Welcome to Rexford Industrial Realty, Inc. fourth quarter and full year 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Aric Chang, Senior Vice President of Investor Relations and Capital Markets. Thank you. You may begin.
We thank you for joining Rexford Industrial's 4th quarter 2022 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and investor presentation in the investor relations section on our website at rexfordindustrial.com. On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined by Federal Securities laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future. In addition, certain financial information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliations and an explanation on why such non-GAAP financial measures are useful to investors.
Today's conference call is hosted by Rexford Industrial's Co-Chief Executive Officers, Michael Frankel and Howard Schwimmer, together with Chief Financial Officer Laura Clark. They will make some prepared remarks, and then we will open the call for your questions. Now I turn the call over to Michael.
Thank you, Aric. I'd like to welcome everyone to Rexford Industrial's fourth quarter 2022 earnings call. I will begin with a brief introduction. Howard will discuss our investment activity, followed by Laura, who will discuss our financial results and guidance for 2023. Our strong results reflect our unique position as the nation's largest pure-play U.S.-focused industrial REIT, driven by our entrepreneurial approach to creating value within infill Southern California. For the full year 2022, Rexford increased earnings or FFO per share by 20%, enabled by a full 45% increase in Core FFO. This brings our average earnings per share growth over the prior three years to 22%, substantially exceeding the earnings growth of all other industrial REITs, which averaged 13%.
We grew consolidated NOI by 40% compared to the prior year, driven by strong internal growth, lease up of our value add repositionings, and accretive external growth. We completed 5.1 million sq ft of lease activity during the year, achieving leasing spreads of 81% on a GAAP basis and 59% on a cash basis. Our team closed on a record $2.4 billion of investments for the full year, 90% of which were acquired through off-market or lightly marketed transactions, thereby enabling substantially above market projected return on investment. We face a higher level of potential economic uncertainty this year, we continue to see strong tenant demand.
Our infill Southern California markets are operating at well above structural full occupancy of about 1% market vacancy and with the highest year-over-year market rent growth of any major industrial market in the nation. Infill Southern California continues to experience a virtually incurable supply-demand imbalance due to an extreme scarcity of land and development constraints that prevent any material increase in new supply. In stark contrast, many other major industrial markets are experiencing increased new supply, reaching record levels. Looking forward, Rexford is exceptionally well positioned with embedded internal NOI growth of 43%, equal to an incremental $200 million of NOI contribution over the next 24 months, assuming no further acquisitions and assuming today's market rents without further growth.
This includes $78 million of incremental embedded NOI driven by the mark to market on our leases and our contractual annual rent steps, plus $48 million of incremental NOI from repositioning and redevelopment projects stabilizing over the next two years, and $74 million of incremental NOI projected over the next 24 months from recent investments closed during the fourth quarter and year to date. We continue to operate with a low leverage balance sheet at about 15% net debt to total enterprise value. This achieves the dual outcomes associated with protecting our business during uncertain economic times, while also positioning the company to continue to capitalize upon highly accretive internal and external growth opportunities.
Thanks to the hard work of the Rexford team, we are pleased to announce an increase in our first quarter dividend to 0.38 per share, which represents a 21% increase over the prior year. With this increase, our five-year dividend per share growth averages 19%, which ranks among the highest in the REIT industry. Above all else, we acknowledge that the primary determinant of our future success is the quality of our people and our deeply collaborative entrepreneurial team. We thank Team Rexford for your extraordinary work, creativity, and dedication. They continue to differentiate our great business. Now it is my pleasure to hand the call over to Howard.
Thank you, Michael. I also want to acknowledge and thank our Rexford Team for their excellent 2022 achievements. Our stabilized portfolio is operating at historically low levels of vacancy, and we continue to see a strong diversity of tenant demand.
By way of indication, we have current leasing activity on over 90% of our vacant space available for occupancy. Based on our internal portfolio metrics, market rents increased 25% in 2022, and the weighted average mark-to-market for our entire portfolio is now 73% on a net effective basis and 58% on a cash basis. According to CBRE, vacancy across our infill markets was 1.1% at the end of the fourth quarter. Two of our largest submarkets, Orange County and South Bay, comprising nearly half a billion sq ft, saw vacancy decline to 0.7%. Many other submarkets, including LA Mid Counties, Commerce Vernon, San Fernando Valley, and Ventura County, still have vacancy below 1%.
