Peter Baccile: So looking at history a little bit, in 2020, Amazon took up more space than the next 30 most active lessees combined. That served as a catalyst, as we now know, for others to say, hey, we have to get in the game. And you saw that happen to a great degree in ’21 and ’22, which created the very, very high net absorption numbers that we saw. That particular player is once again making a rather large move this year. Time will tell if that behaves as a catalyst for others to get involved, but we certainly don’t see it as a negative thing. And the prospects going forward could be pretty good that it is a catalyst for others getting involved.
Peter Schultz: Craig, it’s Peter Schultz. The other thing I would just point out, as I mentioned earlier is the 3PL decisions are slower because they’re waiting on their customers. So there’s two steps in that process. So it’s harder for landlords to have visibility into those discussions between the 3PL and the customers. And that’s where we’re seeing probably the most elongated decision making.
Peter Baccile: The other thing, sector too, Craig, would be housing, home improvement, furniture in particular. That sector’s a little bit slower.
Craig Mailman: Okay. And I guess going to 3PL piece, they traditionally like shorter term leases. I think when things got very strong, they were forced to do five-year leases. Is there any push on their part to go back to shorter-term leases to match it better with their contract lengths or are you guys still able to hold that side of the equation and also just on the concession side, what are you guys seeing from a free rent pickup in certain markets versus others?
Peter Schultz: On the 3PL front, the prospects we’re in discussions with are all five to ten years. Having said that, we have seen some deals in the market that are shorter term, say three years. In terms of concessions, we’re seeing those come up a little bit. So they’ve been less than half of one month per year of term to maybe 0.6 or 0.7. And I wouldn’t say it’s universal. It’s generally in the markets with a little bit more supply, but concessions are ticking up a little bit.
Jojo Yap: Yes. Overall, we don’t think there’s going to be a material change in the terms that the 3PLs want to. I think it’s customarily it’ll be five plus years. And the biggest reason for that is that the 3PLs are meeting their customer’s needs and most customers don’t want to be out of space when they make a commitment to be served by a 3PL, they want it. That’s usually a long-term commitment and potentially cancelable, but long-term. So they don’t want to be thrown back to the street and not having space. So usually that term is pretty sticky. We haven’t really seen it according, like, significantly.
Craig Mailman: Great. Thank you.
Operator: The next question comes from Nicholas Yulico with Scotiabank. Please go ahead.
Nicholas Yulico: Hi good morning, everyone. I was hoping to get a feel for — I know you don’t specifically break out, like, new leasing — new leases signed, but just kind of thinking about the volume of that activity in the first quarter and whether it was down versus budget. Just kind of how you’re thinking about, like, the overall new leasing activity affecting the change in guidance for the year.
Peter Baccile: So the two development leases that we signed were above pro forma. And with respect to the renewal leasing, as you see where our cash rent growth there is pretty significant. And we’re on track with respect to the guidance that we provided in the first quarter. Is that what you’re getting at or are you asking something different?
Nicholas Yulico: Sorry, I was asking more just in terms of overall square footage of new leases signed in the first quarter, how that compared versus the initial budget, if it was down and that affected the occupancy guidance change for the year?
Peter Baccile: No, I think overall, just what we had projected at the end of the year for the guidance. Our leasing volume is about right there.
Scott Musil: Yes. Nick, look at page 15 of our supplemental, we break out new renewal and development. And I would say for the first quarter, we were right on budget with new leasing.
Nicholas Yulico: Got it. Yes, no, I know that’s in terms of commencements, I was asking more in line with leasing volume, new leases signed. I don’t know if there’s a different number there.
Scott Musil: Well, here’s what I would say to that. We gave a statistic, I think it was — we took care of 69% of our expirations as of yesterday. If you looked back in the first quarter last year that number was very consistent. So there’s been no material change in what we’ve been able to lease up at this point in time this year compared to what it was last year. I’d even say compared to the year before that.
Peter Baccile: Yes. We’re actually a little bit ahead. So we’ve taken care about 71%. I think last year this time, we had taken care about 64%. So we’re actually a little bit ahead on that. Renewal lease is taken care of.
Nicholas Yulico: Got it. Thanks. Appreciate the clarity there.
Operator: The next question comes from Nick Thillman with Baird. Please go ahead.
