First Industrial Realty Trust, Inc. (NYSE:FR) Q1 2023 Earnings Call Transcript April 20, 2023
First Industrial Realty Trust, Inc. beats earnings expectations. Reported EPS is $0.42, expectations were $0.28.
Operator Good day, and welcome to First Industrial Realty Trust’s First Quarter Results Conference Call. All participants will be in listen-only mode, [Operator Instructions]. After today’s presentation there’ll be an opportunity to ask question [Operator Instructions]. 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.Arthur Harmon Thank you, Marliese. Hello, everybody, and welcome to our call. Before we discuss our first quarter 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 20, 2023.
We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of 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, Vice President of Capital Markets and Asset Management.Now let me hand the call over to Peter.Peter Baccile Thank you, Art, and 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 rate 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 and to capture incremental demand. However, we expect new starts to decline throughout 2023 compared to last year due to higher capital costs of 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 release is 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% to 55%.
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This new midpoint is 5 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 square foot First Park Miami building, 10 and the 105,000 square foot first Lehigh Logistics Centre in the Lehigh Valley market of Pennsylvania. We leased 50% of our 128,000 square foot first steel building in Seattle. We also inked a 27,000 square foot lease at our 4 building 347,000 square foot first loop logistics park in Orlando. That newly completed project is now 56% leased. Given our development leasing progress and the favourable 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 square foot 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 totalled 3.6 million square feet 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 square feet. 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 in our Phoenix joint venture.Speaking of that venture, in the first quarter, we sold 31 acres to a data centre user for a sales price of $50 million. Our share of the gain in 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 two 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 a little over two months’ time lapse 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.Scott Musil 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, rental rate bumps embedded in our leases and higher average occupancy, partially offset by higher free rent an 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 square 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 to $2.45 per share. Excluding the $0.02 per share income item I discussed earlier, our guidance range is $2.33 to $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% to 98.75%. Same-store NOI growth on a cash basis before termination fees of 7.75% to 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 31.For the full year 2023, we expect to capitalize about $0.09 per share of interest. In our G&A expense guidance range is unchanged at $34 million to $35 million. Guidance does not reflect the impact of any future sales, acquisitions, new development starts, fees debt repurchases or repayments nor the potential issuance of equity after this call.Let me turn it back over to Peter.Peter Baccile 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.Arthur Harmon Marliese?
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Question-and-Answer Session Operator [Operator Instructions]
And our first question comes from Ki Bin Kim from Truist. Ki please, go ahead.Ki Bin Kim 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 couple of quarters?Peter Schultz Ki, good morning, it’s Peter. 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. And I would say the activity has been pretty consistent, not better or worse than it’s been since the beginning of the year. Jojo?Johannson Yap Sure. And 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 other construction.Peter Baccile Overall, Ki Bin, the activity is characteristic of 2018, 2019. We mentioned on the last call, we see demand normalizing. And you’ll recall, those were very, very good years. So we’re coming off the kind of bubble created by COVID and prospect activity is pretty good.Ki Bin Kim Okay.
And you guys mentioned on the opening remarks that you do see, I guess, everyone sees it a — 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. But as we are trying to absorb the amount of supply coming in, how do you think about potentially throttling your development pipeline as we enter potentially a little bit of a soft patch in the economy?Peter Baccile Yes. 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 400 million to 450 million square feet coming this year. About 20%, 25% of that is pre-leased. So it’s not all spec. And — but we also see keep it.
So that will bump vacancies up a little bit. But we also see a pretty big slowdown in starts, probably down in the first quarter, 40% to 50% this year so far, and we think it’s going to continue to decline. And so probably towards the end of next year, you’ll see vacancies kind of come back to where they are now, maybe even a little bit lower. So the market, we think the dynamic is going to remain where it’s a landlord 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. And again, we’re obviously going to 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.Ki Bin Kim Okay, thank you.