Based on these unique market dynamics and our current leasing activity, we believe there is potential for upwards of 15% market rent growth this year within our infill Southern California markets. With regard to the investment market, we continue to see marketed transactions within our infill markets trading at cap rates in the mid 3% to low 4% range as buyers are still drawn to our market's consistent outsized rent growth and stability through economic cycles. We continue to focus our acquisition efforts on highly selective off-market opportunities that we originate through our proprietary data-driven acquisition sourcing.
For the full year, we completed $2.4 billion of investments across 52 transactions, totaling 5.9 million sq ft and 31.5 acres of land for near-term redevelopment, which in aggregate, are projected to generate an unlevered stabilized yield of 4.8% on total cost. 90% of these investments were sourced through off-market or lightly marketed transactions. With regard to the fourth quarter, we completed $358 million of acquisitions, which are projected to generate an unlevered stabilized yield of 5.4% on total investment. Subsequent to quarter end, we closed two stabilized transactions totaling $405 million, which are currently generating an aggregate 5.1% initial unlevered yield, growing through contractual rent increases of about 4% per annum.
We currently have a pipeline of over $125 million of highly accretive transactions under contract or accepted offer, which are subject to customary closing conditions. These prospective investments are projected to generate an aggregate initial yield of 5%, growing to a 6% stabilized unlevered yield on total cost. Rexford's differentiated acquisition strategy continues to enable substantial growth opportunities with $405 million of investments closed year to date, $125 million in our near-term pipeline, and 250 million sq ft of off-market opportunities with identified catalysts tracked through our proprietary origination methods.
With regard to our repositioning and redevelopment activity, for the full year, we stabilized seven projects totaling $140.1 million in overall investment at an aggregate 8.9% unlevered stabilized yield, generating an estimated $175 million of value creation. We have another $1.1 billion of repositioning and redevelopment projects representing 3.3 million sq ft in process or projected to start within the next 24 months. These investments have a remaining incremental spend of $385 million and are expected to generate an aggregate unlevered yield on total cost of 6.5%, representing an estimated $500 million of value creation, assuming today's market rents and no further rent growth. I'm pleased to turn the call over to Laura to discuss our financial results.
Thank you, Howard. I want to first acknowledge our incredible team who produced another remarkable quarter of results and an exceptional year that exceeded expectations. Same property NOI growth for the quarter was 7.3% on a GAAP basis and 10.7% on a cash basis. For the full year, same property NOI growth was 7.4% on a GAAP basis and 10.5% on a cash basis, driven by our record 2022 leasing spreads of 81% and 59% on a GAAP and cash basis, respectively. Strong tenant demand for our high-quality portfolio, coupled with low market vacancy, resulted in average same property occupancy for the full year at 98.7% and 98% for the quarter at the high end of our guidance expectations.
Annual embedded rent steps in our fourth quarter executed leases continue to remain at record levels at 4.4% compared to 3.9% a year ago. Bad debt as a % of revenue was approximately 10 basis points positive for the full year, driven by the exceptionally strong credit of our diverse tenant base and reversals of prior reserves. Note that even if these reversals were excluded, bad debt as a percentage of revenue would have been approximately 20 basis points, well below the historical average of 50 basis points. This solid operating performance, combined with our accretive investments, drove fourth quarter Core FFO per share growth of 9% over prior year and 20% for the full year.
As a result of this strong performance and Rexford's continued commitment to delivering superior total shareholder returns. Our board declared a first quarter dividend of $0.38 per share, representing a 21% annualized increase over the prior year. Turning to the balance sheet and capital markets, our capital allocation strategy includes a highly selective investment process and fortress balance sheet that delivers accretive near and long-term cash flow and NAV growth. Our low leverage balance sheet with net debt to EBITDA at 3.7x provides tremendous flexibility and access to attractive sources of capital to fund accretive future internal and external growth opportunities. In recognition of our balance sheet strength and the quality of our growth, in 2022, we were upgraded to BBB+ from S&P and Fitch, and to Baa2 from Moody's.
In the fourth quarter and subsequent to quarter end, we executed on a number of capital markets transactions to fund investment activities. We sold a combined 12.5 million shares of common stock on a forward basis through the ATM and a public offering for total gross proceeds of approximately $700 million. In addition, we settled $14.1 million shares of common stock associated with forward equity sales for a total of $813 million in net proceeds. We currently have total liquidity of $1.1 billion, comprised of $73 million of net forward proceeds remaining for settlement, $51 million of cash on hand, and full availability under a $1 billion revolver.
