Prologis Inc (PLD) — Q1 2022 Earnings Call Transcript

Thanks, Ron. Good afternoon, everyone. The fundamentals of our business continue to be at all-time record levels. We achieved record high occupancy levels in both our stabilized in-service and total in-service portfolio, record rent growth on a cash and GAAP basis, our development platform had nearly $340 million of development starts, our Coastal Tier 1 exposure is approaching 50%, our portfolio mark-to-market increased to 48%. All of these factors contributed to raising key components of our 2022 guidance, including over 10% growth in FFO and 11% growth in AFFO at the midpoint. Now let me turn it over to Steve to cover some of the market fundamentals and our operations.

Thanks, Jim. On the fundamental side, first quarter demand was 95 million square feet, making it five of the last six quarters of demand in the 100 million square foot or greater range. First quarter deliveries were about 85 million square feet with the vacancy rate at quarter end remaining near record lows at 3.1%. Taking the record low vacancy rate of near 3%, coupled with an expected positive demand-supply gap again this year, we have revised our 2022 rent growth forecast for our markets from the 10% to 15% range to the high teens to low 20% range. On the long-term demand side, CBRE recently affirmed its outlook for 1.4 billion square feet of demand through 2026 with no periods of negative net absorption through 2032. Although we are paying close attention to headline data such as inflation, fuel and labor costs and a resurgence in bottlenecks occurring in some Asian ports, we have yet to see an impact on demand in our portfolio. Based on recent dialogues with our customers, RFPs to lease space and the most recent logistics manager index at record levels, the near-term outlook is as strong as it has been in this cycle. Long term, we believe the secular themes for greater inventory resiliency and e-commerce are still very much intact and should continue to drive short-term and long-term demand. Turning to our own portfolio, we continue to see these positive indicators evidenced by 62 leases executed during the quarter totaling over 7.7 million square feet. Demand was broad-based across categories with a number of leases between 250,000 and 850,000 square feet with customers such as FedEx, Samsung, Walgreens, Cardinal Health, International Paper, Sealy Mattress, some major 3PLs and a global e-commerce customer. Of note, we had only two spaces greater than 100,000 square feet in our in-service portfolio available at the end of the first quarter, and I'm happy and pleased to report that both are now leased. Our lease activity for the quarter, combined with the strong fundamentals I discussed, led to continued growth in rents on second-generation leases of 29% cash and 49% GAAP, both records. I'd also point out that only 18% of this lease activity was in coastal markets. Across our entire in-service portfolio, the portfolio leased mark-to-market is now 48% on a GAAP basis. We believe this presents strong visibility for significant rent growth for the foreseeable future. We finished the quarter with the total in-service portfolio 99.1% leased and the stabilized portfolio 99.4% leased, again, both all-time records. On the development front, we had a tremendous first quarter with starts breaking ground on eight speculative projects totaling $339 million in cost. All of these projects are in well-located submarkets. Our confidence in leasing speculative space continues to be very strong, as evidenced by the 5.6 million square feet of speculative developments placed in service over the past year. Those projects were originally 3% leased at the start and are now 100% leased. Our development pipeline at quarter end totaled $1.64 billion with 63% allocated to Coastal Tier 1 markets and 85% allocated to overall Tier 1 markets. This pipeline is 52% preleased, and we expect to generate value creation margins over 70%. Looking forward, our pipeline for future development starts is very strong. Our land balance at quarter end totaled $582 million with an additional $235 million uncovered land. Ninety-three percent of this land bank is located in Coastal Tier 1 markets. Coupled with the land options we have and another land in our operating portfolio, we can support our current level of annual starts for the next three years. It is also important to note for modeling NAV that the market value of the land we own is about double our book basis, and on average, we've only owned this land for about one year. With the fundamentals I outlined and our best-in-class local operating teams, our outlook for new development starts is strong. This is reflected by our revised guidance, up about 20% from our original midpoint. I'll now turn it over to Nick Anthony to cover acquisitions and dispositions.

Thanks, Steve. I'll start with dispositions. As noted on the last call, earlier this quarter, we contributed to the third tranche of Amazon access to our joint venture with CBRE Investment Management, for which our share of the proceeds was $269 million. Coupled with the outright sale of another Amazon facility in Tampa, dispositions totaled $325 million for the quarter. As a result, our Amazon exposure was 5.7% at the end of the quarter. Given the strong prices for logistics real estate and particularly for a few of our strategically located assets, we are seeing an increase in reverse inquiries for some of our assets at prices we previously did not expect and did not have in our original plan to sell in 2022. As a result, we have increased our guidance for dispositions to a range of $900 million to $1.1 billion. This will provide attractively priced capital to fund our increased development expectations. On the acquisition side, we purchased one facility totaling 75,000 square feet in the Southern California Mid-County submarket. The building was vacant, and given current leasing prospects, we expect it to stay at a 4.6% yield. I will now turn it over to Mark to discuss our financial results and guidance update.

