First Industrial Realty Trust, Inc. (NYSE:FR) Q3 2022 Earnings Conference Call October 20, 2022 11:00 AM ET
Arthur Harmon - Vice President, Investor Relations and Marketing
Peter Baccile - President and Chief Executive Officer
Scott Musil - Chief Financial Officer
Robert Walter - Senior Vice President, Capital Markets and Asset Management
Johannson Yap - Chief Investment Officer
Peter Schultz - Executive Vice President
Christopher Schneider - Senior Vice President, Operations and Chief Information Officer
Conference Call Participants
Ki Bin Kim - Truist Securities
Robert Stevenson - Janney Montgomery Scott
David Rodgers - Robert W. Baird & Co.
Greg McGinniss - Scotiabank
Todd Thomas - KeyBanc Capital Markets
Richard Anderson - SMBC
Anthony Powell - Barclays
Michael Mueller - JPMorgan
William Crow - Raymond James
Good morning and welcome to the First Industrial Realty Trust, Inc. Third Quarter Results Conference Call. [Operator Instructions] Please note that this even is being recorded.
I would like to turn the conference over to Art Harmon, Vice President of Investor Relations and Marketing. Please go ahead sir.
Thank you, Cole and hello everybody, and welcome to our call.
Before we discuss our third quarter 2022 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, October 20, 2022. 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 filing 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 that we'll open it up for your questions. Also on the call today are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management.
Now let me turn the call over to Peter.
Thank you, Art and thank you all for joining us today. Our team delivered another strong quarter highlighted by continued leasing success in our portfolio, including the exceptional rental rate growth we are capturing on lease signings related to 2023 expirations, which I will discuss in more detail shortly. We also started several new developments, including three buildings at our Phoenix joint venture where we continue to build upon our success in the 303 logistics quarter.
Due to our strong operating results, we're increasing the midpoint of our full year FFO per share guidance for the third consecutive quarter. Scott will walk you through the details during his remarks.
Fundamentals in the industrial real estate market continued to support further market rent growth. According to CBRE, industrial vacancy was just 2.9% at the end of the third quarter. Third quarter net absorption was 81 million square feet versus completions of 101 million. For the first nine months of 2022, net absorption was 319 million square feet, exceeding completions of 255 million square feet.
In our core portfolio, we finished the quarter with an occupancy rate of 98.3% and cash same-store NOI growth of 8.5%. We continue to achieve strong overall rental rate increases on our new and renewal leasing.
Through yesterday, we have taken care of approximately 98% of our 2022 rollovers. And when combined with our new leases signed with 2022 commencements, our overall cash rental rate change is 25%. With just a handful of 2022 rollovers remaining, we are set to achieve an annual company rental rate growth record for the third time in four years.
Given the strong fundamentals in our business, our regional teams continue to push rental rates on new and renewal leasing for 2023 expirations. As of last night, we have taken care of 38% of next year's lease expirations at a cash rental rate increase of 28%. Our current outlook for the remainder of the 2023 rollovers is even better. For the remaining 2023 lease expirations, approximately 36% of net rent is from Southern California versus a 24% net rent waiting for SoCal in our overall portfolio. We'll give you an updated view of our projected 2023 cash rental rate change on our fourth quarter call when we have completed our budget review. We have also been successful in pushing contractual rental rate escalators in our leases. Our new and renewal leases with 2023 commencements, our average annual escalator is 3.6%.
With respect to new development leasing, our tenant at the 219,000 square foot building one at First Park Miami is doubling their space and will occupy the entire building, which will deliver in the first quarter. We also pre-leased 43,000 square feet at one of the four buildings at our 344,000 square foot First Loop Logistics Park in Orlando.
Moving to our new development investments. In the Inland Empire, we started the 155,000 square foot First Wilson Logistics Center II, which is adjacent to our first development there that we successfully leased in advance of completion. Our estimated investments for the sister building is $29 million with a projected cash yield of 10.5%, reflecting our attractive basis and the extraordinary rent growth in Southern California since we sourced this site.
Including this start, our developments in process total 3.7 million square feet with an investment of $571 million. The projected cash yield for these investments is 7.4%, which represents an expected overall development margin of approximately 78%. The margin calculation now reflects a cap rate adjustment of approximately 100 basis points relative to our assumptions prior to the end of Q1.