Moving to our 2023 outlook, our Core FFO guidance range is projected to be $2.08-$2.12 per share, representing a 7% increase at the midpoint over the prior year. As a reminder, our guidance does not include acquisitions, dispositions or related balance sheet activities that have not closed. We have provided a roll forward detailing the drivers of our revised guidance range in our supplemental package. A few highlights include, same property NOI growth is projected to be 9.25%-10.25% on a cash basis and 7.5%-8.5% on a GAAP basis. Components of our same property growth include full year cash leasing spreads of 55%-60% and GAAP leasing spreads of 70%-75%.
Year-end same property occupancy is expected to be 98%, in line with year-end 2022 occupancy. Average same property occupancy for the year is projected to be 97.5%-98%, and bad debt as a % of revenue is projected to be 35 basis points. Finally, our acquisitions completed in 2022 and year to date are projected to contribute approximately $73 million of incremental NOI. This concludes our prepared remarks, and we now welcome your questions. Operator?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Craig Mailman with Citigroup. Please proceed.
Hey, everyone. Laura, I noticed, you know, from the operating update to today, you guys raised the mark-to-market assumption in the portfolio. Could you just give a sense of what you're seeing in the last 30 days, that gives you comfort with that? Also, I noticed you gave the 15% market rent growth assumption. Seems like the first time you guys have put that out there. Maybe, if there's differences in some of the sub-markets that you guys invest in, relative to that average.
Hey, Craig. Yeah, thanks for your question. you know, to answer your question, yes, we did project market rent growth of approximately 15% in 2023. I think it's important to talk about kind of the factors that went around generating that forecast. Part of that is the current activity that we're seeing in the market. First, really three factors went into that forecast. First is the current activity in the market and within our portfolio. Year to date is on pace to exceed our recent expectations. We've seen a pickup in activity since the beginning of the year. We have activity on over 90% of our vacant spaces. While one month certainly doesn't represent a trend, we saw a sequential market rent growth in January of about 1.5%.
The second factor going into that forecast is really our ongoing tenant research and outreach. We conducted a very, as we always do, a deep dive into the regional tenant demand within infill Southern California, and we continue to see a very wide diversity of demand. Lastly in that forecast is, we really take into account the ongoing and persistent supply and demand imbalance that we expect to continue within our infill markets.
That's helpful. Maybe just on the mark to market commentary there. Kind of is that just a space-by-space build-up that's giving you that with all the activity you guys have on vacancy, or is that a, an output of this 15%?
Yeah. So we mark to market our portfolio quarterly, and we do that from the bottom up from a space-by-space basis. We did that in our 4Q outlook that we posted about 30 days ago. We had done a mark-to-market. In order to get that as current as possible, we did another mark to market of the portfolio in the, you know, about a week ago. We wanted to be able to provide an update on what that market rent growth looks like within the portfolio over the last 30 days. We've, you know, we've certainly seen a strong resurgence of tenant demand, and our forward outlook remains really strong, and that's that 1.5% sequential growth that we saw in market rents over the last 30 days.
Then just turning to the acquisition market. I mean, it's, you know, you guys are coming out of the gate strong with the 405 million. You guys are getting these at stabilized yields, on your basis of, you know, 5% and higher. Could you just talk about, you know, how you guys continue to get these over the last couple months? It seems like spot cap rates are kind of all over the place, from a, you know, market perspective, with the longer term leases seeing more pressure and maybe, you know, other shorter term deals, kind of not seeing as much pressure. Just any viewpoints on that would be helpful.
Sure. Hi, Craig. It's Howard. Yeah, deals seem to be all over the place in the market. You know, there's still plenty of capital chasing transactions. You know, we're seeing that marketed transactions, you know, as I mentioned in prepared remarks, are still trading in those low 4%, even, you know, sub 4% in some instances. You know, the secret sauce here at Rexford Industrial is really the research we do, the relationships, and our ability to transact in an off-market or lightly marketed manner. You know, for the year, we transacted 90% off market, for the quarter, 100% off market. You know, relationships do pay off, and we're able to find situations where there's a need by a seller.
You know, for instance, the transaction we just mentioned closing in the earnings disclosures, 1 million sq ft in Inland Empire West. We actually had a relationship with that seller, and they had a need to close quickly. Because of that, we were able to capitalize on those needs, and we're able to achieve a 5% yield on a building that you'd typically see trading well below 5%.
