FR - NYSE

Good day, and welcome to the First Industrial Realty Trust, Inc. Third Quarter 2025 Results Call. [Operator Instructions] .Please note this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President, Investor Relations and Marketing. Please go ahead.

Thank you, Dave. Hello, everybody, and welcome to our call. Before we discuss our third quarter 2025 results and our updated guidance for the year, please note 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 16, 2025. 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 on our supplemental report and our earnings release. The supplemental, our earnings release and our SEC filings 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 which we'll open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Executive Vice President of Operations; and Bob Walter, Executive Vice President of Capital Markets and Asset Management. Now let me hand the call over to Peter.

Thank you, Art, and thank you all for joining us today. Our team delivered another solid quarter, highlighted by several development lease signings in the third quarter and fourth quarter to date, including a key win in the Inland Empire that contributed to our FFO guidance increase. Scott will provide additional details during his remarks. We also captured strong cash rental rate growth from leasing activity. The renewal side of our business is exceptionally healthy, and we have now largely taken care of our rollovers for 2025. Moreover, our pace for 2026 is consistent with prior years, and we're producing good early results. Moving on to the leasing market. Touring activity related to new leasing picked up in the third quarter. Notwithstanding our development leasing successes, tenant decision-making on the whole remains deliberate as the uncertainty around tariffs continues to weigh on some prospects. The fundamental picture is improving. Based on CoStar data, vacancy in Tier 1 U.S. markets was 6.3% at the end of the third quarter, which was flat compared to 2Q. We view this as a potential sign that fundamentals nationally are stabilizing. In our 15 target markets, net absorption in the third quarter was 11 million square feet, bringing the total for the first 3 quarters of the year to 22 million. With demand showing signs of strengthening, total leasing nationally is expected to approach near record levels this year. CBRE is projecting 900 million square feet of total leasing in 2025, which would be the second largest year on record, second only to 2021. New starts within our 15 target markets remained measured at 41 million square feet, with completions of 37 million. Space under construction now totals 212 million square feet, and that pipeline is 47% pre-leased. Moving now to our portfolio. Results were in line with our expectations with in-service occupancy of 94% at quarter end. Regarding our 2025 rollovers, we've now taken care of 95% by square footage and our overall cash rental rate increase for new and renewal leasing is 32%. If you exclude the large fixed rate renewal in Central Pennsylvania, we previously discussed, the cash rental rate increase is 37% and the straight-line increase is 59%. As I mentioned, we're making good headway on our 2026 rollovers. Through yesterday, we've taken care of approximately 31% of our rollovers at a cash rental rate change of 31%. We'll provide our full year 2026 cash rental rate increase guidance on our fourth quarter earnings call, but we're off to a good start. Moving now to development leasing. As announced on our last call, we leased the remaining 501,000 square feet of the 968,000 square foot building in our Camelback 303 joint venture. The 3-building 1.8 million square foot project comprised of this building and the 2 we acquired from the venture earlier this year is now 100% leased. We also leased 56,000 square feet at our First Park Miami Building 3. In the Inland Empire, we leased our industrial outdoor storage asset in Fontana. And in the fourth quarter to date, we leased 100% of our 159,000 square foot First Harley Knox Logistics Center. We also signed another lease at First Park Miami for 57,000 square feet at Building 12. In sum, we're excited about the future cash flow growth opportunities ahead. And with that, I'll hand it over to Scott.

Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.76 per fully diluted share compared to $0.68 per share in 3Q 2024. Third quarter 2025 FFO was positively impacted by $0.01 per share related to an insurance claim recovery. Our cash same store NOI growth for the quarter, excluding termination fees, was 6.1%, primarily driven by increases in rental rates on new and renewal leasing, contractual rent bumps and the aforementioned insurance claim recovery, partially offset by lower average occupancy and higher free rent. Excluding the insurance recovery, cash same store NOI growth was 5.4%. Please also note that third quarter 2024 same store NOI excludes $4.5 million of income related to the accelerated recognition of a tenant improvement reimbursement associated with a tenant in Central Pennsylvania. We finished the quarter with in service occupancy of 94%, down 20 basis points from the second quarter. Summarizing our balance sheet leasing activity during the quarter, approximately 2.2 million square feet of leases commenced. Of these, approximately 400,000 were new, 900,000 were renewals and 800,000 were for developments and acquisitions with lease-up. Before I review our overall guidance, let me quickly update you on our bad debt expense and our credit watch list. Bad debt expense was $245,000 for the quarter, bringing our year-to-date total to approximately $750,000, which is right on top of our original guidance. Our forecast for the fourth quarter remains $250,000. Two additional credit-related points. One, Debenhams Group, formerly Boohoo, remains current; and two, we have added one 3PL tenant to our watch list, for which we are collecting rent directly from the subtenant of the property. We are currently working through the collection process related to the lease obligation and due to confidentiality, we will not discuss further details of this matter. Now moving on to our guidance. We increased our 2025 NAREIT FFO midpoint by $0.04 to $2.96 per share. The $0.04 per share increase is primarily due to the development leasing successes, lower interest expense and the aforementioned insurance claim recovery. The tightened range is now $2.94 to $2.98 per share. Our key assumptions are as follows: End of fourth quarter in service occupancy of 94% to 96%. This implies an average quarter-end in service occupancy for the year of 94.4% to 94.9%. Our midpoint assumes we will lease an additional 300,000 square feet of our in service developments on December 31. This lease-up assumption has no impact on our midpoint FFO guidance given the December 31 date. Fourth quarter cash same store NOI growth before termination fees of 3% to 5%. This implies a 2025 quarterly average same store NOI growth of 7% to 7.5%, a 75 basis point increase at the midpoint. As a reminder, our same store guidance excludes the impact of the aforementioned accelerated recognition of a tenant improvement reimbursement in 2024. Guidance includes the anticipated 2025 costs related to our completed and under construction developments at September 30. For the full year 2025, we expect to capitalize about $0.09 per share of interest. And our G&A expense guidance range is $40.5 million to $41.5 million. Now let me turn it back over to Peter.

Thanks, Scott. We're energized about our recent development leasing wins and encouraged by the overall increase in foot traffic for our availabilities. We expect that as the topic of tariffs moves out of the global headlines, we will see prospective tenant requirements commit to making investments in additional space to accommodate future growth. Every day, our teams are working hard to convert prospects into tenants that drive cash flow growth and value for shareholders. Operator, with that, we're ready to open it up for questions.

[Operator Instructions]. Our first question comes from Rob Stevenson with Janney.

Scott, with 75 days left in the quarter, what's the delta between the $0.04 FFO range? How do you get to the low end? How do you get to the high end? What's the key thing that can move on you?

Well, I would say, if you look at development leasing, we have 300,000 square feet of in service development, and that's scheduled to lease up, Rob, on December 31, so that has no impact on the midpoint guidance. I would say the only other thing that we could think of are unanticipated credit challenges that could cause us to hit on the low end. And I would say on the upside, leasing more than 300,000 square feet of our in service development portfolio would push us up to the top.

Okay. That's helpful. And then can you guys talk a little bit about the transaction market today, both in terms of the market for buying assets as well as selling assets? How much product you're seeing on the marketplace and what pricing looks like and how deep that buyer and seller pools are today? And pricing.

Jojo, do you want to take that?

Yes. Rob, it's Jojo. In terms of the market for leased assets, it is very, very competitive. Market -- the capital in the market wants to get invested, and it's a little bit of risk off. So if you have a leased asset, there's a lot of capital from every kind of buyer looking at it. The market for -- in terms of -- just staying on that, in terms of valuation, I would say a product like we have leased at market would be in the low to mid-5s. And depending upon market, it would be -- if you have markets like Nashville, Dallas, South Florida, where it's a kind of market rent growth is outpacing the whole market, the cap rates could fall below 5. In terms of vacant property and land, it is a little bit less robust. And the reason is that's riskier for a lot of investors to go in. But there are some markets where in land is -- continue to be very competitive, and they basically get sold and compute to probably a sub-6 eco yield and a sub-7.5% IRRs. And those markets, again, include the markets I just mentioned because rent growth is expected to be higher, like a Nashville or a Dallas and a South Florida. Does that give you a sense?

Yes. And I guess, any difference that you're seeing pricing-wise, either on the buy or sell side in terms of size for 100,000-plus assets versus 250,000, 500,000 et cetera, the bigger assets?

No, no material difference, Rob.

And the next question comes from Nick Thillman with Baird.