Operator And our next question comes from Rob Stevenson from Janney. Rob, please go ahead. Robert Stevenson 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 day 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?Peter Baccile Yes, really sorry, but the first, I don’t know, 15% of your question we didn’t hear. Can you ask it again? Robert Stevenson Sure. So Peter, you were talking about the expected profit margin and the development pipeline 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?Peter Baccile 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. So 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.
So that will obviously have an impact on the margins that we’re talking about today.Johannson Yap Yes. So that is the primary reason for the movement in the profit margins. It’s roughly a 25 basis point increase from Q4 cap rate wise from Q4 2022 to date. As there were slight tweaks, Rob, in terms of — of course, we keep all the construction cost accurate but that were so slight and there was no movement in rents really. And so the major contributor to that difference in margin is the self-imposed cap rate increase for the [indiscernible].Robert Stevenson And are you seeing any real relief in construction and material or labor cost on the construction side these days? Or is still relatively where it’s been over the last few quarters?Johannson Yap Okay.
Good question. The total construction cost actually are flat to a slight decrease when you compare Q4 to Q1 2022, steel prices actually came down, but 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. But for 2023, our internal underwriting criteria will use a 5% cost escalation. We think there is some downside trended that depending upon the number of construction starts. Because if construction starts continue to be at a low level, we should feel a little bit more moderate increase. Does that answer your question?Robert Stevenson Absolutely. That’s great. Thank you. And then, Scott, what are you seeing today in terms of availability and pricing on debt financing?
What is your best cost of debt?Scott Musil I would break it into two pieces. One, I would look at the bank loan — term loan market. And as everyone knows, we closed on the $300 million term loan in August of last year. That market has changed quite a bit. Our maturity was a five-year deal. And 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, but the upfront fees have increased considerably. So, August compared to where we’re at today at the bank term loan market, maturities aren’t as long, and the total costs, including fees is up. I would say the other option that we have is doing a public bond deal or a private placement.
And if you were to look at spreads on a 10-year deal, I would say were probably 200 to 210 basis points.Robert Stevenson Okay. That’s helpful. And then one last one for me. The Camelback 303 purchase option, is that at a fairly similar price to the 1.6 million acre you did here in the first quarter? And is there anything different in terms of the quality or use of the land between the first 50 acres and the last 70?Johannson Yap Rob, can I 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. And so we disclosed to you the ground lease numbers. And in terms of use I would say it would be a similar use with — and the lot that they bought has frontage on two of their corners, and this one is published on the freeway.
So maybe one less suite from it, but that’s about it. It’s same use.Robert Stevenson Okay, perfect. Thanks guys, appreciate the time. Operator And we have a question from Todd Thomas from KeyBanc Capital Markets. Todd, please go ahead. Todd Thomas Yes, hi thanks. Good morning. I just wanted to follow up a little bit on some of the development leasing. I think the guidance continues to assume 12 months of downtime from completion to lease up, is that right? And I know you’ve been running closer to six months on average. But how should we think about the pace from here? And do you see any risk that any of the projects delivered in ’22 might not be leased before that 12-month mark?Peter Baccile So yes, you’re right. We do continue to use a 12-month assumed downtime for lease-up on new completions.
The last couple of years, it’s been shorter. I would characterize the post 2020-time frame 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 ’19 going forward, we’d all be just fine. So 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 want to talk about the projects in your region?Peter Schultz 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 moving ready. So there’s not a long lead time to permit and outfit the building.
So 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 midsized 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. So 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 want to add?Johannson Yap Yes. Yes. I just want to add that we’re really excited about the projects that you see here under construction and already completed.
In terms of the under construction, I mean, about 73% of them are in super infill markets and coal cell markets, primarily in California, Northern Cal, SoCal and South Florida. And so if you look at all the designs of these projects, I would say they’re top tier and not only top tier, but the very constrained markets. So we’re really very happy with this pipeline. And so of course, our job is to beat that 12 months down time.Todd Thomas Okay. That’s helpful. And then in terms of rent change going forward, you previously had highlighted the opportunity that you had in Southern California this year with sort of an outsized percentage of role during the year. Are you through that now with this quarter’s results? Or is there still some role in SoCal to be worked through in that, I guess, 37% portion of this year’s role that has not been addressed yet.Christopher Schneider Yes.