The, you know, the one kind of topic that we've been hearing more recently, and I know I've brought up to you guys is, you know, when you look at issuing equity, you guys did the last deal sub 4%. Given the mark to market in your portfolio, you know, your stabilized yield on your stock is probably in the mid to high 5s, right? You guys are putting that capital to work on your basis and the stabilized yields in the mid 5s. You know, could you talk to, you know, maybe how you guys look at your stabilized yield or average yield over long term to put against that stabilized yield, right? Because it's accretive on FFO, but long-term NAV.
You know, how should we think about the stabilized yields that you guys give versus maybe an average yield over a seven to 10-year period as we think about sort of NAV accretion long term versus that stabilized yield where you're issuing equities?
Hey, Craig, it's Laura. I'll jump in here. you know, I think it's a great question about kind of how we think about growth. When we think about, you know, our stabilized yields that we're acquiring at today, they represent a very healthy spread over current market yields. certainly that is what, you know, differentiates Rexford Industrial and our strategy. I think that, you know, when you think about our business model, it's about, you know, how we create value above market yields, through our acquisition sourcing, through our asset management, through our repositioning and redevelopment expertise. When we think about investing, you know, we're investing in a basket of goods. We're looking at, you know, core plus and value add opportunities.
You know, you've seen us acquire some core assets as well, as well as our repositioning and redevelopment. When you put those together, you know, we're generating very significant cash flow growth. If you look over the last five years, our FFO per share CAGR has been, you know, 15% annually, and that compares to the peer group of 10%. You know, our business model allows us to generate that outsized cash flow growth. When we think about investing, you know, internal or, you know, external growth are not mutually exclusive, and, you know, both diversify our overall risk profile and contribute to accretive NOI and NAV growth.
Is there a way to look beyond that 5.5% versus your cost of capital that maybe is a better gauge of where you guys are putting that capital out longer term in terms of, you know, are you guys hitting high single-digit unlevered hurdles? Is that, you know, 5.5 plus bumps over the life getting you know, well in excess of that stabilized yield that you guys have on your stock? Just any kind of-
Yeah
thoughts around that?
Yeah, that's a great question, Craig. I think a really good point. When we quote these stabilized yields, these stabilized yields are a point in time. The embedded rent steps within our leases are pretty powerful. You know, if you look at the embedded steps that we signed in the fourth quarter, within all of our executed leases, the average was 4.4%. For the full year 2022, the average rent step was 4.3%. When you look at the power and the compounding effect of those, of those embedded steps, you know, those stabilized yields grow considerably over time. You know that, you know, 5.5%, you know, 6% stabilized yield is going to grow, you know, through those 4%, you know, 4.4%, 4.5% annualized rent steps.
Great. Thank you.
Our next question is from John Kim with BMO Capital Markets. Please proceed.
Thank you. I wanted to ask about your leasing spreads in the fourth quarter. Very healthy compared to where it was historically, but just comparing over this last couple quarters, it did moderate a little bit, and it seems like that's going to continue next year. I was wondering if you could just comment on that dynamic.
Yeah, John. In terms of our leasing spreads, I mean, we continue to see extremely strong leasing spreads. In the fourth quarter, our leasing spreads were impacted by one lease that had a fixed option renewal at a 6% increase. That lease had an impact. That fixed option had an impact on our leasing spreads of about 700 basis points. You know, if you were to look at, you know, look at leasing spreads without that lease, you'd look at GAAP and cash leasing spreads that are really in line with what we've experienced for the full year.
Are there any leases like that in 2023? When I look at your lease expiration schedule, it looks like the expiring rent of $14 is higher than it is in your overall portfolio and in subsequent years. I was wondering if you could discuss that and if we could see potentially an acceleration of lease spreads in 2024 and 2025.
Yeah. In terms of our, you know, our mark-to-market for 2023 is 61% on a cash basis and 75% on a GAAP basis. You know, our guidance incorporates, you know, cash leasing spreads of 55%-60% and GAAP leasing spreads of 70%-75%. That would incorporate if we had, you know, if there were any of these options. We don't have a lot of fixed options within our portfolio. If there were any of those anomalies, that guidance would incorporate that. I mean, when you look at, you know, the projected leasing spreads for 2023, you know, we ended the year with 59% cash leasing spreads, our guidance is within, you know, within that range.
You know, as we look forward in term into the mark-to-market over the next, call it, you know, two years, the mark-to-market for 2024 and 2025 is really within the area, you know, the 60% area, you know, that we're experiencing in 2023 on a cash basis.
Appreciate the color. Thank you.
Thank you.
Our next question is from Nate Crossett with BNP Paribas. Please proceed.
