Jojo Yap: No, nothing we do add except that, again, want to emphasize all our buildings are designed to be multi-tenanted. Our larger buildings, you know, we could access that almost every time, the core sites, secure [indiscernible] and all that. So it gives us a lot of flexibility.
Nick Thillman: That’s helpful. Thank you, guys.
Operator: The next question comes from Michael Mueller with JPMorgan. Please go ahead.
Michael Mueller: Yes, hi. Actually, I think my questions were answered. I was just really going to ask about activity levels on some of the larger developments and just kind of what you’re seeing today compared to two or three months ago. And I guess how real did the discussions feel?
Peter Schultz: Mike, it’s Peter Schultz. I would say, again, that activity is better. Engagement is better. Decision making across some prospects has demonstrated a little bit greater urgency, but I would say most are still proceeding cautiously. So while there’s a lot of activity under the surface, tenants still need to be deliberate in making their decisions to move forward. As Peter mentioned earlier, the commitments for tenants, particularly for large buildings, is a lot of money when you outfit one of these large buildings. And like we’ve seen with elevated construction costs previously, they’re seeing elevated costs and some of this material handling equipment. So it’s a slower decision. And that’s partly why we’re seeing much better activity and faster decision making on the smaller mid-sized tenants.
Michael Mueller: Okay. Thank you.
Operator: The next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.
Unidentified Analyst: Hi, this is Dion [ph] for Mike. I guess just a quick question. Apologies if I missed this. But how much of the remaining 2024 leasing is in Southern California?
Peter Baccile: Chris, do you want to cover that?
Chris Schneider: Yes, there’s actually a higher percentage in Southern California remaining in 2024. If you look at the top three rollovers in 2024 are in Southern California. And we assume in our guidance that two of those three tenants will renew.
Unidentified Analyst: Okay, got it. And where do, just, I guess, where do you think spreads would be for that renewal?
Chris Schneider: We expect both of those rental rate increases to be 100% or more.
Unidentified Analyst: Okay, got it. Thanks.
Operator: The next question comes from Nicholas Yulico with Scotiabank. Please go ahead.
Greg McGinniss: Hey, good morning. This is Greg McGinniss on with Nick. And looking at some of the, 800,000 square feet vacant in Denver, I understand that you’re going to be converting some of the larger spaces into multi-tenant. Can you just give us an idea of the cost of that conversion and what the expected spreads will be? Just trying to get an understanding of kind of like net effective increase.
Peter Schultz: Greg, this is Peter Schultz. In our underwriting, we assumed multi-tenant. So most of those costs are covered to the extent we demise to a couple of additional spaces. There might be some incremental cost, but it’s not going to be material.
Greg McGinniss: Okay. Thanks. And just to follow up here on the developments, we see the – you added the Orlando build-to-suit to the pipeline this quarter. We do know that tenants pulled back a bit from build-to-suits with growing vacancy and more deliveries. This increase in activity and urgency that you’re seeing, could we potentially see build-to-suits kind of pick back up? Or does that feel like more of a unique situation in Orlando?
Peter Schultz: The situation in Orlando is for a manufacturing company that needs the additional capacity because their business is growing. They’re in the mechanical equipment business. So they had a real need for additional space, and we have the opportunity here to step into a deal where the sponsor was struggling with financing. So we were happy to take advantage of that opportunity. I would say more broadly speaking, Jojo, Peter can jump in on this. It depends on where you are. In some markets, there’s some additional supply. And where return expectations may be, given where the interest rate environment is, it may be less expensive for tenants to consider existing buildings. So we’ll see. Jojo or Peter, anything you want to add on that?
Peter Baccile: The only thing I’d say is that the build-to-suit as well as our acquisition in Houston are good examples of opportunities that came up because the owners couldn’t raise the money. So we had an opportunity to step in there and obviously get some good economics and add some great assets to the portfolio.
Greg McGinniss: Great, thank you.
Operator: The next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.
Caitlin Burrows: Hi, good morning, everyone. Maybe on development starts, they slowed later in 2023. So I was wondering if you could talk about your expectations for 2024, and when or under what conditions you would start some additional spec [ph] development?