As I mentioned in my opening remarks, we are launching a new project in our Camelback 303 joint venture in Phoenix. This follows the land sale we completed last quarter that netted us north of $100 million in gain and promote. The JV is developing three speculative distribution facilities, totaling 1.8 million square feet. The total projected GAAP cost of all three buildings is approximately $210 million, and the targeted cash yield is approximately 5.7%. The venture is using construction financing for a portion of the total project cost, so our share of incremental cash out of pocket spend for these developments is only about $20 million.
On the acquisition side, in the third quarter we acquired a relatively even proportion of land sites and existing buildings totaling $84 million. All were in coastal markets, including Southern California, Miami and Seattle.
With these new development site additions, we continue to be well-positioned to support future growth with land holdings that can accommodate an additional 14 million square feet. This represents approximately $2 billion of potential new investments based on today's estimated construction costs and the land at our book basis.
Lastly, consistent with our strategic objective to derive 95% of rental income from 15 key logistics market by the end of 2023, we sold the remainder of our holdings in Cleveland. The sale price was $107 million, which equates to approximately a 6.4% in place cap rate on the sale.
With that, I'll turn it over to Scott to provide additional details on third quarter performance and update you on guidance.
Thanks Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.60 per fully diluted share compared to $0.51 per share in 3Q 2021. As Peter noted, we finished the quarter with in-service occupancy of 98.3%, which is up 120 basis points compared to the year ago quarter.
Our cash same-store NOI growth for the quarter, excluding termination fees, was 8.5%, primarily driven by higher average occupancy, increases in rental rates on new and renewal leasing and rental rate bumps embedded in our leases.
Summarizing our leasing activity during the quarter, approximately 3.3 million square feet of lease has commenced. Of these, 700,000 were new, 1.2 million were renewals and 1.5 million were for developments and acquisitions with lease up. Tenant retention by square footage was 65%.
Moving onto the capital side. In August, we announced the closing of a new $300 million delayed draw term loan with a tenor of three years plus two one year extensions, the proceeds from which will approximate the remaining costs to complete our current developments. The delayed draw feature allows us to borrow on this facility for up to one year from the date of closing. The new term loan has an interest rate of SOFR plus a credit spread of 85 basis points, plus a SOFR adjustment of 10 or 15 basis points depending on the tenor of the interest period. As of today, we have not drawn down any funds from this facility.
Moving onto our updated 2022 guidance per our earnings release last evening. Our guidance range for NAREIT FFO per share was now $2.21 to $2.25 with the midpoint of $2.23. This is an increase of $0.04 per share at the midpoint compared to our prior guidance. The increase is primarily due to better portfolio performance and an increase in capitalized interest due to our developments.
Key assumptions for guidance are as follows. In-service occupancy at year-end of 98% to 98.5%. This implies a full year quarter-end average in-service occupancy of 98.2% to 98.3%. Our occupancy guidance now reflects our 644,000 square foot Old Post Road building in Baltimore will be occupied in the first quarter of 2023 based on the conversations we are having with our leasing prospects.
Fourth quarter same-store NOI growth on a cash basis before termination fees of 5% to 6.5%. This implies a quarterly average same-store NOI growth for the full year 2022 of 9.3% to 9.7%, an increase of 75 basis points at the midpoint compared to our prior earnings call. Guidance includes the anticipated 2022 costs related to our completed and under construction developments at September 30th.
For the full year 2022, we expect to capitalize about $0.12 per share of interest, $0.02 higher than our prior guidance. And our G&A expense guidance remains unchanged at $34 million to $35 million. Other than previously discussed, our guidance does not reflect the impact of any other future sales, acquisitions, or new development starts, the impact of any future debt issuances, debt repurchases, or repayments and guidance also excludes the potential issuance of equity.
Let me now turn it back over to Peter.
Thanks Scott. Industrial fundamentals remain strong supporting high occupancy and rent growth even while the financial markets sort through rising interest rates, high inflation and extreme volatility. Our team is working day and night to serve continuing tenant demand with new best-in-class projects and drive long-term cash flow growth and value for shareholders.
Operator, with that, please open it up for questions.