Hey, thanks for taking my question. Maybe just the first one related to the funding question that was asked earlier. Historically, I don't think you guys have done a lot of dispos, but clearly cap rates, like, there's support for high pricing right now to sell into. Would you guys ever consider doing more dispos as part of the funding calculus? What would change it, I guess?
Hi, Nate, it's Michael. Thanks so much for the question. Thanks for joining us today. You know, dispositions and recycling capital are part of the Rexford program, and we have an ongoing, you know, process where we're constantly and continually assessing the opportunity to recycle capital through dispositions. You'll see us doing that, and it'll be on a selective basis. You know, we don't give guidance in terms of volumes, but it's certainly a part of the Rexford program.
That's helpful. Maybe just a few on the Production Avenue acquisition. I'm just curious if you could kind of speak to the level of interest in that, you know, maybe what were the number of bidders? What was the WALT on the property? What was the kind of mark-to-market, on in-place rents there?
Yeah. Hi, Nate. It's Howard. You know, first of all, this was a very unique opportunity for us. You know, it's not often that we're able to be able to buy a quality building like this, a cross dock in a strong location in the Inland Empire West, at the yield that we're able to capture. You know, it really had to do with, you know, timing on the seller's part, an urgency to close for some other capital needs that they had. You know, as far as the rent, you know, we believe there's some upside in the rent that was put in place. This was a sale leaseback. You know, with the rent was negotiated at the closing.
There is some upside in that. As, you know, as far as, the tenant and, you know, the buyer pool, you know, there were other buyers. You know, timing and ability to perform were a priority for the seller. You know, there were some other buyers that, perhaps were able to or willing to pay more, but that certainty may not have been there from the eyes of the seller. That we have a relationship with, the seller, on this particular asset. You know, that really came into play in terms of getting the seller comfortable in our ability to perform and, perhaps our ability to achieve better pricing than maybe others were offering.
Okay, that's helpful. Is this the top tenant for you guys now? I'm just curious.
It will be. Yeah. It will be.
Is it a new top tenant or is it going to be additive to an already top tenant? I'm just trying to get a sense of concentration.
Well, it'll be, you know, the top tenant in our next reporting cycle.
Yeah. and it's.
Yeah.
It's a new tenant. It's not in our top tenant list today.
Okay, that makes sense. Just maybe one last question on this. Does this tenant have other potential sale leasebacks they could do with you?
They do have some other property in Southern California. They're a national tenant. They have other assets in other markets. We of course, you know, don't focus on those markets, so wouldn't pursue those. There's, you know, there's a possibility for that. There's also a possibility that we might be able to do some build to suit construction for them as they expand. You know, the sale and the capital generated here is for their growth. They're in a growth mode. We are discussing some other opportunities.
Okay, I'll leave it there. Thank you.
Our next question is from Camille Bonnel with Bank of America. Please proceed.
Hi. Laura, I wanted to follow up on your earlier comments around the projected rent growth, as that continues to be a key consideration that seems to be underappreciated in our conversation. Have you run any sensitivity analysis on this projection? Like, for example, assuming a 15% is the base case, what do you see as the lowest level of rent growth you think we could see or the potential upside from that?
Camille Bonnel, thanks for your question. We haven't actually put out a forecast in terms of from a sensitivity perspective, so not something that we're including in the guidance today. Important to mention that the rent growth forecast that we have today is not included in our guidance metrics. It's not our practice to embed rent growth into guidance, similar to how we don't include prospective acquisitions in our guidance. As market rent growth is realized, we'll adjust our guidance accordingly through the year.
That's very helpful. On guidance, just trying to get a better understanding of what's been factored into your occupancy outlook and the impact from the timing of expiries to lease commencement. Could you update us on the typical downtime you're seeing within the portfolio and how that compares to the recent past and your expectations factored into guidance for this year?
Yeah, Camille, that's a great question. Our occupancy is projected to be flat year-over-year. We're projecting 2023 same property occupancy to be 98% at the end of this year, that compares to 98% at the end of 2022. Our average occupancy is projected to decline about 75 basis points at the midpoint compared to 2022. What's impacting that average occupancy is our projection around downtime, and downtime being the time between lease expiration and lease commencement. Our 2022 downtime was abnormally low. Our 2022 downtime was 67 days. That was driven by, you know, proactive move-outs, where we had a tenant in place, and we were able to move out someone and then put a new tenant in with very little downtime.