This is Chris. Actually, if you look at our three largest remaining rollovers, they range from 225,000 square feet up to 300,000 square feet. All of those rollovers are in the Inland Empire market.Todd Thomas Okay. And then just last question around the guidance and I guess, the occupancy assumption. Does the guidance still assume that old Post Road is leased up, they have an executed lease in the third quarter?Scott Musil Todd, this is Scott. That’s correct.Todd Thomas Okay. So that — so 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 in terms of the occupancy assumption then that’s what sort of 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?Scott Musil Well, we gave a range of occupancy quarter end average and that was 98.25%. So we’re higher than that as we stand today. So 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%.Todd Thomas Okay. And the guidance, though, assumes that 100 basis points — a little over 100 basis points…Scott Musil It assumes that old costs leased up in the third quarter, it only impacts the quarter and average by 50 basis points because it’s only in place for two quarters. But yes, it’s assumed in our occupancy guidance to lease up in 3Q, Todd.Todd Thomas Got it. All right, that’s helpful.
Thank you.Operator And we will follow with a question from Rick Anderson from SMBC. Rich, just hang on a second while I unmute you. Okay, Rich, go ahead, please. Richard Anderson So the — this nearly 60% cash releasing spread 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.Scott Musil Over that Chris, the leasing costs on average, and they really haven’t changed materially. Christopher Schneider Yes. One statistic we really look at is kind of our percentage of but TI and leasing cost as a percentage of the net rent over the entire lease term.
And if you look at that number, that x number for the — of the ones signed already, is actually a little bit lower than where we were in 2022. So we — so we’re not spending any more money to get those of those higher.Scott Musil 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.Johannson Yap And no additional concessions. In fact, there are some deals in California or renewals or as is.Richard Anderson Okay. Good. So it’s a pretty pure number. And then 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 perhaps they’re not 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?Peter Schultz Rich, this is Peter Schultz. No, 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. So no change in their program or what we anticipate, 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.Richard Anderson Could you quantify how much a typical tenant that does beyond the just basic racking system, but more of the higher tech type of investment?
How much is that as a percentage of something? Can you quantify how much of an investment tenants are willing to make, which really makes the sort of sticky?Peter Schultz 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. Jojo, anything you want to add to that?Johannson Yap No, I mean in addition to the racking that Todd mentioned, I mean, the investment forklifts investment charging stations and then sometimes dock packages. But overall, there’s really not — I mean net we’re not open to all of the expenditures, but these are standard expenditures. And nothing materially has changed.Richard Anderson Okay, thanks very much.
Operator We will follow up with the question from Nicholas Yulico from Scotiabank. Nicholas, please go ahead. Greg McGinniss This is Greg McGinniss on with Nick. So, good morning, everyone. Just looking at the FFO per share guidance, which was raised $0.04 at the midpoint with the $0.02 from Camelback, $0.01 from capitalized interest, potentially from $0.01 from a more bad debt expense assumption embedded in the same-store growth guidance. So 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 really looking more towards the top end of the guidance range now for the year?Scott Musil Yes. So let me just correct you on things about the $0.04 increase.
$0.02 per share was primarily due to early development leasing First Park Miami 10 on firstly high as examples, $0.02 per share was the increase in FFO from the joint ventures, primarily due to the leases. You’re absolutely correct that our capitalized interest was increased to $0.01 that was offset by an increase in interest rates we’re assuming for the remaining three quarters in our line of credit, so that got netted against it. But what I would say is, if you look at our guidance now compared to what it was in the fourth quarter, the only change we made was an increase sides FFO guidance was the increase in the same-store by 25 basis points, and that has to do with the better increases on cash runner rates due to new and renewal leasing.