Maybe wanted to touch a little bit on 2026, good progress there. Spreads are pretty stable year-on-year. But as we look at kind of '26 expirations, is there anything we should -- that's worth calling out, whether it be size of tenants or like fixed rate renewals that could really swing the numbers?

Chris...

Yes. If we look at 2026, like I said, we're in pretty good shape. We've already renewed 31%. Our largest remaining rollover today is a 550,000 square foot expiration in Southern California. That rolls in the third quarter of 2026. And right now, we're in discussions with them about a renewal.

That's helpful. And then maybe, Peter Bacilli, when you're talking to Peter Schultz or Jojo, like what markets or who do you like hearing from more right now? Like, I guess, who's been a little bit more active here in the last 90 days?

I love hearing from both of them. I mean, as far as market performance, South Florida, Nashville, Houston, Dallas, actually the Greater Philly area continue to be, I'll say, outperformers nationally. Atlanta is doing pretty well also. That doesn't mean I don't love to hear from Jojo about what's going on in Phoenix and SoCal. And in particular, I ping Jojo quite a bit about what's going on in SoCal. So we're encouraged by the new lease First Harley Knox, 159,000. We do have good foot traffic around our other availabilities. And not everyone is that tariff sensitive. And so we're beginning to see some of those players begin to act.

And the next question comes from Todd Thomas with KeyBanc Capital Markets.

First, I wanted to ask if you could discuss the company's appetite for future developments, how you're thinking about new starts today? And can you talk about the mix between spec and build-to-suits as you think about adding more product to the pipeline and what the yield expectations between the 2 are like today?

Sure. We don't give guidance on volumes, but I don't mind talking about directionally what we're thinking about in the terms of development. As I mentioned a second ago, we do continue to like the markets of South Florida and Greater Philly, Dallas, Houston, Nashville. Where we have land in those markets, we will be considering starts in 2026. Where we don't have land like Nashville in those markets, we're working very hard to change that. But we have some great sites today available in some of those markets that are entitled and ready to go. So we'll be thinking about that. In terms of yields, on a portfolio basis, our available opportunities are going to yield close to 7%. Some will be higher than that with IRRs 9% or north of 9%. Is that -- was that -- you asked about returns, didn't you?

Yes, between sort of spec and build-to-suits...

Build-to-suits are going to be a little bit less than that, where we try to get 100 to 125 basis point spread on spec development relative to market cap rates, you're probably looking at more like 50 to 60 basis point spreads for build-to-suits. And in terms of mix, as you know, most of our development volumes over the years has been spec. I don't think that, that mix is going to change much for us going forward.

Okay. That's helpful. And then I just wanted to follow up, I guess, on SoCal. Can you elaborate a little bit on current market conditions there and maybe discuss rent trends and sort of what the latest is in terms of concessions and free rent in the market?

Yes, Jojo?

Sure. Thanks. Well, a couple of things. Top level, on the demand side, if you look at Q-to-Q, gross and net absorption was higher from 3Q to 2Q. So -- and that's -- and that was also as a result of increased traffic. There's more inquiries, tours and RFPs. As Peter noted, in terms of the market, there are tenants just like the recent lease that we did where the tenant had to make a decision quickly because they need it and they're not kind of tariff related. But the tenant pace for committing and signing leases were about flat Q-to-Q. On the supply side, that's where we're continuing to be having good supply metrics. Under construction was basically flat and starts were actually much lower Q-to-Q again. So just top level, all in all, the fundamentals are pointing to the bottoming out of the market. And overlay with that, you have improving supply metrics and signs of increasing demand. So overall, we see rents -- Q-to-Q, rents were about flat. Vacancy was about flat, again, reflective of bottoming out of the market. In terms of going forward, we think it's going to be flattish still because the so-called market still has space to digest, but it really -- we feel like it's stabilized.

And the next question comes from Craig Mailman with Citi.

Just thinking about '26, you guys still have Aurora and your asset in New York to backfill. Can you talk through the kind of the competitive landscape in each of those markets and what the prospects you guys have to kind of address those vacancies?

Peter?