In fact, over 550,000 sq ft of our new leasing had downtime of less than 15 days in 2022. As we look into our 2023 forecast, we're projecting 90 days, so about 3 months of downtime. To put that into perspective, that's really in line with the downtime that we've experienced in the prior two years, that's averaged about 90 days as well. You know, and if you look back to pre-COVID levels, was over four months. You know, 90 days in 2023 certainly continues to reflect the strength of demand within our market. The other thing that I'll note is our expirations are skewed towards the later half of the year. Actually, about a third of our expirations are in the fourth quarter.
As we get more visibility into our three, you know, three and four Q expirations, we'll certainly provide updates to guidance as we go through the year.
Really appreciate all the color there. Just finally from me. The operating dynamics of a 1 million sq ft industrial property is very different from the typical asset within your portfolio. Should we expect a shift towards these larger acquisitions moving forward, or was this more of a one-time deal?
Hey, Camille, it's Michael. It's a great and important question. Number one, we don't expect a shift in Rexford's strategy. I think our strategy and our business model have been very consistent. I think even going back to the IPO, the way we communicate our business model and our strategy is that on average, one should expect us to be acquiring a high volume of, you know, single assets or smaller portfolios or even some larger medium-sized portfolios or And once in a while, from time to time, you should also expect us to buy larger assets.
Substantially larger portfolios. The larger assets and the substantially larger portfolios are harder to predict in terms of timing, and they also tend to be heavily marketed. That's why we tend to see fewer of those. However, one should expect to see some share of our investment activity to include larger assets and larger portfolios. On average, we're really targeting a blend of yield profiles through that activity. There, one should expect 50%-75% of our activity on the investment side should have a core plus or value add orientation with relatively high yields. Then maybe 25%, 30% over time, over the long term might include more stabilized assets, which oftentimes will include a larger transaction. That's how we would encourage you to think about the activity.
Thank you for taking my question.
Our next question is from Jason Belcher with Wells Fargo. Please proceed.
Hi, good morning out there. Just wondering if you could talk a little bit about which types of tenants are creating the most demand across your portfolio today, and maybe if you could touch on tenant size and industry, and also if you're noticing any differences in demand within or across your submarkets?
Yeah. Hi, Jason. It's Howard. Nice to hear your voice. I think really it's business as usual. You know, there's such a varied amount of demand in our markets that, you know, it's really not typical to point to demand from any one particular user group. Yeah, we're, you know, today there are emerging industries and different groups that we see a, you know, a bit more activity from. You know, we've seen some heightened demand from food and beverage users. There's incremental demand from building construction materials, you know, electric vehicle manufacturing, medical devices, and, you know, stable industries like fashion and apparel and e-commerce as well.
You know, in the past, we've seen some strong demand related to industries associated with housing and with some of the change in new home-type sales. We've seen some declines in activity related to, you know, furniture, and other household goods. You know, otherwise, very diversified still. We've seen as Laura, I think mentioned earlier, we've seen really a resurgence in demands after the new year.
Oh, that's great. Thank you. Just, on the contracts, I mean, on the acquisitions that you have under contract, at this point, any color you can give us on the breakout between core deals and, the portion that might be value add or land plays?
Yeah. Yeah, we really don't like to report in advance on what that mix is. We of course will report on closing because, you know, these things vary from quarter to quarter. Generally the mix Michael just referenced seems to, you know, blend out over the course of the year with that 75% value add, core plus, and then about 25%-30% in the core or stabilized bucket.
Hey, Jason, I'll add to that, when you look at our acquisition pipeline, I mean, we're seeing, you know, continue to see strong yields, approximately 5% initial yield on that $125 million pipeline and 6% stabilized yields.
Great. Thank you. Just lastly from me, anything you guys can share on how you're dealing with or mitigating higher construction and labor costs, and what kind of impact you might be seeing from that?
Sure. It's, it's an interesting topic and, you know, really we think of it in terms of escalating construction costs. Costs, you know, costs are coming down here and there in different categories. Last year, you know, we saw basically escalation that we were using in our modeling of 25%-30%, that occurred during the year. Today, we're looking at underwriting 12% escalations, and we see potential for that, to come down further. Our costs, for instance, in our supplemental on all of our repositioning and redevelopment projects include the expected escalation. Quarter to quarter, going forward, you know, we may actually be able to lower some of those projected costs as that escalation, continues to, come in.
You know, typically, you know, the main lingering issues out there are still permitting. You know, cities are under-resourced, so permitting occasionally takes longer than expected. Labor. You know, there's a lack of available workforce. Really it's all about getting to the point where you can start the project, because once we start a project, we're generally going to be on track in terms of timing. To make sure about that, you know, we've got a strong program in place where we're buying a lot of the materials that are needed in advance to avoid any delays, such as, you know, roofing materials, electrical switchgear, HVAC and so forth. I think, you know, we've done all we can to mitigate, you know, some of the costs and delays and so forth.