One other point we want to make also, if you remember on the fourth quarter call this relates to our midpoint to $2.38. Our fourth quarter call, we mentioned we were being negatively impacted by real estate taxes in regions in Denver, it’s about $0.02 per share. The values in that market up. We’re going to collect there was increases in the following fiscal year. So if you were to take out that negative impact, our FFO midpoint would be $2.40 per share.Greg McGinniss Right. Okay. I appreciate the color there. And I guess just following up on the millions of bad debts. Is that no longer assumed within same-store growth? I guess what changed there? And if you should touch on following some movement in the top tenant disclosure this quarter, how are you viewing the credit quality of tenants today?
And what is your tenant watch list look like?Scott Musil Sure. So bad debt expense for the quarter was $100,000 compared to $250,000 what we assumed in original guidance for the quarter. Quarters 2, 3 and 4Q are $250,000 per quarter, which is unchanged compared to our fourth quarter guidance. I would say, so bad debt expense was very low in the quarter. I would say as far as tenant watch list, nothing material on our watch list, but I will bring up ADESA, which we talked about in the fourth quarter call owned by Carvana. They’ve been having some financial problems, but what we’re seeing on the tenant front from ADESA and the rent timely.Greg McGinniss Okay. Thank you.Operator And our next question is coming from Caitlin Burrows from Goldman Sachs.
Caitlin, please go ahead. Caitlin Burrows So yes, 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. So 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 is it from a timing perspective since we’re already where we are in the year, is it not quite that amount. Just wondering kind of keep on gating the 12-month lease out, how much potential there still is?Scott Musil 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. So some of the developments that we talked about in the fourth quarter are already inside of that 6-month period. So we’re not including them in our number. Is that — does that answer your question? Okay?Caitlin Burrows Yes, I think it does. Thanks. And then separately, you talked about how demand today seems characteristic of the 2018 and ‘19-time frame, which I agree was a really good time for the industry. So I was just wondering, what do you think is driving that change versus, say, 2021? Is it that company’s 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.Peter Schultz Caitlin, it’s Peter Schultz. I would go back to what I said a few minutes ago. So the cadence of decision-making smaller and mid-sized tenants continues to be better than larger tenants. Larger tenants had been certainly a large percentage of the net absorption in the last couple of years. So 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. But the smaller midsized tenants continue to be very active and make decisions quicker.Peter Baccile So the other thing, Caitlin, remember in 2020 leasing was pretty anemic given COVID and the shutdowns and everything.
And one very, very large e-commerce player went at least about 70 million square feet, probably in an effort to outrun and outpace and put down their competition who was weaker that year. In fact, Amazon needs more space than the next 30 most active tenants combined in 2020. So you get to ’21, in the beginning of ’22 and everybody play a catch-up and you had this very, very high strong sense of urgency that it was built out your network and your platform now or maybe you get outcompeted and go out of business. So you had a high sense of urgency and a huge pop in leasing to try to catch up. And 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 ’19.Caitlin Burrows That makes sense.
And then maybe one last one. Just in terms of — you talked about how the market starts the development activities come down some, but given what you have placed in service and started you’ve maintained close to $600 million of in-process construction. So 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?Peter Baccile 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, 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 or making those decisions a little bit more slowly, so 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 wanted to have integrity and it mitigates risk.And at the same time, as you know, it’s a number that can move as the company grows. So it’s not a constraint on our growth, yet it is a mitigant on the risk, and we’ll just have to see what happens with leasing, especially with the larger spaces as we move forward.Caitlin Burrows Perfect. Thank you.Operator Our next question comes from Vince Tibone from Green Street. Vince, go ahead.Vince Tibone Good morning. I wanted to follow up on your cap rate commentary embedded in the development pipeline and crop margins. I’m just curious, is the higher stabilized cap rate, the result of transaction you’ve seen and a little bit more pricing visibility?