Nick Thillman: Hi, good morning, guys. Maybe just want to touch a little bit on your renewal discussions. Has there been any really shift in kind of the environmental, when a tenant approaches you kind of to begin those discussions maybe over the last, like, two quarters or so. Are they feeling less urgent to kind of sign new deals because they might think that rental rates are starting to roll over? Just a little commentary there would be helpful.
Peter Baccile: Well, most of the big guys have representation and it won’t surprise you that those tenant reps are in many cases telling them to wait a little bit because maybe they’ll get a better deal. And, you know, the — as we mentioned a couple of times, the pace of those discussions does get impacted pretty significantly by market news, economic news, rate news, global goings on, et cetera. So the tone is evolving. I would say when we were going into the fourth quarter of last year, coming into the first quarter of this year, there was some optimism, of course, about three or four rate cuts and maybe they would start early in the year and people were feeling like it’s probably time to get ready to pull the trigger. And that feeling has dulled a little bit with the recent news in the last few weeks.
Peter Schultz: Nick, the other thing I’d add is that if you — if a tenant is considering moving, they need to do it. They need to plan for that well in advance because getting the permits to modify or improve another space as we’ve talked about on other calls continues to be very elongated. So that continues to weigh on tenants’ decisions. Are they staying or not? But I would say, generally speaking, there’s been no real change in tone or timing other than what Peter alluded to.
Nick Thillman: That’s helpful. And maybe touching a little bit on dispositions. Maybe what’s getting a little bit more of a flavor of what the buyer pool like and kind of what — is there a portfolio premium still being placed on assets, and then also kind of where pricing is shaking out relative to expectations of some of the assets that you have traded.
Peter Baccile: So the market is active. Remember that what we have in our expectations in terms of our sales program is really more targeted to users. And the 1031 market is coming back now because they’re able to do both sides of the trade. So it’s users, 1031 buyers, local investment entities, doctors, dentists, lawyers, et cetera. So that’s the profile. I would say that the activity is robust meaning the number of people signing up to get information is high. The conversion to offers is also pretty good. So, yes, it’s an active market. In terms of pricing, obviously, that fluctuates depending on the market and the asset in particular. Still, the users are going to be more aggressive on pricing. The 1031 buyers are going to be more aggressive on pricing. But, those values are coming in pretty close to our expectation.
Nick Thillman: Helpful. Thank you.
Operator: The next question comes from Jessica Zheng with Green Street. Please go ahead.
Jessica Zheng: Good morning. I was wondering if you could please share some color on where you’re seeing relative strength and weaknesses in your portfolio on the market level?
Peter Baccile: You mean with respect to, say, rent growth, leasing, anything specific?
Jessica Zheng: Yes, rent growth and leasing activity.
Peter Baccile: So the markets right now that are showing rent growth and good leasing activity, South Florida, as we said, continues to be pretty strong. Nashville, the demographics there continue to impress, and that market’s doing well. Excuse me. In terms of the slower markets, we’ve spent a lot of time talking about SoCal. That would have to be on the list there. Seattle is a little quiet. Anything else that I’m not remembering, no. Everything else is kind of steady as you go.
Jessica Zheng: Great that’s very helpful. And then I was also wondering if you can share some color around utilization levels in your properties. Do you sense there’s some excess capacity among your tenants? I’m just curious, like, how they’re accommodating growth in their businesses today?
Peter Baccile: Jojo, you want to take that?
Jojo Yap: Sure. Based on our — so we survey our properties. We inspect our properties constantly and we look at — when we meet our tenants, our customers. And our view is that they’re utilizing their space pretty well. There’s not a lot of excess space. In fact, I would say there’s very, very few sublease situations in our portfolio. It’s de minimis.
Jessica Zheng: Great. Thank you.
Operator: The next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Blaine Heck: Great. Thanks. Good morning. Just wanted to talk a little bit more about the reduction in same-store guidance and the specific drivers there. Given that occupancy was relatively flat and rent spreads on 70-ish percent of 2024 commencing leases increased. So I guess we’re just wondering whether there was anything in particular outside those metrics that gave you pause or if it’s just a matter of an inflection you were forecasting in rent or occupancy that now you don’t think will happen and just also trying to determine how much conservatism is baked in with that decrease together.
Peter Baccile: Scott?