We're really pleased to see the escalations starting to trim back.
Encouraging to hear. Thank you very much.
Our next question is from Dave Rodgers with Baird. Please proceed.
Yeah, good morning out there. Maybe Howard, Michael, you have talked about re-acceleration and leasing and maybe a re-acceleration of rent growth for the market in L.A. since the end of the year. I guess going back to the fourth quarter, market rent growth really kind of flatlined. Wondering about pushback from tenants on rents. I'm sure you always get it, but are they pushing back for more concessions? When you talk about 2023 having kinda more downtime, you know, is this really just a function of higher churn in the portfolio where tenants just can't keep up? want to get a better sense for tenant health overall.
Since I'm talking tenant health, I'll just throw the last question in for Laura, which is bad debt in the outlook and kinda any experience with bad debt so far, you know, late in 2022, early 2023.
Why don't I start, and then Michael and Laura can jump in. You know, as far as tenant demand, it's really been strong. We're really pleased. We have. You know, as Laura mentioned earlier, we have activity on 90% of our vacant space that's available for occupancy, so that's very encouraging. You know, in terms of, you know, what's happening, you know, there was a little bit of a slowdown, and a pause in the fourth quarter. We were hearing from people that they were concerned about inflation, they were concerned about interest rates, they were concerned about the economy. I think what's happened is some people, I think, probably had this wait and see attitude, thinking, "You know, let's wait a little longer.
Maybe rents are going to go down." That obviously hasn't happened. There's still rent growth. The resurgence is really, I think, people realizing that they have to do something about their space needs, and they really can't wait because they are hearing from the brokerage community that rates are going up. You know, in fact, we, you know, subsequent to quarter end, we signed a lease at a record lease rate on a renewal in the South Bay. I think about a 130,000 foot state-of-the-art building that we just renewed at $2.30 triple net.
That, you know, from our vantage, represents fairly substantive near-term rent growth, you know, from similar buildings that were leased in that micro market, you know, just in the past 90 days. We're very encouraged from what we see.
Maybe I'll just add a little bit to that in that, just sort of anecdotally when we talk to tenants, your question was around, you know, are we getting much pushback in terms of rents and given tenant expectations. When you look at the availability of product in the market, in other words, when you look at what alternative space is available to the typical tenant, we have an overall market vacancy of 1.1%. As Howard mentioned earlier, many of our largest submarkets are well below 1%.
If you were actually look into those vacant buildings and say, "Well, of the vacancy in the market, how much of that actually even begins to compete with Rexford?" Again, we're typically the best locations and the most functional product in each submarket we invest in, also thanks to our repositioning activity. We believe that less than half of the stated market vacancy even begins to compete with our product on average on a locational and functional basis. We continue to hear the same refrain from tenants, which is that, hey, they may not like the rent or the new rate, they may look around in the market, but it's just so exceedingly difficult to identify alternative space for them that they eventually come back to the table in pretty short order, typically.
Yeah. One other comment I'd like to add, Dave, is on subleasing. You know, that is a very good indication of the health of tenants in the marketplace. In the fourth quarter, we saw the fewest number of subleases occurred during the year. If we then drill down and look at our sublease square footage as a percentage of our overall portfolio, it was lower than in 2019, pre-COVID, and it's about half of what we've seen on average over the past three years. That is, you know, a very close indicator that we track, which really speaks to the health of tenants in the market.
Dave, I'll take your questions around downtime and then specifically around, you know, the health of the tenant and bad debt. In terms of downtime, as I mentioned, it's really not directly related to, you know, anything that we're seeing in the market in terms of demand. It's, it's more of that 2022 was abnormally low because of some of these proactive move-outs where we've, you know, had very, very little downtime in estates. We haven't underwritten those when we think about, you know, 2023, but it's possible that those could, you know, continue.
At this point, you know, our forecast is in line with the downtime that we've experienced in 2020 and 2021, of 90 days, which, as I mentioned earlier, is still, you know, considerably less than the downtime that we were experiencing, you know, pre-COVID of 4+ months. In terms of, you know, the health of our tenant, you know, our tenant base continues to exhibit, you know, incredible strength and stability. You know, obviously as reflected in our bad debt, you know, was a positive 10 basis points in the full year of 2022. Even if we exclude reversals, you know, Bad debt was 20 basis points, you know, compared to the pre-COVID average of about 50 basis points.