Sure. Craig, it's Peter. Starting in Denver, we're 1 of 2 buildings in that size. The supply picture in Denver has improved. We continue to see and work with prospects for all or portions of the building. As we've talked about on prior calls, the larger deals tend to move a little bit slower than the smaller midsized deals, but we continue to see good activity there. And as I said, not a lot of options for full building users. In Pennsylvania, for the 708 New York, there are 3 or 4 other buildings of similar size. Pennsylvania saw some positive absorption in the third quarter. More importantly, there's almost 9 million square feet of deals that are already signed in Pennsylvania that will be taking occupancy in the fourth quarter of this year and the first half of next year. So as Peter said in his remarks, activity is up. We're seeing more tours and interest. We are talking to a couple of prospects, particularly on the 3PL side for our building in New York. That size, I would say, has been good, but smaller and bigger has been better, but we're encouraged by the level of activity and the lease signings that we've seen to date that are going to occupy as I said, in the fourth quarter and the first half of next year.

That's helpful color. And listen, I know it's not embedded in your '25 guidance. But at this point, just given the dynamics in the market and the activity that you're seeing, how should we think realistically about kind of commencement timing potentially for those 2 assets over the next 12 months?

No, I think we'll update you on that on our fourth quarter call, but we're encouraged by some of what we're seeing at this point.

Okay. And then slipping one more in. Scott, on the 3PL that just got added to the watch list, I know you can't give too many details, but is that subtenant kind of talking to you about potentially going direct if the primary tenant does default? Like what's the -- can you give anything on the magnitude of the rent there or what market it's in, just anything incremental?

We're not going to get into the magnitude of the rent, Craig, but there are some potential conversations or conversations we're having with the subtenant to take over. So yes.

And the next question comes from Nicholas Yulico with Scotiabank.

This is Viktor Fediv on for Nicholas Yulico. So just a quick question on your development leasing assumptions. So on the previous call, you mentioned 1.5 million square feet by the end of this quarter. Obviously, got pushed a bit. Just trying to understand whether it's end of first quarter or end of second quarter of 2026. Do you have a perspective on that?

We're -- Peter talked about 2 of the leases that we're talking about. But we're not going to -- we're having our budget process coming up in December, fourth quarter. And in our fourth quarter call, which is in early February, we'll give you a better idea of what our thoughts are on lease-up on that remaining pool.

Got it. And then a quick follow-up on market rents. Just trying to understand from boots on the ground, what you are seeing in terms of best-performing markets and worst performing markets in your portfolio in terms of market rents?

Yes. To start with, just kind of say our leading markets in 2025, I'll highlight 4 of the markets. Atlanta, we had cash rental rate increases of 113%. Baltimore, Washington, was up 86%. South Florida was up 62%. And then finally, Dallas and Fort Worth have been a strong market for us. They're up 61% in 2025. So that kind of give you the idea on the leading markets. Maybe Peter and Joseph can comment a little bit more on what they see.

Do you want to talk about market rent growth?

Sure. In terms of market rent growth, I mean, in terms of the West part of the market, I think Dallas is -- would be the strongest market. And then we expect SoCal to be flattish. And the Phoenix has been a slight increase, a lot of supply, but outperforming in terms of gross and net absorption. Peter?

And I would say the other markets around the country are flat-ish to slightly up, and it's really a submarket-by-submarket call.

And the next question comes from Blaine Heck with Wells Fargo.

Okay. Great. Not to pile on, but can you just clarify and walk us through the ins and outs related to the 1.5 million square feet of development leasing discussed last quarter. Just wondering some of the specific adjustments that might have been made to that lease-up time frame and whether any of the development leasing that you guys did this quarter was part of that 1.5 million square feet? Or was that expectation reduced by the full 1.2 million square feet?

So here's the math that we talked about on the second quarter call. We had the 1.5 million square feet of projected in-service development leasing, and that was going to happen on December 31. We have the 708,000 square foot in Central PA that Peter talked about. So that's the 2.2 million square feet that we referenced on the second quarter call. We signed 200,000 square feet of leases in the in service development pool, one in Miami, one in Southern California. That leaves us with 2 million square feet remaining. We are -- in our forecast, our guidance forecast, we have 300,000 square feet, and that's a macro assumption of in service development. It could be a multitude of different options assumed. So that leaves us 1.7 million square feet, and that's now slated to lease up in 2026. And as we've said, we're going to go through our budget process here in the next couple of months. And when we have our fourth quarter call in early February, we'll give you an idea of when we think lease-up will occur.

