed.
Okay, that's all I got. Thanks very much.
Okay, we will follow up with a question from Nicholas Yulico from Scotiabank. Nicholas, please go ahead.
Hey, this is Greg McGinniss on with Nick. Good morning, everyone. Just looking at the FFO per share guidance, which was raised $0.04 to the midpoint with the $0.02 from Camelback, $0.01 from capitalized interest, and potentially $0.01 from no more bad debt expense assumption embedded in the same-store growth guidance. Given that combined $0.04 impact, and what appears to be very healthy leasing, was year-to-date leasing in line with the original expectations for the year, or should we be looking more towards the top end of the guidance range now for the year?
Let me just correct you on a couple of things about the $0.04 increase. $0.02 per share was primarily due to early development leasing, First Park Miami Ten on First Lehigh as examples. $0.02 per share was the increase in the FFO from the joint ventures, primarily due to the ground leases. You're absolutely correct that our capitalized interest was increased $0.01. That was offset by an increase in interest rates we're assuming for the remaining three quarters of the year on our line of credit, so that got netted against it. What I would say is, if you look at our guidance now compared to what it was in fourth quarter, the only change we made was an increase...
Besides FFO guidance, was the increase in the cash same store by 25 basis points, and that has to do with the better increase, better increases on cash rental rates due to new and renewal leasing.
Okay. Thank you.
One other point we want to make also, if you remember from the fourth quarter call, this relates to our midpoint, $2.38. Our fourth quarter call, we mentioned we were being negatively impacted by real estate taxes in one of our regions in Denver. It's about $0.02 per share. The values in that market went up. We're gonna collect those increases in the following fiscal year. If you were to take out that negative impact, our FFO midpoint would be $2.40 per share.
Right. Okay. I appreciate the color there. I guess just following up on the $1 million of bad debt. Is that no longer assumed within same-store growth? I guess, you know, what changed there? If you could just touch on, you know, following some movement in the top tenant disclosure this quarter, you know, how are you viewing the credit quality of tenants today, and what does your tenant watch list look like?
Sure. Bad debt expense for the quarter was $100,000 compared to $250,000, what we assumed in original guidance for the quarter. Quarters two, three, and 4Q are $250,000 per quarter, which is unchanged compared to our fourth quarter of guidance. I would say, bad debt expense was very low in the quarter. I would say as far as tenants on our watch list, nothing material on our watch list, but I will bring up ADESA, which we talked about in the fourth quarter call. They're owned by Carvana. They've been having some financial problems, but what we're seeing on the tenant front from ADESA is they're paying their rent timely.
Okay, thank you.
Our next question is coming from Caitlin Burrows from Goldman Sachs. Caitlin, please go ahead. Caitlin?
Caitlin?
There we go. Caitlin?
Yes. Hello, can you hear me?
Go ahead. Go ahead, Caitlin.
Okay. Yeah, just another follow-up on the guidance shift. I know last quarter you guys had talked about the potential $0.08 of upside from early kind of development lease up, and you just mentioned in the last quarter how it seems like you've recognized $0.02 of that. I'm just wondering for how development on lease up of new developments could go forward. Does that mean there's still another $0.06 of potential, or from a timing perspective, since we're already where we are in the year, is it not quite that amount? Just wondering kind of if we keep on dating the 12-month lease up, how much potential there still is.
Very good question, Caitlin. You're right. We did pick up $0.02 of that due to our early development leasing that I talked about. We have another $0.03 per share of opportunity related to early lease up if we're able to lease up our developments within the six months. That leaves us with about $0.03 short of what we talked about in the fourth quarter call. Some of the developments that we talked about in the fourth quarter are already inside of that six-month period, so we're not including them in our number. Does that answer your question?
Yeah, I think it does. Thanks. Separately, you guys have talked about how demand today seems characteristic of the 2018 and 2019 time frame, which I agree was a really good time for the industry. I was just wondering, what do you think is driving that change, versus, say, 2021? Is it that companies' warehouse needs have been built out? Is pricing too high, macro uncertainty delaying more build-out? Just wondering if you have a view on kind of what's driving the current demand situation.