You know, our forecast of 35 basis points at this point, I think is prudent given that we're early in the year. There's certainly still some, you know, economic uncertainty out there. You know, I'll note that we have not seen an increase in tenants on our watch list. In fact, bad debt as a percent of revenue in the fourth quarter was only 10 basis points, even when you exclude prior year reversals. The health of the tenant base, I'd say, is stronger than ever.
Thanks, everyone.
As a reminder, just star one on your telephone keypad if you would like to ask a question. Our next question is from Jessica Zheng with Green Street. Please proceed.
Good morning. I was wondering if you could share your view on how the new transfer tax in L.A. might impact property values in the city and whether it has any impact on your external growth strategy.
Hey, Jessica. Thanks so much for your question. You know, I think it's a little too early to know the full impact of the transfer tax, but at this point we're not seeing a material impact on valuations in the transaction markets. Importantly, you know, to note that the tax does not impact rental rates. You know, the impact on valuations actually could be potentially accretive to our yields on acquisitions. You know, while it could have a modest impact on, you know, your IRR, it's less impactful for us as long-term owners. You know, and for us as well, you know, our exposure is a bit limited there. This tax only applies to the city of L.A. Our portfolio, only about 15% of our portfolio is in the city of L.A.
It represents just 150 municipalities within our infill markets. The city of L.A. is just one of those. You know, if you look at our 2022 acquisitions, only about 8% of our acquisitions of our 2.4 billion in 2022 was in the city. You know, we're continuing to watch and track the impacts and potential impacts across other municipalities, but at this point we're not seeing a material impact.
Great. Thank you very much. Just a second question from me. We're seeing import container volumes at the ports of L.A. and Long Beach falling more than 20% year-over-year in the fourth quarter. Are you seeing any impact of that kind of trickling through to the warehouses at all? What's your view on what it could mean for just overall tenant demand in the SoCal markets if this trend kind of persists in the next few months?
Hey, Jessica. Michael. Thanks for joining us today. You know, first of all, the reduction in port volumes is principally and primarily a reflection of a comparison against last year, which was a record level for port volumes driven by, you know, the impacts of COVID and sort of the whipsawing effect of, you know, manufacturing and shipping and bottlenecks and all the rest as it flowed through the supply chains globally. Actually last year was the second year, best year on record, in terms of volume, and I think about 8% greater volume than 2019 by way of indication. You know, there's still a lot of noise in the market. The full COVID whipsaw has, is, you know, still resolving itself throughout the supply chains globally, to some degree.
With regard to the impact to our tenant base, we really haven't seen an impact to the tenant base. In part because the reasons I described, and because volumes are actually still quite robust. Also, and maybe more importantly, that our tenant base is truly disproportionately focused on regional consumption. So they're really less concerned about where the goods come from or how they are received, whether they're over the ocean, through our ports or otherwise. The fundamental tenant demand within our portfolio is more driven by regional demand in terms of business and consumer consumption. So we've seen even in prior years and prior decades, when we've had port slowdowns or even port shutdowns due to labor or whatever, we've never seen a change in demand from the tenant base.
In fact, I can't even think of an example of a tenant coming to us and saying, "Oh, gee, my needs have changed because of the ports." I think we're very fortunate in that respect.
Great. Helpful color. Thank you.
Our final question is from Michael Mueller with JP Morgan. Please proceed.
Yeah. Hi. Just curious, how should we be thinking about, I guess, head count G&A trends over the next few years, just given the continued pace on the acquisition front?
Hey, Mike, nice to hear from you. In terms of G&A, we continue to realize economies of scale within our operating platform, relative to our portfolio growth. When you think about 2022, we grew NOI by 40%, and we also saw, you know, with that's an 18% expansion in our square footage. significant growth, but at the same time, we're realizing operating synergies at an accelerated pace. When you look at our 2023 G&A as a percent of revenue, you know, we're projecting about 9.8% G&A as a percent of revenue, and that compares to 10.2% in 2022, and 2022 was down from 10.8% in 2021.
We do expect for that downward trend to continue, as our platform is nearly fully built out and our team is very focused on, continuing to find those operating efficiencies as well as, you know, innovation through technology.
Got it. Okay. Thank you.
Thank you.
We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.
On behalf of the entire company and our board of directors, we want to thank everybody for joining today. We wish you a great day, and we look forward to reconnecting in about three months. Thanks, everyone.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.