Okay. Great. That's really helpful. Second question, Asian 3PLs have been a significant part of the leasing activity we've seen over the last year or so. Can you give us any color on how demand from that group has trended more recently? How much additional demand is behind that group over the longer term? And maybe also how you're thinking about credit for those tenants?

Yes. They've definitely been very active following up on a lot of the, I'll say, pull forward of imports trying to get ahead of the tariffs. We kind of look at that as a bit of a short-term thing. And from a credit standpoint, we would prefer not to be in discussions a year or 2 or 3 from now about trying to get rent that we couldn't collect. So we have generally stayed away from that demand. It has been pretty strong though and been a pretty significant percentage of the space that's been leased.

And the next question comes from Vikram Malhotra with Mizuho.

Maybe just I'm wondering if you can maybe give us a little bit more color on some of the large lease-ups in particular, like the Federal-Mogul space, some of the other large lease-ups, more -- just not timing, but what sort of demand are you seeing relative to kind of what you typically see in the submarket? Anything unique you may be seeing any need to subdivide or, I guess, redevelop those assets? If you can walk through some of the bigger pieces you're trying to lease up and what sort of demand and what the strategy is behind those?

Yes, Vikram, it's Peter Schultz. I answered that question a couple of questions ago. But I will say that both of the buildings are designed to be multi-tenanted. That's something we always incorporate in our new developments. So certainly flexible. Activity is good. As we've commented on a couple of times, the larger deals tend to move a little slower and more deliberately, but we're encouraged by the activity we're seeing today.

Okay. Great. And then maybe just a follow-on to the, I guess, the '26 sort of -- you mentioned good progress on expirations. I'm just wondering if you have some high-level math. You've done a lot of leasing this year, which will flow into next. For whatever reason, if you had -- if you were to do all the additional leasing that you've pushed out into next year, if that were to occur right at the end of next year, is there like a rough impact to earnings next year you would have?

I mean, the later in the year that we complete that leasing, the less impact it has on 2026 results. And that timing, when we sit down and do our budgets, we're going to talk about where we are in discussions on these assets, and that will inform our decisions around when the -- during the year that we think we can get those leases signed. So that's work that we have yet to do, and you'll hear a lot more from us on that subject in February.

Okay. No, I guess what I was just saying is it seems like you have a lot of the growth baked in for next year through the leasing you've done, through the expirations. Obviously, the renewal activity has been good. So it just -- to me, it felt like there's less risk whether you do it at the beginning of the year or the end of the year, a lot of the growth that, I guess, the Street is anticipating seems to be locked in. I don't know if you agree or disagree with that.

Yes. I mean when you look at what we're trending right now on cash rent growth, the 31% on, call it, 31% of the rollovers, that's obviously a very strong number and helps 2026 considerably. Also for next year, our portfolio-wide bumps on average are going to be 3.45%. So that obviously contributes to the proportion of the portfolio that doesn't roll. So yes, we're in a pretty good position.

And the next question comes from Rich Anderson with Cantor Fitzgerald.

So just reading your sort of tone on this call.

Hey Rich, we're having a hard time hearing you.

How about now?

Much better.

Better. Okay. Sorry about that. Just listening to your body language on the call and just sort of the level of confidence that you're expressing doesn't necessarily jump off the screen as much as it did for PLD yesterday, but I was sort of mentioning deliberate tenants and all that sort of stuff, but good tone nonetheless. But how would you describe the interplay between tenants? I mean, to what degree are they sort of watching one another and someone takes the leap and the others are following? Do you think that, that's sort of perhaps an oversimplification, but how the market may ultimately recover, there will be more of a herd event of some sort? Or do you think it will be more like a slow and steady recovery type of process?

Yes, there's definitely linkages from a competitive standpoint between certain businesses and certain sectors. And you do see that when a bigger player moves quickly and moves significantly, it does tend to act as a catalyst for others to get off the sidelines. We saw that certainly during COVID with Amazon getting way ahead of its competitors. And pretty much if you sell anything today, you're competing with Amazon. So what they do definitely has a play through to the rest of the business. But that's kind of a higher-level observation to get too focused on details on that is probably not constructive. But yes, there is a little bit of a follow you, follow me that happens. And the more leases that get signed now. If you're a tenant rep and your attitude toward your clients' needs goes from you can wait a couple of months to you better sign now, it's the best deal you're ever going to get. And when the Chinese 3PLs lease up all the competitive space and all that's left to, say, ours and maybe one other, people start to move a lot more quickly. So that dynamic hasn't happened, but it's certainly trending toward that.