Scott Musil: Sure, Blaine. I would say the main reason, and we touched upon it in the script is there was a handful of properties that we adjusted the leasing assumptions on that were in the same store pool. So that was the reason for the adjustment that we made.
Blaine Heck: Okay, that’s helpful. And then just to follow up on Baltimore, you guys made some good progress at Old Post Road last year, but there is still some space there that remains and now includes Hagerstown, sorry. Can you just talk about whether you’re seeing a slowdown in tenants looking for space in the market given the shutdown in the port and whether you think your chances of getting more leasing done in that market have changed in the near term?
Peter Schultz: It’s Peter Schultz. There’s been no real change in the levels of demand or impact on customers from the collapse of the bridge. You probably know that Baltimore is primarily an automobile and bulk material port. So what we refer to as roll on roll off or RORO. So the container volume there is only about 5% of the East Coast ports. It’s not that material. So it’s not having an impact one way or the other. In terms of leasing activity, it’s about the same as we’ve described earlier. There’s interest but it’s moving slowly. Where the balance of our Old Post Road building is along the I-95 Corridor, that’s 172,000 feet. That’s in a different market than Hagerstown, which is along I-81 coming out of Pennsylvania. The Hagerstown market is a little soft. Vacancy rates are in the double digits there. So that’s my answer for you this morning.
Blaine Heck: Great. Thank you very much.
Peter Schultz: Sure.
Peter Baccile: Dave?
Operator: Caitlin, your line is now live, are you on mute?
Caitlin Burrows: Nope, now I hear you. Maybe just back to the market question that somebody asked a few minutes ago. You mentioned that South Florida and Nashville were two of the stronger ones, SoCal and Seattle more quiet. Could you talk through some of the drivers of the different markets and what’s driving the difference in performance? Like is it more supply-related, demand-related or both?
Peter Baccile: I think particularly with South Florida and Nashville, they’re smaller markets. South Florida obviously extremely land constrained with the Everglades on one side and the Atlantic on the other. And the tenancy in those markets tends to be a little bit smaller as well. And the — as we’ve talked about in the past, the activity levels on leasing are much better in the smaller spaces. That has something to do with it, of course, the demographics. A lot of people still moving to Florida, a lot of people are still moving to Nashville. So those are supporting those markets. We’ve talked a lot about SoCal. I won’t get into that. And as with respect to Seattle, we’re just seeing a slowdown of tenant traffic there that happens from time to time there. I wouldn’t say there’s anything in particular that we would point to as being an issue.
Caitlin Burrows: Got it. Okay. And then back to earlier in the call, you mentioned how you have the three large expirations this year and you have assumed one is not going to renew. For that one, I was wondering if you could talk about how, like, informed of an assumption that is, like, is it based on conversations with the tenant or it’s more of like a blanket assumption?
Scott Musil: It’s a macro blanket assumption, Caitlin.
Caitlin Burrows: Got it. Okay. Thank you.
Operator: The next question comes from Bill Crow with Raymond James. Please go ahead.
Bill Crow: Hi good morning, Peter and team. Curious. When you started to see the weakness in Southern California, it feels like it was what 12 to 18 months ago. And I’m just — I’m thinking about your list of cities that are doing better and worse. Is there anything you can look ahead and say, you know, this city, while it’s steady eddy at this point might be poised to kind of follow Los Angeles’s lead, Southern California’s lead.
Peter Baccile: Peter, you want to take that?
Peter Schultz: So, Bill, I would say to Peter’s point earlier, the markets where the rents ran the most in Southern California is certainly at the top of that chart. That’s where we’ve seen slower activity. We’re not seeing that in Pennsylvania, in Nashville, in Atlanta, in Florida, in Texas. The rents there have not run as much. So that hasn’t been a headwind. And as Peter said earlier, it’s not an affordability issue. The other thing I’d say in some of those markets is there’s simply not as much supply today and the fundamental backdrop of that continues to be good. So that’s not something I’m really concerned about today.
Bill Crow: Is New Jersey at risk? You didn’t mention that one.
Peter Schultz: So New Jersey had a little bit of a weak quarter in terms of net absorption. I think northern New Jersey, so think about the Meadowlands as an example has a similar rent dynamic with Southern California. So I think there’s been a little weakness there. But again, they don’t have the supply issues that you’re seeing in some other markets.