Thank you. And we will now begin the question-and-answer session. [Operator Instructions]
And our first question today will come from Ki Bin Kim with Truist. Please go ahead.
Ki Bin Kim
Thanks. Good morning. Scott, can you talk about the guidance and implied 4Q FFO guidance on $0.54? You can just help us bridge the gap between the $0.60 you reported and the $0.54 in 4Q. That's expensive.
Yeah. Hey, Ki Bin. Hope you're doing well. Absolutely, I'll provide that. There's three main areas that are impacting the drop of our FFO per share from 4Q to 3Q. One penny of that is due to one time items that we recognize in the third quarter related to NOI. So that could be tax draw ups, tax rebates we received or our easement income. So 3Q has a penny of one time items that we are not recognizing in 4Q.
$0.02 has to do with the third quarter property sales. Those happened in late September. And then another $0.02 of that has to do with an increase in interest expense primarily on our line of credit. So, those are the three main drivers for the drop of our FFO from 3Q to 4Q.
Ki Bin Kim
Okay. Great. And a macro question for you guys. We've seen some major banks, especially the bulge bracket, start to pull back from commercial real estate lending, which has led to some chopping of banks participate in some of the REIT credit facilities. So -- and some of this might be due to the government stress test and how CRE loans are treated. So, I'm just curious from your take, especially like Scott, you've been a CFO at far for a long time, and Peter, you had a great interesting background in banking at JP Morgan. But I'm curious about your take on all this, what you're seeing and how this might all play out.
Let me go first. Well, hey, Ki Bin, I would say that the bank term loan market is drying up. I think our deal that we inked in the middle of August is probably one of the last deals that you're going to see for a while. I think you're right. A lot of it has to do with stress tests that banks are undergoing in the third or fourth quarter. So, my guess is that market's going to be closed probably for the next couple of quarters. Maybe it opens up in early 2023. I have a feeling if I was a bank I would probably increase the spreads a bit though compared to what our deal was that we closed in August.
So, Peter, do you anything to add?
I think on a macro level, if you were to ask the CEOs of these big banks, they would express significant frustration with how high the capital requirements are. It effectively take them out of the market at a time when their customers need them most. And so that's -- I know that's a point of frustration after some conversations I've had with some of those people.
Bob, do you want to talk about the availability of construction finance too?
Yeah. I would say availability frankly is kind of the key right now. We're seeing a lot of banks clearly pull back, keep it as you alluded to through at least year-end on even looking at new business and heard a lot of stories of people of banks pulling term sheets that they had outstanding. So, availability for construction financing is key and very difficult right now.
Ki Bin Kim
Got it. Thanks. I'll jump back in the queue.
And our next question will come from Rob Stevenson with Janney. Please go ahead.
Good morning, guys. Given those comments, how would you characterize the market for dispositions today? Presumably the asset you sold in third quarter or marketed a while back. What's the sort of pricing today and what's your appetite to do more dispositions over the next few quarters in the current environment?
Sure. Yeah. I mean, we're very pleased with the execution we got on Cleveland. The team did a great job and what obviously is a rapidly changing investment sales market. We do have appetite for additional dispositions. It just depends on what we find when we go out with assets in terms of pricing. This is good real estate at the end of the day. It's very solid. It's by and large a hundred percent leased. So, we're not going to be letting the stuff go cheap. We'll see where the markets are.
We do know that there are literally billions of dollars of new funds coming into this space looking to gain exposure. Funds are forming as we speak for this purpose. I'm not sure if they're forming because they think there's going to be distress or not, but given the size of the dollars involved, I have to believe they expect regular weight, what I would call regular weight purchases. So, yes, we have appetite for sales and we think there's going to be a lot of capital out there. We'll just have to see what the pricing looks like.
Okay. And then, I guess, the alternative here, the expected stabilized cap rate on the current development pipeline is 74. When you factor in land costs today, current development costs and current rents, where do you think the projects that you're going to start in the next six to 12 months are going to average out about the same, a little bit skinnier on the yields, a little bit better on the yields? How's that likely to flush out?
So, Jojo, you want to comment on that?