Caitlin, it's Peter Schultz. I would go back to what I said a few minutes ago. The cadence of decision-making smaller mid-sized tenants continues to be better than larger tenants. Larger tenants had been certainly a large percentage of the net absorption the last couple of years. Given that the decision-making time frames are taking longer, I think that's really where we're seeing a little bit more normalization of demand, as Peter was saying earlier. The smaller mid-sized tenants continue to be very active and make decisions quicker.
The other thing, Caitlin, remember in 2020, leasing was pretty anemic given COVID and the shutdowns and everything. One very, very large e-commerce player went and leased about 70 million sq ft, probably in an effort to, you know, outrun and outpace and put down their competition who was weaker that year. In fact, Amazon leased more space than the next 30 most active tenants combined in 2020. You get to 2021, the beginning of 2022, and everybody's playing catch up, and you had this very, very high, strong sense of urgency that it was build out your network and your platform now or maybe get outcompeted and go out of business. You had a high sense of urgency and a huge pop in leasing to try to catch up.
I think now, as we look forward, we're getting back to what we more call a normal course of business and normalized demand, and that's why we refer more to 2018 and 2019.
That makes sense. Then maybe one last one. Just in terms of you talked about how the market starts and development activities could come down some, but given what you have placed in service and started, you've maintained close to $600 million of in-process construction. Just wondering for First Industrial, I know you had talked about how much opportunity you have and that you could move pretty quickly if you expect to maintain that level or if you think it could come down before coming up again?
You know, that really depends on the continued strong fundamentals of our submarkets in particular. We certainly expect that to continue. Some of our buildings are larger format, and as you've heard a couple of times already this morning, the larger tenants who have a very large financial commitment when they take down a building are making those decisions a little bit more slowly. That will impact the timing of any new starts that we have. We're not going to violate our cap. Our self-imposed cap is there for a reason. We want it to have integrity, and it mitigates risk. At the same time, as you know, it's a number that can move as the company grows.
It's not a constraint on our growth, yet it is a mitigant on the risk. We'll just have to see what happens with leasing, especially with the larger spaces as we move forward.
Okay, thank you.
Our next question comes from Vince Tibone from Green Street. Vince, go ahead.
Hi, good morning. I wanted to follow up on your cap rate commentary, embedded into development pipeline across margins. I'm just curious, is the higher stabilized cap rate a result of transaction you've seen and a little bit more pricing visibility, or is it still just the best estimate at this point in time?
Yeah. There haven't been a lot of data points and a lot of trades. Again, I guess a year ago, we said to be intellectually honest, we felt like with the change in the capital markets and the increase in cost of capital and the lack of construction financing, et cetera, that cap rates clearly have to have moved. You've seen some transactions, and one of our peers announced one recently a t a pretty, decent yield. That's really just a judgment on our apartments to try to be intellectually honest with where we think cap rates really are.
No, I appreciate that, and I figured that was the case. I just wanted to confirm. Also, you know, somewhat related, I was wondering if you could talk about some recent trends in, you know, the development land market. In particular, I'm curious, you know, where you would estimate the Phoenix land sale price relative to the peak, presumably about a year ago. You know, just how far off do you think that price was from the peak or kind of broader development land values?
Yeah. This is Jojo. You know, the pricing is basically to a data center buyer, and the data center metrics, land price is totally different from the industrial, you know, pricing. You know, we're very happy to be selling at the data center, although I will tell you that we are not data center experts, and we do not make trends on data center prices, whether that grows even more from the platform or flatten out, that's not our business. Our business is creating value. We create a lot of value there. In terms of the industrial overall around the country, prices have moderated because of the higher yield requirements and the higher cost of capital. That is a trend across all markets, including Phoenix.
That's a really helpful color. Anything you'd throw out there for a range of, you know, how much land would have fallen? I mean, I agree with your broader points, but is there any way you can take a stab at quantifying that?
Are you asking about a data point on data center pricing or?
Well, no, I guess just for more traditional industrial development land. Like, do you think pricing's off 10%, 30%? You know, any kind of rough range would just be.
Yeah.
Curious to get your thoughts on.
