Hamid Moghadam: Yes. In terms of where deals are being priced out, I would say nine months ago, a year ago, there was very little activity, and we were pricing deals in good markets in the US in the low nine IRRs, albeit not much was happening at those kinds of return expectations. Today, I would say those are 100 basis points lower and there’s a lot more volume in that a lot of transactions happening in the marketplace in the low 8s. Europe, that number — those numbers would be in the mid-7 IRRs. The reason I’m answering in IRR and not cap rate is that the mark-to-market in different locations is significantly vary. For example, for the same IRR, you would be a lot lower cap rate in Southern California than you would be in a market that is leased at market rents.
Operator: And the next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question
Thomas Catherwood: Thank you and good morning, everybody. Hamid, I appreciate your comments on rates and the Fed’s actions or inaction serving as the key governor of customer activity and leasing right now. But how are you seeing supply chain disruption, like in Baltimore, and geopolitical risks impacting customer behavior, if at all?
Hamid Moghadam: I don’t think Baltimore has been a big deal in terms of its impact on our business. It’s obviously been a big deal to the people who died in the accident and the like, but — and to traffic patterns. But not to the customer. The customers have enough optionality that they can deal with those kinds of disruptions. I do think the geopolitical stuff has people a little wigged out, more — definitely more than last quarter. And look at the interest rates, I mean, we’re up a good 70, 80 basis points since the last time we all met. And I think that didn’t happen evenly throughout the quarter. I think in the last month that sentiment has changed pretty dramatically. So I think both of those things are weighing on decisions, particularly if the decisions are discretionary.
And people, when there are no choices like they were no choices in Southern California, they always lease more space than they need because they don’t want to be held short. And when the opposite is and they have some choices, they take their time because they expect better deals if they wait. And that difference, even if it’s minor, even if it’s 5% to the upside and 5% to the downside can be a 10% swing, which are sort of the kind of numbers we’re talking about here. So that’s very much what happens in the short term. In the long term, demand has to match supply and they can’t keep doing that forever. So now if you’re going to ask me exactly what that point is, I can’t really tell you. But we think it’s a matter of quarters, not years.
Operator: And the next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question
Jonathan Petersen: Great. Thank you. Maybe one more question on the port of Baltimore. I know it’s not a big container traffic port, but have you seen any knock-on demand show up in other East Coast markets given the dislocation that’s created? And then also, maybe a part two, but I know SoCal has been weak over the past year, you’ve talked about that a lot, and the resets already happened. I guess I’m curious if you could help us contextualize, from where we stand today, if you compare the strength of like SoCal versus the East Coast markets like New Jersey and Pennsylvania, like from where we stand today, which one looks the best over the next year?
Chris Caton: Hey, Jon, it’s Chris Caton. First on Baltimore, you’re right. The container traffic there is typically 50,000 TEUs a month. The time horizon of necessary diversions is not thought to be more than a couple of months. By comparison, New York, New Jersey is a 300,000, 350,000 TEU port. And a lot of these diversions have gone to Norfolk. So you’ve seen some leasing in Norfolk. It’s not a market where we operate. So no, there are not knock-on effects. As it relates to Southern California versus the East Coast, the SoCal market remains fluid, and I believe — we believe it will underperform. This is a six-month, 12-month view. Naturally, New Jersey has a completely different set of factors as it relates to rent growth that it’s experienced over the last several years in terms of the level of demand that we see in that marketplace as well as sublease trends.
Now it’s not the moment to get bullish on New Jersey. Let’s see the port agreement, the IOI port agreement get made. But over time, both will be very strong performers after this period of fluidity and uncertainty.
Hamid Moghadam: Yes. The way I would answer that question is that if you limit it to the next 12 months, I would go PA, New Jersey, SoCal. And if you ask me for the longer term, I would go SoCal, New Jersey, PA. And I would put all three of them in the upper 1/3 of markets across cycles. Maybe the upper 20% of markets across cycles.
Operator: And the next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question
Ronald Kamdem: Hey, good morning. Just hoping we could put some numbers on the soft demand that you seem to be messaging. So previously you were forecasting 1.5% of stock of net absorption this year. I’m just wondering what that number has shifted to given what’s happened over the past 30 to 45 days. And if you can tie in where you see sort of availability rates and next 12-month market rent growth. Thanks.
Hamid Moghadam: Yes. Let me take — we have taken demand down for this year internally from 250 million feet in the US to 175 million, and fundamentally have kept demand at the same level going forward. What we debated that we were going to do is whether we add the 75 million that we missed this year into the subsequent two years, and that’s where the bid and ask is in our shop. And we’re not clairvoyant, so that’s — I’m just giving you the range of how we think about it. Now you answer the second part of your question, Chris.