Well, we -- thanks for quoting that number. We're very, very pleased about the profitability and the margins and accretiveness on those projects, because they clearly our great site as well. So, the function of that is rising rates and are real good basis. We actually have not done in -- we don't -- we haven't done mark-to-market kind of computation of that. What we report is what we, as a company and shareholders are going to get based on our basis.
But what -- I mean, the fair market values of the land today are, of course, are higher in our basis. So, the cap rate is going to be lower than 74, but we haven't really done that math.
Okay. And for stuff that you're going to start, I mean, is that -- I mean, if we're sitting here a year from now, is the cap rate -- the expected stabilized cap rate on that development pipeline about the same, a little bit less, a little bit more, how do you characterize that when you're looking at where development costs are going and your ability to lock-in pricing on materials and labor today as well as what's -- whether or not there's been any increased softness on land or whether or not land is still very expensive, et cetera? How does that sort of play out?
Yeah. Well, it's really hard to forecast yield. So, we'll report to you once we are ready to start development where our projected yields are. I think that's a more accurate way, because there's various variables like you mentioned, building costs and where the rents are.
But one thing I'll tell you is that if you look at our land holdings, in almost every market rents have increased and are increasing faster than construction costs. And so, if it actually stays the same, then the yields would be very attractive. But again, we'll give you a sense of when we start new projects.
Yeah. Don't forget, Rob, we've got about $2 billion of investment opportunity in our current landholdings. So, the yields, as Jojo points out, are difficult to project right now. But with rents growing the way they are, we certainly like our prospects.
Okay. And then one last one for Scott. The term loan basically removes the need for you to access the debt markets in the foreseeable future? Or are you going to be looking to do anything over the next six months until things sort of calm down?
Well, I would say a couple of things. From a debt maturity point of view, we have nothing coming due to 2026, assuming you give us credit for the options. Extension options, we have in our line. The development spend that we need to complete our developments is about $350 million. And when you look at the liquidity we have in our line of credit, the term loan, which is $300 million undrawn and cash flow next year, it's about $700 million. So, it's about double of what the requirements are needed to complete the developments and that doesn't even include any sales proceeds. So, I think we're in very good shape from a liquidity point of view.
Okay. So, more than enough to fund any sort of first half of 2023's development starts?
Okay. Thanks guys. Appreciate the time.
And our next question will come from Dave Rodgers with Baird. Go ahead.
Yeah. Good morning, everybody. I wanted to follow up, Peter, on your comments in your opening remarks about just kind of the financial market sorting out inflation and higher interest rates. I guess, I wanted to get your thoughts maybe on just the overall economic environment and positioning potentially for any type of recession. You obviously have the speculative leasing cap, which is good or the investment cap.
But can you talk about kind of how you want to position the company for a potential slowdown in activity, whether that cap gets reduced further, or whether you might want to just have more slack in that or even taking that to the next step? Are you seeing any reasons to be more cautious as you look forward?
Right now, all of the markets that we're targeting are pretty tight. There's unmet demand. So, the fundamentals remain strong. Clearly, we're keeping a close eye on what's going on with the rest of the economy. So, we're juggling like everyone else what we think is coming in the way of consumption on the consumer side as well as the volatility in the capital markets.
With respect to our cap, we're really not focused on the cap. Remember the cap is just that a cap and not a target. Our geographic functionality and risk adjusted return requirements drive our investment decisions not the level of the cap. So, we're very pleased that we have this great growth opportunity on the balance sheet today. But, of course, we're going to be driven primarily by that risk adjusted return opportunity and what happens in the broader market.
In terms of positioning the company, we have a rock solid balance sheet. We're going to maintain that rock solid balance sheet. And we're going to fund ourselves properly and adjust our growth as the market requires.
Maybe as a second point of that, are you seeing any reasons that you would want to slowdown development or be more cautious whether that's kind of gestation time of leases or just fewer people showing up for those leasing negotiations than maybe a year ago?
Well, the number of prospects that we have looking at our new opportunities is significant comparing it to say six or nine months ago, would clearly be a tough comp. Those were the best days probably in the history of this business. But we don't really see any reason right now to slowdown per se. We're excited about what we have in the way of prospects and the opportunities that are out there to capture this tremendous rent growth in the coastal markets and the value creation that comes from it.