Okay. In terms of national pricing, it really depends on the market. The market in the middle part of the country on a percentage basis has come down less than the coastal markets, and it's a simple reason why, because the land in the south part of the market represents a smaller portion of total investment. If your total investment comes down, therefore your dollar per square foot comes less. In the coastal markets, you know, the land component there represents a higher portion of total investment. If I were to forced to give a range, the range would be anywhere from 10%-40% delta.
No, I appreciate those numbers and taking a stab at it. Thank you.
At this time, I would like to remind you if you still would like to pose a question, please press star then one. We will continue with a question from Mike Miller from JPMorgan. Mike, go `ahead.
Yeah. Hi. Two questions. First, are you seeing any trends for tenants wanting to sign either longer or shorter spaces than normal? Secondly, I guess for the ground lease income, do we just assume that the $0.04 of annual income goes away in 2Q 2025, or is it something more to it than that?
Mike, it's Peter Schultz. I'll take the first part of the question. We're not seeing any material change in terms from tenants, new or renewal. Our average lease term has ticked up a little bit, but I wouldn't say it's material.
Mike, it's Scott. On the $0.02 per share related to the ground lease, the option holder has the ability to buy the land over the next two years. If they do buy the land, you're right, the ground lease income goes away. The benefit that we have, though, is we'll get sales proceeds and a distribution from the joint venture to First Industrial. We will use those proceeds to pay down our line of credit, which we're assuming, you know, roughly a 6.5% all-in via the model. The pay down of the line of credit decreases our interest expense, which almost offsets the loss of the ground lease rent pickup. That's how we look at that.
Got it. Okay, that's helpful. Thank you.
We'll proceed with a question from Jon Petersen from Jefferies. John, please go ahead.
Great. Thank you. A lot of talk about development, and that's where you focused most of your capital deployment in recent years. Curious what you're seeing or expect to see in the acquisition market, and what it kind of takes. You know, we hear a lot about a pretty wide bid-ask spread. You know, what do you guys? Do you expect that bid-ask spread to narrow as the year progresses and see more acquisition opportunities? Maybe one way to kind of also frame that question is last year you did $300 million of acquisitions at a 3.9% cap rate. If you were to do those same acquisitions today, what kind of cap rate would you be willing to pay?
You guys wanna start on cap rates? Overall, let me address, you know, in terms of the market for more acquisitions. We're not forecasting that. We're not seeing a lot of distressed type of sales. A lot of the quality product that we may have considered are still the bid-ask spread is really, really high. Owners, you know, because of the strong fundamentals in all the markets, owners who have good product, you know, has elected really not to sell that much. You know, we don't, we're not forecasting significant amount of-
you know, cap rate, a significant amount of deals of great product that we would pursue. In terms of cap rates, we've already mentioned to you, our view is that if you look at the start of 2022, from today, cap rates have increased, you know, roughly 120 basis points. A little bit over 120 basis points to date.
Okay. All right. That's, that's very helpful. I guess within your markets and your properties, do you guys have a view of what are you guys seeing in terms of market rent growth, you know, the first four months of this year? Maybe just talk about the cadence of rent growth you're seeing this year versus what we were seeing last year.
Hello. Okay. First, market rents grew from Q4 to Q1. It's different market by market. The coastal markets continue to grow faster than the non-coastal markets. In terms of year-over-year, we expect 2023 market growth to moderate versus 2022. In 2022, market statistics from different sources stated that the rent growth was anywhere from 15% to low 20s in terms of percentage. We internally are forecasting 5%-10% this year.
Okay. All right. That's helpful. Thank you very much.
Cool.
We have a question now from Vikram Malhotra from Mizuho. Please, Vikram, go ahead.
Thanks so much for taking the question. I just maybe building off of that market rent question. I just maybe just leading into SoCal, there's been some debate amongst the brokerage community. Some of the data would show there's maybe a lot of dispersion amongst the sub-markets within SoCal, and then some differences between demand for large blocks versus small. Can you maybe unpack this a little bit? You know, what are you seeing that may be similar to what brokers are calling out, and maybe what's different?