Yes. I wonder if the pull forward of demand in the early COVID era, if that's something like that could materialize and if perhaps you don't even want that, but it may be the fact of the matter, nonetheless.

Yes, I wouldn't call it pull forward. I would call it now all of a sudden, there's a cost to waiting. And for the last 2 years, there's been no cost to waiting. And when there becomes a cost to wait, that's when people act, and that does not mean that we're oversigning leases like we did during COVID. That's a completely different phenomenon.

Okay. Fair enough. Second, -- any -- you talked about taking advantage of the land positions in some of your better markets and considering development next year. What about monetizing some land elsewhere, the data center movement, AI, all that? Is that something that could be on the horizon for you guys as well to some degree?

Yes. I mean we're looking at everything we own, not just land, but even all the income-producing assets we have to see if from an economic standpoint and from a feasibility standpoint, it would make sense to convert those assets to a higher and better use. From a value standpoint, data centers are a higher and better use. So we're looking at that. There are a lot of hurdles and a lot of challenges involved in trying to produce something like that, but we're tearing into it, and we'll see if we can dig up any opportunities.

Great. Last for me. We've done some work on this sort of the ultimate recovery of industrial. And it seems to me that larger boxes may be the leaders in the inevitable recovery of the business if it's not already recovered or getting recovered. Do you agree with that, that perhaps the larger boxes are -- will lead the pack? Or do you have sort of a different view based on the size category?

Certainly, that impacts the volume and capacity. And one of the reasons that volume has been down is that there haven't been that many 1 million footers leased like there were in '21, '22 and '23. So from that standpoint, that impacts the capacity or the large numbers. But what we really need as a group of tenant requirements that begin to sign consistently new development leases and invest in growth. And it's beginning to happen. Some of it is from tenants who aren't that tariff sensitive. Some of it is from tenants who kind of say they can't wait anymore. So there's definitely been some pent-up demand. And I would say this is the -- we're getting back to a feeling like we had pre-April 2. We're not there yet, but it's feeling like we're getting back to that time period.

Rich, it's Peter Schultz. The other thing I'd add to Peter's comments is we continue to see a flight to quality. So as you think about the quality and location of our assets, and activity, certainly, we're seeing activity $1 million and more, but we're also seeing strength and breadth of activity across a variety of sizes. So I wouldn't say it's in one size, but we focus, as you know, on delivering new product in unmet pockets of size in our target markets. So we feel pretty good about the broad range of square footage requirements.

And I just want to emphasize that movement to quality favors us because we've built now so much of what we own, and that's another reason that we -- our foot traffic is way up.

And the next question comes from Caitlin Burrows with Goldman Sachs.

I was wondering if you guys could go through today how you're balancing the rate versus occupancy equation? How does it vary maybe by first-generation development properties versus the existing portfolio and then renewals?

Sure. I mean the whole thing is all about NPV. We're constantly trying to maximize the NPV with respect to those inputs. Base rate is most important and near and dear to our hearts, giving up another month or 2 of free rent is not the end of the world, although we'd rather not. And on the TI front, it's typically been standard TI packages. Do you guys want to add some color on what you're seeing in your markets?

So Caitlin, the other thing I'd point to is, as we talked about in the script, our renewals in '26 are really strong to date, and you're seeing good pricing pressure there. So it's -- I think you've asked us about this before. It's not really about price. It's about demand and the right product in the right place. And we clearly see an improvement in traffic, particularly among those tenants who are not tenant -- I'm sorry, not tariff-centric, as we've commented about a couple of times today. Certainly, there are assets where we have work to do and some of those may be in more competitive pockets like Jojo has talked about, and we're going to meet the market and do what we need to do to lease the space.

Got it. Yes. I guess I was wondering if like the willingness for you guys to wait that extra month to get the better rate has changed, but it sounds like it probably hasn't, so got it. And then on the point you made on the progress you guys have made on '26, I would have generally thought that spreads would decline over time as comps get tougher, but you have essentially maintained the 31% or 32% spread in '26 from 2025. So I was just wondering if you could give more detail on how that was possible, what the drivers were, if it could continue? Is it just like lease specific? Or is there something else going on to kind of sustain the same level of spreads?

