Q1 2024 Earnings Summary
- First Industrial Realty Trust has addressed approximately 71% of their lease expirations, ahead of the 64% at the same time last year, indicating strong leasing activity and effective tenant retention efforts.
- Broad-based demand continues, particularly in e-commerce, where the largest occupier is on track to lease more in the first half of the year than they did all of last year, potentially doubling their previous leasing activity and catalyzing further market momentum.
- The company is increasing speculative development capacity to $300 million, reflecting confidence in future demand and growth opportunities, especially in strong markets like South Florida, where new development starts are anticipated in the near term.
- Reduced Guidance Reflects Leasing Challenges: The company lowered its guidance for same-store NOI growth to 7.25% to 8.25%, a 75 basis point reduction at the midpoint, and decreased average occupancy guidance by 25 basis points, citing adjustments in leasing assumptions for certain properties. This indicates challenges in leasing pace and timing. , ,
- Tenant Delays in Leasing Decisions Due to Economic Uncertainty: Management noted that economic uncertainty and market volatility are causing tenants to delay leasing decisions, especially for larger spaces. This has led to elongated conversations and slower decision-making, which may negatively impact future occupancy and revenue growth. , , ,
- Weakness in Key Markets: The company is experiencing slower leasing activity in key markets such as Southern California and Seattle. Management acknowledged a slowdown of tenant traffic in these areas, potentially signaling broader weakness in tenant demand that could affect performance in important markets. ,
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Development Leasing Guidance
Q: Should we be aware of any other risk in the development portfolio?
A: The company adjusted its development outlook by increasing exit cap rates by 18 basis points to approximately 5.22% and reducing pro forma yields by 16 basis points, resulting in an overall profit margin reduction from 36% to 32%. Despite these adjustments, they view their forecast as similar and have active prospects across their development pipeline . -
Tenant Demand and Leasing Timing
Q: Is tenant hesitancy a timing issue or a sign of weak demand?
A: Management believes tenant decision delays are primarily about timing rather than lack of demand. Discussions are ongoing, and tenants are not canceling but taking longer due to economic uncertainties. Demand remains broad-based, with activity from various sectors, and renewal activity continues to be solid . -
Southern California Market Softness
Q: What is causing the weakness in Southern California?
A: In SoCal, completions exceeded absorption, leading to a vacancy rate uptick. New leasing is slower as tenants are more deliberate and some are deferring decisions. However, renewal activity remains strong, and port activity in Q1 is 26% higher than last year, which could positively impact the market . -
Development Lease-Up Progress
Q: Can you update us on development lease-up guidance?
A: They had 2.8 million sq ft of development lease-up in original guidance. With 500,000 sq ft leased in Q1 (Rockdale deal), 2.3 million sq ft remains, mostly expected to lease in the back half of the year. Additionally, 1 million sq ft (First Stockton) was leased in Q1 but wasn't budgeted, indicating positive progress . -
Changing Lease Terms and Concessions
Q: Are 3PLs pushing for shorter leases or more concessions?
A: While there's some shift, most 3PL deals are still for 5 to 10 years. Concessions have increased slightly, with free rent now at 0.6 to 0.7 months per year of term, up from less than half a month. Overall, terms for 3PLs remain relatively steady . -
Property Expenses Increase
Q: Why were property expenses higher this quarter?
A: Property expenses increased due to higher recoverable snow removal expenses, which are all recoverable. The $0.02 in additional expenses affecting guidance are included in G&A . -
Occupancy Decline in Baltimore
Q: What caused the occupancy dip in Baltimore?
A: The occupancy decline was due to a 309,000 sq ft known move-out at year-end in the Hagerstown submarket along the I-81 corridor. No other changes in occupancy occurred in Baltimore . -
Renewal Discussions and Rent Growth
Q: Are tenants less urgent to sign renewals due to possible rent declines?
A: Some tenants are delaying decisions, influenced by tenant reps suggesting they might get better deals later. However, there's been no material change in renewal discussions, and rent bumps are holding strong at 3.5%, with recent leases even at 3.7% ** , **. -
Mark-to-Market Rent Outlook
Q: When will mark-to-market rent growth slow down?
A: Management believes that due to significant past rent growth, there's resiliency in mark-to-market rent increases for some time, even if rents are flat or slightly down. The sector should enjoy good rent increases moving forward . -
Leasing Activity in Colorado Development
Q: How is leasing progressing on the Colorado development?
A: They continue to see activity for portions and full-building users of the 600,000 sq ft Colorado asset. The building is designed to be multi-tenanted, and while decisions are slower, they have interested prospects . -
Tenant Relocation to Phoenix
Q: Are tenants relocating from Southern California to Phoenix?
A: They see some expansion into Phoenix but not significant relocation from SoCal. Decisions depend on transportation costs; companies needing proximity to the Port of LA/Long Beach tend to remain in SoCal . -
Assumptions on Lease Renewals
Q: How informed is the assumption that one large SoCal tenant won't renew?
A: The assumption is a macro, blanket one, not based on specific tenant feedback. Discussions continue with both tenants, each occupying spaces of 150,000 to 300,000 sq ft ** , , **.