Great. And then, maybe just last for me and going back to Old Post Road. It looks like it was delayed to the first quarter. Is there more clarity around the first quarter? Or is that just not happening in the fourth quarter?
Sure. David. It's Peter Schultz. Good morning. So, our discussions with our prospects continue. As we talked about on our last call, our expectation was occupancy would happen in the fourth quarter. The primary prospects are both third-party logistics providers and their discussions with their customers are simply taking longer. There's certainly the possibility that it happens in this quarter, but we think it's more likely at this point that it's the first quarter or so. And our estimate was prudent to make that adjustment.
Having said all that, the building is positioned for immediate occupancy and tenants continue to have very few choices in that submarket. So, it's on us to get this done, and the team's very focused on it.
And our next question will come from Nick Yuko [ph] with Scotiabank. Please go ahead.
Hey. Good morning. This is Greg McGinniss on with Nick. Just looking at the dispositions, there was a 60 basis point increase in cap rates in Q3 versus 2021. How much of this increase reflects Cleveland versus just general market rate increases? And if you could also comment on potential cap rate expansion more broadly, that would be appreciated.
I'll start this and Jojo and Peter can jump in. In terms of cap rate movement more broadly, as we mentioned in the opening remarks, we for our own purposes in terms of looking at margins have increased our cap rate assumption by about 100 basis points.
When it comes to a discussion of cap rates, it's really a submarket-by-submarket conversation certainly, in the fastest growing submarkets, i.e., fastest growing rents in, say Southern California, cap rates haven't moved a whole lot. And in other markets, they moved more. Jojo, you want to?
Yeah. I mean, it's a different mix. So, it's really, like Peter said, you can't really compare quarter-to-quarter because there's a mix of different products and different weighted average lease terms, different occupancies and different submarkets. So, I wouldn't compare quarter-to-quarter because in fact it's not really that efficient. But again, we're very pleased with the execution we did in Cleveland and we'll be able to reallocate that to higher rent growth markets.
Okay. Thanks. And then, just touching on those margins in the development pipeline. Has underwriting been adjusted in any other way besides that kind of 100 basis point increase that you spoke about? And then, also, if you could just touch on what cap rates you're actually using, especially thinking Inland Empire versus elsewhere, that would be appreciated.
Our underwriting hasn't really changed. We're still using the same conservative or at least what we think is conservative input in terms of 12-month leasing downtime and moderated rent growth versus what we're seeing in the markets. Cap rate …
Yeah. Basically -- so, absolutely, the same underwriting. If you just do the math, I mean, it's there, right there in terms of our investment and our reported margin, it imputes to a low four cap rate. And I just want to emphasize, and you probably know this already because it's right there. About 62% to 63% of development pipe that you're seeing is Florida and SoCal, which has both one of the lowest cap rates in the nation. So, we're very pleased with this pipeline. We've not had this high of a concentration in two of the most active markets in the U.S.
Sorry. And just to make sure I understand. So, you're basically saying that like that, I think it calculates a 42 cap rate would be the exit cap rate in kind of Florida -- sorry, Southern Florida and Inland Empire?
Yeah. It will be lower, because that's only equal price 62%. So, the 62% in Florida and SoCal is a component of that low 415cap rate. And so, SoCal, Florida would be lower and the rest of the 32% or 33% would be a little bit higher.
Okay. I mean, honestly, it seems a bit low based on debt cost, but I'm sure you guys know the market much better than I do. Thank you for the color.
Yeah. A couple of points on that. A lot of investors, especially the most active ones today are the low leverage -- lower leverage investors, and they're looking at total return. They're looking -- the market is looking for a total return of maybe 6.5% to 7.5%. And clearly, given the rent growth in these markets that I mentioned, you can exceed those with those cap rates.
Great. Thank you.
And our next question will come from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Hi. Thanks. Good morning. I just wanted to touch on the 2023 expirations where you made significant progress and mentioned that the cash rent spreads bumped up to 28% from 20% on the last update last quarter for what's been signed. And you indicated that the spreads would actually get better.
Any sense of what you're projecting for the balance of the expirations? What you're seeing in the Southern California portfolio there and sort of what you're projecting for the year in terms of rent change, if you could maybe sort of book end it a little bit?
