Marshall Loeb: It’s definitely helping them and when we look at our activity in markets, especially some of the Texas market – I guess I’m lumping onshoring and nearshoring together and the number of – the building we acquired in Dallas, for example, it’s a tech company electrical equipment, and they are a supplier to the semiconductor plant in Sherman, Texas, which is suburb of Dallas. So, again, as we see those things, so many of the different kinds of semiconductor EV plants have been, Tesla go into Austin, we’ve picked up Tesla suppliers in Austin and even we’re in Northeast San Antonio, so just on I-35. There’s San Diego, we’re feeling the effects of Tijuana and Juarez, so that we’re going to stay on this side of the border have really picked up.
And then so many of the plant, whether and even Phoenix has the TSMC plant, and some things like that. So it’s picked up a number of those. So we’re – whether if we’re directly involved, we won’t be directly involved, if we are it’ll be as sub – we’ll have the suppliers to that plant, but it’s also helping push that economy forward. So I like, again, when I mentioned some of the sector drivers, whether it’s just e-commerce growing every year and more people moving to Phoenix, or Orlando, or Dallas, Texas, those that onshoring and nearshoring. It seems like the tech plants really come onto the U.S. and then you end up with a lot more activity. We’ve been looking for our next opportunity and patient with that end markets like El Paso and San Diego was an example.
It’s been hard. We’ve kind of we’ll wait till we find it. But we’d like to grow in those two markets, just given the pace of activity across the border. And I don’t think that’s slowed down. It really started with some of the trade tariffs with China and each quarter, it seems that the Mexican – the trade with Mexico seems to grow and China falls as a trade partner and again, we think between Arizona, Southern California and Texas we’re in a good position to try to grab our piece of that market share.
Samir Khanal: Thank you.
Operator: Our next question comes from Bill Crow from Raymond James. Please go ahead with your question.
William Crow: Thanks. Good morning. Marshall, you’ve talked about the looming risk out there potentially being the health of the tenant, their balance sheets, et cetera. Wondering as you look ahead to the lease all next year, is that causing you to think about retention rates being lower than they were, say, this year?
Marshall Loeb: No, it’s interesting. Actually, what seems to happen is when things get bad like during COVID, our retention rate goes up and doesn’t make sense to me, as people are nervous to expand or things like that. So you might do a shorter-term renewal. I think next year is rollover, we’ve taken a big bite out of it from where we started, we’re down to about 11%. It should be an opportunity for us to push rents next year as we move those to today’s market. I guess, I just worry about all the compounding effect that, say, it may be twofold. At a high level, you think of all the things that are impacting any business today, and our tenants aren’t immune to that, and so that concerns me. But then when I look at our bad debt, and our watch list, it feels very manageable.
And it’s been actually each quarter, it’s been a little bit less than what we budgeted knock on wood. So we haven’t had the problems, probably then I would have expected at this point in time. I’m glad we have the tenant diversity we do and things like that. And, I think, the roll next year will give us an opportunity to push rents which are really benefit mainly – certainly kind of a mid-year convention 2025 even more will benefit next year, from this year’s rent increases. And as a hope our tenants as well as the tenants and the buildings next door can hang in there given this drops in supply.
William Crow: Is there any reason to think about a material downshift in same-store NOI as we turn the calendar to next year?
Marshall Loeb: Unless we have a lot of tenant bankruptcies, I guess, as I’ve tried to think about it mathematically, it has to be a pretty big drop in occupancy. And we only have 11% rolling and we’ll – any quarter can bounce around. But it always seems that we average some ways. And if you and I were picking up coverage of a company, I would model 70% to 75% retention rate that seems to be kind of on an annual basis about what we shake out at any time. And if the economy gets weak, we might pick up a little bit and a low number isn’t always bad, especially if we’re moving them into the next building enough hard.
William Crow: Yeah. Okay. That’s it for me. Thank you.
Marshall Loeb: Okay. Thanks, Bill.
Operator: Our next question comes from Vince Tibone from Green Street Advisors. Please go ahead with your question.
Vince Tibone: Hi, good morning. It looks like the expected yield on third quarter development starts are slightly higher than the existing pipeline. Can you just confirm if that was the case, and also just discussed kind of where you believe market cap rates are today for new developments? And what profit margins you’re targeting on any new starts just given a lot of uncertainty right now around where cap rates may be and kind of what profit margins could be on some of these developments?
Marshall Loeb: Yeah, that’s a good point. We’ve typically will probably for a new start now look, ideally, I’d say, again, it would depend on if we had some pre-leasing an existing tenant or what city that, but the cap rates will vary, north of 7, we typically said as a rule of thumb, we’d like 150 basis points above a market cap rate to kind of justify the construction and the leasing risk of a new development. And I will say that cap rates, and you all study it more closely, probably than even we do it. It’s been a pretty fluid market. We’ve been able to buy one-off buildings at attractive cap rates. And we’ve gotten clobbered on some portfolio transactions. And, again, not big portfolios, meaning kind of 3, 4 or 5 building portfolios.
So cap rates think pretty fluid right now. And, ideally, we thought if we can start in the 7s, call it, we have high 6 to at least 7, you’re looking at our cost of capital, we’re creating value above the cap rate when we deliver the building and what I like about the REIT model compared to maybe private equity or merchant developer, our bid has always been they’ll be another half million people in Austin, Texas, 10 years from now. So if we can start with a good yield, it will only grow over time. So if that helps, that’s kind of how we think about it.
Vince Tibone: No, that’s really helpful. To me just clarify one point when you say kind of high-60s, low-7s, is that on a GAAP or a cash basis that yields?