Or is it still is the best estimate at this point in time?Peter Baccile Yes. There haven’t been a lot of data points a lot of trades. Again, when 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. And you’ve seen some transactions and one of our peers announced one recently at a pretty decent yield. So that’s really just a judgment on our apartments to try to be intellectually on us with where we think cap rates really are.Vince Tibone No, I appreciate that, and I figured that was the case. I just wanted to confirm. And then also somewhat related. I was wondering if you could talk about some recent trends in the development land market.
And in particular, I’m curious where you would estimate the Phoenix plan sell price relative to the peak, presumably about a year ago? Like do you — just how far off do you think that price was from the peak or kind of broader development land values.Johannson Yap This is Jojo. The pricing is basically to a data center buyer and the data center metrics, land price is totally different from the industrial pricing. So we’re very happy to be selling at the data center, although we will — 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 flatten out, that’s not our business. Our business is creating value we create a lot of value there. In terms of industrial, industrial overall are on the country a price has moderated because of the higher yield requirements and the higher cost of capital.
So that is a trend across all markets, including Phoenix.Vince Tibone No, that’s really helpful color. Anything you draw out there for a range of how much land would have fallen and I agree with your broader points. Is there any way you can quantifying that?Johannson Yap Are you asking about a data point on data center pricing or…Vince Tibone Well, I guess is for more traditional industrial development. Do you think pricing is off 10%, 30%? Any kind of rough range would just be your thoughts on.Johannson Yap Okay. In terms of national pricing, it really depends on the market. When 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 sell part of the market represents a smaller portion of total investment.
So if your total investment comes down, therefore your per square foot is less. In the global markets, the land upon the repeat is a higher portion of total investment. So if I were to force to give a range, the range would be anywhere from 10% to 40% delta.Vince Tibone No, I appreciate those numbers and taking a stab on it. Thank you.Operator [Operator Instructions] And we will continue with a question from Mike Miller from JP Morgan.Michael Mueller So two questions. First, are you seeing any trends for tenants wanting to sign either longer or shorter spaces than normal? And secondly, I guess around lease income, we just assume that the $0.04 of annual income goes away in 2Q, 2025? Or is it something more to it than that?Peter Schultz Mike, it’s Peter Schultz.
I’ll take the first part of the question. No, we’re not seeing any material change in terms from tenants, newer renewal. Our average lease term has ticked up a little bit, but I wouldn’t say it’s material.Scott Musil And then 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 roughly a 6.5% all-in via the model. So the paydown of the line of credit decreases our interest expense, which almost offsets the loss of the ground lease rent pickup.
So that’s how we look at that.Michael Mueller Got it. Okay, that’s helpful. Thank you.Operator And we’ll proceed with a question from John Petersen from Jefferies. John, please go ahead.John Petersen Great. A lot of talk about development. That’s where you focus most of your capital deployment in recent years. But curious what you’re seeing or expect to see in the acquisition market — and what it kind of takes. We hear a lot about a pretty wide bid-ask spread. What do you guys — do you expect that bid-ask spread to narrow as the year progresses and see more acquisition opportunities — and then maybe one way to kind of also frame that question is last year, you did300 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?Johannson Yap Overall, let me address that in terms of the market for more acquisitions.
We’re not forecasting that. We’re not seeing a lot of distressed tie sales a lot of the quality product that we may have considered are still — the bid-ask spread is really, really high. Owners because of the strong fundamentals in all the markets, owners who have good product has elected really not to sell that much. So we don’t — we’re not forecasting a significant amount of 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 roughly 120 basis points, a little bit over 120 basis points to date.John Petersen Okay. All right. That’s very helpful. And then I guess within your markets and your properties, do you guys have a view of — or what are you guys seeing in terms of market rent growth the first four months of this year?
Or maybe just talk about the cadence of rent growth you’re seeing this year versus what we were seeing last year?Peter Baccile Jojo?Johannson Yap 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-wholesale markets. In terms of year-over-year, we expect 2023 market growth to moderate versus ’22.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 to 10 this year.John Petersen Okay. That’s helpful. Thank you very much. Operator And we have a question now from Vikram Malhotra from Mizuho. Please, Vikram, go ahead. Vikram Malhotra Thanks so much for taking the questions.