The potential uplift there is pretty significant. We haven't finished our budgets and that's why we're not going to put numbers out there. But I think what give you a pretty good indication is -- for Jojo to talk about the last few leases that we signed, so that you can see what we're achieving.
Yeah. Thanks Peter. So, the most recent leases in LA or either that we've done, there's three leases, two in South Bay and one in IE and the square footage range from 40,000 feet to 140,000 feet. And the rent change on those leases were from -- the range was 90% to over 200%, rent change -- cash.
Okay. And then, is that sort of indicative of what we should think about for that portion of the expirations, which I think you said Southern California represents about 36%. Is that right?
Well, we're not going to give three examples. You'll have to come up with your own thoughts on what it's going to look like. We can't really guide on that.
Okay. Got it. And then, Scott, so tenant recoveries were up meaningfully in the quarter. Your expense reimbursement ratio was up almost, I think, 500 or 600 basis points around 89%. I think you mentioned there were some tax true ups in the quarter. Was that -- was the increase solely related to those true ups? Or is that going to revert back to, call it, 83%, 84%? Or is some of that increase perhaps sustainable?
Yeah. When you looked at three months -- three months and nine-month same-store expenses were up. What I would say, Todd, is due to the fact that we're highly occupied at over 98%, pretty much almost dollar-for-dollar, we recovered that. So, there hasn't been much leakage on that.
As far as next year is concerned, you're probably going to see some pressure on real estate taxes, like we have the last couple of years on the way up. But we'll have a better idea of that in our fourth quarter call. But I think the one point you want to take away is that the increase in expenses again was pretty much recover dollar-for-dollar from our tenants because of the net lease structure.
Okay. Got it. And then, just sticking with NOI or same-store NOI growth. I realize you have a difficult comp in the fourth quarter. You have a couple of difficult comps coming up. But can you talk about that a little bit? And I realize you're not providing 2023 guidance, but maybe some insight around the trajectory of same-store NOI growth here as we sort of think about the next few quarters and sort of how the year starts out maybe, I guess Old Post Road is may be a factor, but I'm really curious just given the volatility in that for you and sort of what you're seeing potentially?
Yeah. This is Chris. I think you're first referring to kind of the deceleration from 3Q to 4Q. If you look at 4Q, our midpoint is 5.75%, which represents about 275 basis point decrease. It's really due to 150 basis points due to some free rent burn off and some free rent given on some of the larger new leases. And then the other 100 basis points is really a swing on -- Scott kind of mentioned about some real estate tax refunds and true ups that happened in the third quarter. So that swing from 3Q to 4Q is about 100 basis points difference.
And then, Todd, when you look at 2023, this is not guidance because we got to still go through our budgets, but I'm not going to comment about occupancy. So, we still have to go through that. We talked about the Old Post Road that we're going to lease it up by the first quarter. Free rent, we'll have to see how that burnout works out. But if you look at the other two main components of rental rate bumps and rental rate increases on new and renewal leases, I'm just using roughly a 30% increase next year of cash run rates, which we talked about in our script, we think it's going to be higher than that, you're at least going to have -- handle just from those two components for same-store. And again, we'll update you on a fuller number that takes into account occupancy and free rent burn off on our fourth quarter call.
Okay. Great. That’s helpful. Thank you.
Our next question will come from Rich Anderson with SMBC. Please go ahead. Your line is open.
Sorry about that. I guess my headphones is not working. Can you hear me now?
Okay. Thank you. So, back to the capital raising question. So, you did the delayed draw. And I know you ran through the math, the debt maturities are non-existent for a while and you went through the development spend. But are you sort of lining up some options, say, six, 12 months from now assuming the world does indeed come to an end. And these forms of capital start to become lesser elements to the story. Is joint venture partnerships is more in the way of dispositions sort of on the horizon, at least thinking about it now to be prepared for whatever might come our way six, 12 months from now.
Certainly. We're going to be opportunistic and consider all forms of potential capital raising across the spectrum. Obviously, if the world comes to end, we won't be investing anyway.
But thinking about a darker scenario, we have spent the last dozen years creating a rock solid portfolio. From a credit standpoint, I think 2020 was reflective of how strong that is in terms of the fact that we collected all of our rents during COVID -- that COVID year, and I'm not sure anybody else did. And we've got this rock solid balance sheet with plenty of debt service coverage. So -- and access to all forms of capital for us. It's trying to arbitrate those forms of capital to make sure we're funding ourselves as cheaply as possible. That's really the game plan.