Well, in terms of what we're seeing in the market in our portfolio is doing really well. We've been able to push rents, strong activity. We've been getting on. The only tenants we lose in our SoCal portfolio has been tenants that are expanding, or else everything is almost all renewal. Of course, when they're expanding, we couldn't accommodate their growth. In terms of rent growth, we're seeing, again, positive rent growth from all size ranges. I would say that, you know, businesses right now, of course, you know, given, you know, all the things that, you know, they're seeing in the macroeconomy, are watching rents, you know, as well.
You know, for larger format buildings, the only thing I will add is that, you know, some tenants, you know, have gone a little bit further in L.A. There's activity, continued activity to the I-10 corridor all the way to Beaumont, Banning. There's some large format building happening in the High Desert. That's basically what we call IE North. Basically, there's also activity south on the 215 corridor, so I-215 South. That's the common I would see that's different from in the last six months. The large building tenants, large format tenants are looking a little bit further to save on rent.
The core sort of Inland Empire then I guess east to west, are there any, you know, any specific inflections you're seeing? Things may be still very, very strong, but I'm wondering if there are any inflections in terms of those two specific markets around, either rent growth or the type of demand, or just maybe as you're watching some of the supply come in, is there anything you're sort of thinking about changing, or seeing any signs of inflection?
No. No, no change. I'm not seeing really any big inflection. In IE West, there's not much opportunity to build like in IE East. If you look at the total gross leasing absorption, IE East, because of the ability to build a little bit more there, took a lot of activity. Then, IE East rent growth actually now was higher than IE West, but that doesn't mean IE West is lagging. IE West does not have enough product to really compete with IE East. Not seeing anything-
Got it. Okay.
I mean.
Just in terms of the last question, just on the development side, assuming if there are more opportunities. Sorry I missed this. I joined later. Just in terms of funding, as you think about further divesting properties to raise capital for additional funding, can you just remind us sort of where are we in that process and your appetite for that versus other forms of capital?
Sure. The spend that we're forecasting in 2023 related to our developments is about $180 million. Property sales is gonna be a big piece of that. The midpoint of our guidance for sales is about $100 million. We're gonna generate excess cash flow after CapEx and dividend of about $60 million. The remaining $20 million will be funded by cash on hand or our line of credit. We're in pretty good shape from a funding point of view.
Thank you.
We now have a question from Anthony Powell from Barclays. Anthony, please go ahead.
Hi, thank you. Just one for me on Dallas, where we're seeing some deliveries and availability increase. What's your role in Dallas the next 12 months, and do you expect to see any, I guess, rent and growth pressure there given the supply?
Well, in Dallas, you know, our portfolio is primarily infill markets. We have good investment in the Great Southwest, which is infill market. You're actually absolutely correct that, when you look at deliveries in Dallas, there's three markets that have the influx of most, you know, product, which we don't have either ownership in or not planning to develop. That's South Dallas, East Dallas, and North Fort Worth. If you combine all the new buildings in those markets, that comprise about 80%, I think, of the products coming in. We're not in those markets. In those markets, if you have product, expect to have competition. We're not in those submarkets.
All right, thank you.
A question comes now from Nick Thillman from Baird. Nick, please go ahead.
Hey, good morning. Maybe just touching on demand a little bit. Peter, you usually mention lease renewals or the timeline on that as a good indicator on demand in the market. Have you seen any shift in the timeline of tenants going to discuss renewal options with you?
Not really. That timeline has stayed pretty consistent over the past year.. two years. Not a big change.
Then the last one for me, maybe just on 2023 roll, you said there was a little bit more outside exposure to Southern California. As we're looking at 2024, is that gonna be more in line with your current portfolio, or is there anything, any markets that are a little bit more exposed there?
From a rollover standpoint, as you know, in 2023, California was disproportionately high, meaning disproportionate to its share of our portfolio. In 2024, it is slightly lower than its share of our portfolio.
Okay. That's it for me. Thanks.
Okay.
This concludes our question-and-answer session. I would like to turn the conference back over to Peter Baccile from, for any closing remarks. Go ahead.
Thank you, operator, and thanks to everyone for participating on our call today. We look forward to connecting with many of you in June in New York.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.