We have said over time that we thought that, that math had some running room, some duration. And when we look at the mix of our leases and when they were signed, don't forget, if you signed a lease in 2019 for 7 years, you signed at a very, very cheap rate relative to even today coming off the highs. And that is going to be driving that cash rental rate number for some time.

And the next question comes from Vince Tibone with Green Street.

The stock has been trading at a significant discount to NAV for several quarters now. Have you given consideration to selling assets and buying back shares as a way to create shareholder value?

Vince, we have looked at that. Selling assets and buying stock has not turned out to be from a mathematical standpoint, that accretive. And we've also looked at borrowing and buying back stock, and that doesn't look very accretive. And given that we're in a capital-intensive business in a very volatile market as this has been in March, I think we're at $58, sector was trading a lot better. It's now obviously coming up from the lows. But speculating in our stock is probably not what investors invest in us to do. So what I have said in the past is if we had some opportunity, for example, to convert some of our properties to data centers and create significant additional value beyond industrial value that, that could be capital that could be used to buy back some stock. But in the absence of that, the math doesn't really move much, Vince.

And then switching gears, I was hoping to drill down a little bit on the supply landscape in your markets. Are there any markets where you're starting to see a pickup in development starts activity? Or is it still pretty quiet out there across the board?

Peter and Jojo, you want to talk about starts?

Sure. No, there's really -- we don't see pickup. In fact, starts are on a decline. So there is some -- if there's a pickup, there will be a little bit on the build-to-suit activity. But by and large, we don't see significant pickup. In fact, there's a decline in starts.

In Pennsylvania, I would say there's anticipated to be a couple of starts for 1 million square foot plus buildings in the next couple of quarters. But other than that, pretty flattish.

We don't know what everybody's math looks like. Obviously, most of the space, Vince, is developed by the private players with private capital. But a lot of that land we've competed for over the years, and we think that it's very possible that the underwriting assumptions that were used at that time, we're pretty aggressive, not to mention the cost of debt is a lot higher than it was in 2022 and '23. So it's possible those deals don't pencil that well. So we think there's a natural drag to new supply ramping up.

[Operator Instructions]. Our next question comes from Michael Mueller with JPMorgan.

I guess, for Scott, can you help connect the dots a little bit? I think you said earlier, part of the guidance increase was due to development leasing success, but it looks like you pushed off some of the, I guess, anticipated '25 leasing into 2026. And I know it sounds like that component was at year-end anyway, so it may not be a lot of impact there. But again, what was the portion of development leasing success that is pushing the numbers higher?

I would say, Mike, it's about $0.01. And keep in mind, all development leasing, this is what we assumed in our second quarter call was assumed to happen on 12/31. So all of the leasing that we announced on the call helped us by about $0.01 a share.

Okay. So it's this stuff just earlier than what was expected. That was it. Got it.

Yes. Yes. Again, from an FFO guidance point of view, we assumed it leased up on December 31, and it leased up earlier than that.

Okay. So that was about $0.01 of it. Okay. And then just as it relates to escalators, 3.45% or something in place bumps for next year. On the 2026 signings thus far, have there been any notable changes one way or the other in terms of lease escalators compared to what you were getting in '25?

It's interesting. We got 3.6% in '24, 3.6% in '25, including the big fixed rate renewal. And so far in '26, about 3.6%. So our team is doing a really good job dealing with significant pushback, as you can imagine, since that's a number that's above inflation. So they've been successful in keeping that number about 3.6%.

The next question comes from Michael Carroll with RBC Capital Markets.

I guess, Scott, I know that the guidance range doesn't include leasing within the recently completed or in-process development projects. But I know that you guys continue to highlight some of your best markets and a lot of these buildings are in those markets. So can you talk a little bit about the activity that's happening at those specific properties? And what are the near-term leasing prospects of getting those leased up?

Yes. I mean the stuff that's under construction, there's not really much activity around that. Our business has always been to build it first and then they will come. And that was a little bit different during COVID when, I'll call it, we had the gold rush to go lease up in logistics space. But -- so it's a little premature to try to talk about activity around the current construction pipeline. The assets that have been recently completed, there's really good foot traffic around those. And again, we hope to have leases on some of those buildings sooner rather than later.