I just maybe building off of that market and question, 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 broader the submarkets within SoCal and then some differences between demand for large box versus small. Can you maybe unpack this a little bit? What are you seeing that may be similar to what brokers are calling out and maybe what’s different?Johannson Yap 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 as the tenants that are expanding or else, everything is almost on renewal.
Of course, when they’re exciting, we couldn’t accommodate their growth. In terms of rent growth, we’re seeing, again, activity from — we’re seeing positive brand growth from all size ranges. I would say that business is right now, of course, given all the things that they’re seeing in the macro economy are watching rents as well. But for larger format buildings, the only thing I will add is that some tenants have gone a little bit further in L.A. So there’s continued activity to the I-10 corridor all the way to 12-month banning. There’s some large format building happening in high desert that’s basically what we call IENorth. And then basically, there’s also be south on the 215 Corridor. So I-215 South. That’s still a comment I would see that’s different from — in the last six months.
The large building tenants, a format tenants are looking a little bit further to save on rent.Vikram Malhotra Okay. So — but the core sort of Inland Empire than, I guess, East-West, are there any specific inflections you’re seeing maybe 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?Johannson Yap No, no, no change. I’m not seeing really any big infection. In U.S., there’s not much opportunity to build like in IE East. So if you look at the total gross leasing absorption, IE East because of the ability to build a little bit more there to a lot of activity.
And then IE East rent growth actually now was higher than our IE West, but that doesn’t mean, IE West is lagging. IE West does not have enough products to really compete with IE East. So…Vikram Malhotra And then just in terms of the last question, just on the development side, assuming there are more opportunities. Sorry, I missed this. I joined later. But just in terms of funding, if 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?Scott Musil Sure. The spend that we’re forecasting in 2023 related to our developments is about $180 million. Property sales is going to be a big piece of that.
The midpoint of our guidance for sales is about $100 million. We’re going to generate excess cash flow after CapEx and dividend of about $60 million. And then the remaining $20 million will be funded by cash on hand or our line of credit. So we’re in pretty good shape from a funding point of view.Operator We now have a question from Anthony Powell from Barclays. Anthony, please go ahead. Anthony Powell Thank you. Just one for me on Dallas, where we’ve seen some deliveries and availability in please. What’s your role in Dallas for the next 12 months? And do you expect to see any guess rent growth pressure there given the supply?Johannson Yap Well, in Dallas, our portfolio is primarily infill markets. We have good investment in the Great Southwest which infill market you’re absolutely correct that when you look at deliveries in Dallas, there’s three markets that have the influx of most products, which we don’t have either ownership in or not planning to develop.
The South Dallas, East, Dallas and North Forth worth. If you combine all of the new buildings in those markets, that comprise about 80%, I think, of the products coming in. So we’re not in those markets. So — we — in those markets, if you have a product, you expect the competition, but we’re not in those markets.Anthony Powell Thank you.Operator Next question comes now from Nick Thillman from Baird. Nick, please go ahead. Nick Thillman Good morning. Maybe just touching on demand a little bit. Peter usually mentioned lease renewals or the time line on that as a good indicator of demand in the market. Have you seen any shift in the time line of tenants going to discuss renewal options with you?Peter Baccile Not really. That time line has stayed pretty consistent over the past year, two years.
Not a big change.Nick Thillman And then the last one for me. Maybe just on 2023 role, you said there was a little bit more outside exposure to Southern California. As we’re looking at ’24, is that going to be more in line with your current portfolio? Or is there anything — any markets that are a little bit more exposed there?Peter Baccile The — from a rollover standpoint, as you know, in ’23, California was disproportionately high, meaning disproportionate to its share of our portfolio. In 2024, it is slightly lower than its share of our portfolio.Nick Thillman Okay, all that’s it for me. Thanks. Operator And 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.Peter Baccile 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.Operator The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