And/or slowing down the development starts business, obviously, would be the option?
Correct. We don't feel that the case now. But certainly, that would happen if, as you point out, darker days come.
Right. Second question, I think as Jojo mentioned something like 100% rent change on some areas of the country, which is great, but also a vestige of what has happened over the past few years. I mean, how are you monitoring this in terms of just kind of flushing itself out of the system with each passing renegotiation releasing event. Do you see that you have multiple years ahead of you of -- well ahead of trend type of cash releasing spreads? Or is this something that maybe has a shorter sort of shelf-life to it at this point and may start to think about guiding the communication down a little bit so that people aren't over their skis from an expectation standpoint.
I think you are right. Run rate increases -- as cash run rate decreases in 2024 and 2025.
Well, our job is with our quality properties is really to get the best economics from each deal. And a lot of the rent growth is really a function of supply/demand. And so, for example, if you go to the Inland Empire in LA, demand is very, very strong and continues to be forecast to be strong. And then, you have that and you then juxtapose that with the lowest vacancy rate in the whole U.S. at 0.5% and in some markets 0.2% of 1% then what you have is tenants don't have options really and now they have to pay the rent. And also remember, long-term, today real estate really only comprised anywhere from 5% to 6% of those logistics costs.
So, if a third-party logistics provider or ecommerce company, all the other users need the service, we are cost pale in comparison to transportation cost and labor. But they still need a real estate. So, of course, that varies market-by-market, but that's what we're charged to do. We always monitor to keep an eye on supply/demand.
And don't forget, where we start today is completely different from where we started as an industry say before the Great Recession. We're at 2.9% vacant. Back then, we were closer to 8%. Everybody's portfolio today is much better than their portfolios were back then. We have recurring cash flow, which back then it was really cash flow and quotes from the sales of assets. So, we're in a much better position right now to weather any kind of a storm.
And as Jojo pointed out, tenants don't have alternatives still today. And there's unmet demand, especially in the coastal markets, and that's where we're focused.
Well, I mean, I guess, I would say using that history lesson, there's the potential that vacancy rates can go up substantially as you just pointed out, 8 versus 3. Using that history, are you stress testing the model at all about, obviously, things were different. There was much more development back then. But do you look at how FR performed 10, 12 years ago and try to sort of draw some conclusions of where things go now? Or is it just apples-to-oranges in your opinion?
It is apples-to-oranges, but a couple of thoughts on that. One of the things that we saw back then, so this is 2008/2009 is that the vacancy rate had to get pretty high before the balance of power, if you will, between landlord and tenant changed. And that's kind of low 1990s. And that would be in a specific portfolio. So, we're, obviously, a long way from that. So that gives us confidence that this rent growth that we're seeing is going to continue for some time. Don't forget, ecommerce today is a much, much bigger component of the equation than it was back then. And that is a bit of an economy within the economy, if you will.
Yeah. Thanks very much.
And our next question will come from Anthony Powell with Barclays. Please go ahead.
Hi. Good morning. I have a couple of questions on the developments that are completed, but not in service that's in Colorado and Tennessee that aren't leased yet. How are your conversations with tenants around those assets? And generally, in the development pipeline, should we expect a bit more downtime between completion and leasing given kind of the environment here.
So, this is Peter Schultz. So, I would first say that overall demand continues to be very good across our development pipeline, both completed and under construction, as Jojo commented earlier, multiple prospects on most of our spaces.
To your specific questions on the buildings that are completed. So, in Nashville, we're trading paper with a prospect there. In Denver, that's in our Park. And our experience in Denver as activity picks up as the building is completed, and we've seen exactly that. A couple of fresh RFPs and proposals out there. And then lastly, in Miami at our First Park Miami, we have only 66,000 square feet remaining in what's completed and we have a lease out on that space as well.
Jojo, do you want to talk about Seattle?
Sure. Yes. In Seattle, we are responding to proposals back and forth with multiple prospects. And just your comment on downtime, we've not changed our underwriting to one year. On average, we've been beating that. We're well inside of a year, closer to half of that.