Peter Schultz: Yes. So we do anticipate new starts this year. The level of that in terms of volume of that will be very dependent upon the leasing pace that we experience over the next call it six months. But we do expect to have starts and I’ll go so far as to say the first starts will probably be in South Florida.
Caitlin Burrows: Okay, got it. And the sale leased back that you announced, could you give a little more detail like how long is that lease? And you mentioned that you can build, I think it was over 100,000 feet on the site. Is that in addition to the existing building and maybe also what the competition was for the asset?
Jojo Yap: Sure. So Inland Empire, so we acquired it basically just land value and the sale leased back is long-term and we can build 175,000 square foot there.
Peter Baccile: That would be demolishing the existing building and building a new 175.
Jojo Yap: It is a completely new 175,000 square footer and basically based on our numbers today and where construction costs are and based on our land value, we think we can achieve good value creation on that, potentially new 175,000 square feet when the lease expires. But the lease right now is long term and we will enjoy rent from that tenant while we have a valuable asset and an infill market of Chino.
Caitlin Burrows: And anything you could say in terms of like was it a marketed dealer, a cost market or how that came to be?
Jojo Yap: How that came to be? It was a through a relationship just being in the market, leasing space. We came about this tenant needing to modernize, this corporation needing to modernize their real estate and so we came in off market.
Caitlin Burrows: Got it. Thanks.
Operator: The next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Blaine Heck: Great, thanks. Good morning. I think last quarter you talked about a few opportunistic acquisitions on development projects that had capital needs. What are you stepped into to kind of help with funding? Are you seeing any more of those opportunistic or distressed opportunities emerge? Or do you expect those deals to continue to be few and far between?
Peter Baccile: Yes, so we are definitely looking, beating the bushes. As I mentioned a bit ago, the Orlando and Houston deals would fall in that category. There’s a lot of institutional capital looking for similar opportunities. So it’s very competitive. And that just means that it’s the opportunity is — the arbitrage opportunity is probably fleeting. There was a lot of money on the sidelines. A lot of that capital has come in. And so it’s very competitive out there to try to bid on these opportunities.
Blaine Heck: All right, great. That’s helpful. And then given that development deliveries are still hitting the market at a higher than average rate despite the drop in new development starts. Can you just talk about whether you think there are any markets that might be significantly weaker rent growth as we look into 2024 given the rise in availability?
Peter Baccile: You know, I think it would be the traditional markets that you would think of that are less high barrier are going to have lower growth. That would be markets like Chicago, Houston, Denver, and then the coastal higher barrier markets would be the ones that are going to grow obviously faster.
Blaine Heck: Very helpful. Thank you.
Operator: The next question comes from Jessica Zheng with Green Street. Please go ahead.
Jessica Zheng: Good morning. Could you please provide some color around the trends you’re seeing for rent concessions? Are you seeing concessions increasing in any of your markets compared to the last couple of years?
Peter Baccile: Trends for rent concessions. Peter you want to start.
Peter Schultz: Sure, this is Peter Schultz. I would say generally speaking, rent abatement is up a little bit where it has been less than one half month per year of term to trending a little bit more than one half month per year of term. But that would really be at TI’s or have been higher largely because the cost is more, not really as an additional concession.
Scott Musil: And the only thing I’ll add is that renewals has changed. And renewals, the current, the past three rents and TI has been very, very sticky, basically no free rent and no TIs.
Jessica Zheng: Great. Thank you. That was helpful. And then just to follow up. I guess you mentioned you’re optimistic on the SoCal markets given the 20% year-over-year increase in import volume. I was wondering on the flip side, are you seeing that shift back to SoCal negatively impacting the East and Gulf Coast port markets at all?
Peter Schultz: No. It’s a short answer. Supply chains take a long time to change. Companies have diversified their supply chains to take advantage of both the East Coast and the West Coast. There are certainly disruptions now, as we all know, in the Suez Canal and Panama Canal. There’s been labor issues on the West Coast pit. We’ll go back and forth.
Peter Baccile: There’s a labor agreement on the East Coast to be done.
Peter Schultz: The pace of change is slow.