Okay. Great. And then just lastly, can we talk a little bit about the 3PL tenant. I know that there's not much that you want to say. But is the issue with the subtenant or is the issue with the direct tenant at that specific site?

The issue is with the direct tenant, the 3PL.

Okay. So then assuming that there is an opportunity for the subtenant to take that space and you're just kind of working through the process on that?

Yes, that's something that we're thinking about and having conversations about. We can't give you a definitive view of what's going to happen at this point in time, but that's something we're working on.

And the next question comes from John Petersen with Jefferies.

I guess in the saga of the 10-year treasury throughout this year, it definitely seems to be trending downward, at least today, let's say, and spreads have been tightening a bit. I'm just curious what impact that's been having on cap rates for warehouses across your market and how you've seen those trend?

You guys want to cover that?

No material change from Q2 to Q3. I would just say that the demand for -- like I said earlier, demand for leased assets and quality buildings have increased from Q2 to Q3.

And the next question comes from Brendan Lynch with Barclays.

You mentioned that there are some tenants out there that are still quite sensitive to tariffs. Can you describe their thought process? Is it that they're just out of the market while tariffs are in place or they're just waiting for tariffs to kind of settle into a final rate? Or any other considerations that might be keeping them on the sidelines but might be able to move them off in the future?

There are 2 things. One is the cost to them. Without knowing the cost, they don't know what the impact on their margins might be. And then secondly, to protect those margins, can they put some or all of that additional cost through to the end buyer, the consumer. And so they're looking perhaps at investing in growth in, say, a 500,000 square foot building that's a $60 million investment when you consider the lease and the equipment and the racking and the material, the product and then hiring all the people. And if your EBITDA multiple is 8x, that's almost $0.5 billion decision. And so they don't want to make that decision unless they know what the cost of their inputs is and what's going to be the outcome for their margins. And that's really it. And I think over time, the subject is becoming, I'll say, more commonplace, but digested a little bit like interest rates. When interest rates started to move much higher, that caused people to pause for a while. And now pretty much everyone is built into their business plans, their models, their P&Ls, higher interest rates, and they are now moving ahead and it's kind of not an issue anymore. So that's where we need to get with the tariff subject.

But Brendan, I would add that we're seeing some of those companies are actively looking RFPs and discussions, but they're not making decisions and continuing to push off their target occupancy dates for all the reasons Peter just said. That's what's happening on the ground.

Okay. Great. That's helpful. And a related question. We've seen some weakening consumer data, jobs growth a little bit weaker. To what extent are prospective tenants factoring in this kind of change in the macro environment and just kind of waiting on the sidelines because of that as well.

I think it's different depending on the sector and the business that they're in and notwithstanding all of the shocks and the projections of doom and gloom, the economy has done pretty well through it all. We haven't seen massive increases in inflation from the tariff subject so far, and it doesn't mean it won't come. But right now, things -- I think most of the prospects are pretty confident in the base business, and it's really just this question about when and how and how much to invest in growth.

And I just want to add that the 3PL activity continues to be good. In fact, it's increased from Q-to-Q. Food and beverage, RFPs and tours have increased as well. So that sector seems to be doing good. Manufacturing activity is higher from Q-to-Q. We see some softness in the home related like furniture. There's some weakness in that. So by and large, overall, I think demand activity has increased, offset by a slight decrease from other sectors.

Our final question comes from Caitlin Burrows with Goldman Sachs.

Maybe just a follow-up to that last point on like where is stronger, where is weaker. I mean, yesterday, Prologis reported they had a record leasing volume in 3Q, and you mentioned that CBRE is forecasting '25 will be second only to 2021. Could you put your own leasing volume in 3Q into the context of your past? And if you have a view on the future of like how that should be trending, realizing that you might be more weighted to development, which makes it lumpier, but trying to figure out a trend there, if there is one.

It's hard to see a trend. I mean, last year, we leased 4.7 million square feet. And this year, it's less. Some of that has to do with what we have available and what's rolling and what's renewing. And I'm not sure you can -- we don't have enough volume given the scale of our company to have -- to identify trends like that, Caitlin.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Baccile for any closing remarks.

Thank you, operator, and thanks to everyone for participating on the call today. If you have any follow-ups from our call, please reach out to Art, Scott or me, and have a great day.