And in terms of adjusting, we will not forecast where it will end up, but we have comfort in terms of our underwriting of giving it a year. But I will mention to you in terms of the development pipeline, you'll see about 64% of that in dollar volume is not scheduled to be completed until 2023. So, we have plenty of time. And already, we're getting inquiries on that. And remember, again, like I mentioned -- what we mentioned -- our team have mentioned, about 62% of that pipeline is in the tight markets of Florida and IE.
Got it. Thanks for that. And maybe just generally, obviously, you're pretty positive on the demand and its outlook. Has anything changed over the past three months in terms of tenant demand, tours or just commentary around the tenant? It seems like things added, but maybe a broader discussion about that. And how you think that may evolve in the next several weeks? I know you can put the future 100%, but it sounds like things are still pretty good.
Getting into pretty micro timeframe given the long life assets that we have here, I know what you're trying to get at. The mood or the tone hasn't changed. By the way, big companies take a long time to make decisions. That's just the way it is. So that hasn't changed either. And -- but we haven't seen a change in the tone of the mood. There's still a sense of urgency on the part of anyone who didn't grow in 2020 and 2021 to grow now. I mean, to grow the supply chain and their footprint now. And so the conversations are robust.
The other thing I'd add to that, Anthony, is as you think about tenants that have moved out of our portfolio, it's in many cases because they need more space that we're not able to accommodate given our high occupancy level. And we've, for the most part, backfill those spaces very, very quickly at much higher rents.
Right. Thank you.
And our next question will come from Michael Mueller with JPMorgan. Please go ahead.
Yeah. Hi. I think you mentioned you were getting about 3.6% rent bumps on the 2023 lease signings. How does that compare to what you achieved on your 2022 signings? And then, where does that put the overall portfolio kind of today?
Yeah. If you compare 2022, we get 3.3%. So that's up about 30 basis points to 2023. If you look at the in-place in the overall portfolio, we're right now at about 2.9%. So, obviously, those numbers are definitely increasing and going up.
Okay. That was it. Thank you.
And our next question will come from Bill Crow with Raymond James. Please go ahead.
Thanks. Good morning, guys. Any changes to the watchlist on the tenant side, thoughts on bad debt reserve for next year?
Hey, Bill. It's Scott. The bad debt expense for the third quarter was $188,000, so very low. Year-to-date, it's $25,000. That was aided by a $250,000 payment for a prior reserve balance. No material tenants on the watchlist.
As far as next year is concerned, we're going through our plans and our budgets, all depends on the economy, but where we stand today, no material issues of credit concern.
Thanks. You've talked a lot for good reason about Southern California, Florida, some of those markets in Seattle. What about markets like Phoenix and Texas as we look to next year in kind of the supply/demand balance? How do you see those markets playing out?
Jojo, you want to take that?
Sure, Bill. It's Jojo. In terms of Dallas and Phoenix, they've actually performed really, really well this year. They brought in there, actually the top four and five markets in terms of year-to-date net absorption. Dallas, 19 million square feet absorption year-to-date, Phoenix 21 million. Vacancy in Dallas is record low-- in my 30 years of being in the business never been this low, 3.8%. And in the last 30 years, Phoenix has never below this lower vacancy rate of 2.7% in Phoenix. So, you have two markets right now that have robust in migration and with low vacancy rates. So that's the reason why Dallas and Phoenix have continued to have robust rent growth.
There is supply coming in. And one note on our building, we're building in Phoenix, we think we have the best product out there, if are none. The most active market is 303 Corridor. And if you go out there and ask everyone who has the best project out there is the three buildings that First Industrial building. So, we were very proud of it. From a high exposure point of view, from a space plan point of view and access to how close it is to 10 and 303 interchange. So, by and large, we'll be keeping an eye on the supply. But right now, the demand and the supply and the vacancy rates are all favorable for Dallas and Phoenix.
Great. Thanks for the color. That’s it for me.
End of Q&A
And there are no further questions at this time. I'd like to turn the conference back over to Peter Baccile for any closing remarks.
Thank you, operator. And thanks to everyone for participating on our call today. We look forward to connecting with many of you in-person in the coming months. Be well.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.