Thanks. Good afternoon, everyone. Core FFO for the quarter was $0.44 per share, which represents 12.8% growth over the first quarter of 2021. The increased core FFO per diluted share was primarily driven by rental rate growth, increased occupancy and portfolio growth in highly leased developments. AFFO totaled $156 million for the quarter. Our best-in-class low level of capital expenditures, along with strong NOI growth continues to generate significant AFFO growth on a share-adjusted basis even in excess of our FFO growth. Same-property NOI growth on a cash basis for the first quarter of 2022 compared to the first quarter of 2021 was 7.3%. The growth in same-property NOI was due to increased occupancy and rent growth as well as the burn-off of some free rent compared to the first quarter of 2021. We do expect this growth to moderate a bit for the remainder of the year based mainly on less free rent burn-off. Same-property NOI growth on a net effective basis was 5.2% for the quarter. As a result of our strong start to 2022, we announced revised core FFO guidance for 2022 to a range of $1.88 to $1.94 per share compared to the previous range of $1.87 to $1.93 per share. The $1.91 midpoint of our revised core FFO guidance represents an over 10.4% increase from 2021 results. We also announced revised guidance for growth in AFFO on a share adjusted basis between 9.1% and 13% with a midpoint of 11% compared to the previous range of 8.4% to 12.3%. For same-property NOI growth on a cash basis, we have increased our guidance to a range of 5.8% to 6.6% from the previous range of 5.4% to 6.2%. This increase is mainly a result of expectations of continued strong rental rate growth and occupancy for the remainder of the year, similar to the levels that we experienced in the first quarter. On the development guidance, the market fundamentals are submerged and continue to be very supportive of speculative developments, and coupled with our lease-up track record, we are revising guidance for development starts to be between $1.45 billion and $1.65 billion compared to the previous range of $1.2 billion to $1.4 billion. This increase in development starts provides a key source of growth in 2023 and beyond. We've updated a couple of other components of our guidance based on our more optimistic outlook as detailed in our range of estimates included in our supplemental information on our website. I'll now turn it back to Jim for a few closing remarks.

Thanks, Mark. In closing, despite facing some rising macroeconomic challenges related to inflation, interest rates, and geopolitical issues, we remain confident that the multiple long-term trends benefiting our business, alongside a positive environment for GDP and consumer spending, will create opportunities for strong leasing and development. Additionally, the significant embedded rent growth in our current portfolio reinforces our confidence in achieving double-digit growth in FFO and AFFO for our shareholders not just in 2022 but well into the future, which should lead to a corresponding increase in our annual dividend. I appreciate your continued support of Duke Realty. We will now open the floor for questions. Let's take our first question.

Considering the guidance, there are several areas where the outlook appears fundamentally better, particularly with more development starts. Could you discuss some factors that may have had a larger negative impact than we might expect, as you evaluate the positives and negatives, if there are any?

Jamie, I'll start. This is Mark. There were no really big drags. I guess maybe the only thing you could point to is this change negatively on this year's FFO number will be your increase in dispositions guidance. Most of that increase in dispositions guidance will go to fund the development pipeline. So that's modestly dilutive this year. But it will be certainly accretive in the long run as we trade a low cap rate on disposition sales for higher-yielding development assets. But that was probably a little bit of a drag from where we were last quarter. But I think we're pretty optimistic to start the year, and it's only better now.

Can you discuss the current state of portfolio credit quality and how you believe earnings growth, occupancy, or leasing spreads would fare if we were to experience a pullback in the economy, especially in comparison to past cycles?

Yes. Sure, Jamie. It's Jim. I would make a couple of observations. I think we can all point back to roughly two years ago at the start of the pandemic, which was a great stress test for our portfolio and the quality of our credit tenants. And reminding everybody, 18 to 24 months ago, we were collecting 99.99% of our rents. So not that anybody wants to see that kind of thing again, but that's the kind of stress test that gives us confidence that in any sort of a downturn out there in the future, our portfolio will continue to perform. And then as Steve pointed out earlier, even if the market softens to the point where there's no rent growth in the markets, we still have 48% embedded rent growth in our portfolio. So I would point to those two things as giving us a great deal of confidence in our ability to perform even if things were to soften somewhat.

Okay. I guess just to be fair, though, I mean, there was a lot of government stimulus that kept tenants healthier, I guess, thinking about even earlier downturns, if we look back at that, it's really declined.

No, I don't believe that's the case. If you look at the number of tenants in our portfolio that received any form of government assistance, it's less than 10%. Additionally, if you review some of the tenants with whom we established rent offset agreements, half of them prepaid early. This really highlights the quality and resilience of our portfolio and the tenants we have.

If we think about just the long-term drivers of the growth in this business, at this point in the cycle, how much of that should be coming from sort of the internal growth, especially with the mark-to-market as high as it is? I guess the deeper questions there is how much of that we get each year and the next few upcoming years here, how much of that is going to come from external growth? So if we take your, call it, around about 10% growth, is that half from development and half from this rent mark-to-market? Or is it a different proportion than that?

You're close, Manny. We have a slide in our investor deck that outlines this, and it hasn't changed much. You're largely accurate. If you examine our external growth, we quoted a development return of about 10% to 12% to FFO, with the impact on FFO, after financing costs, being 4 to 6. This aligns with your estimate of 5% to 6% of external growth. Our internal growth for GAAP FFO same property is approximately 5%, so it's about a 50-50 split. You're right on track. The simple way to think about it is that our mark-to-market portfolio is at 48%. When you factor in the 10% growth we’ve achieved at 48%, that translates to 5% growth. So that's straightforward math, and you're quite close.

Great. Regarding the development starts, is there a cost or mix component involved? If we compare the number of starts you plan to have this year with the old guidance, has that changed? Are there new projects, or are the projects more expensive, or is it a mix of larger projects compared to some smaller ones previously?

Yes, Manny, this is Steve. There are always some fluctuations. I would say we have a few additional projects, but nothing significantly large that would sway the overall picture. We have most of next year planned out already. While there are always a few surprises that come up, we have been focused on building our land bank and maintaining clarity for the next few years in our development plans.

So Steve, what would be the potential for that to start guidance to go up again this year at all? Or is that kind of fixed for '22 at this point?

Yes, if we found another project that we're able to start near-term, but those are harder and harder to come by with entitlements. So could it go up modestly, perhaps. But most of what we have is, we're already in some level of process on.

Yes. I think the only significant filter in that would be some big build-to-suits. And they're out there, but they take a lot of time. We've got a number of those built into the pipeline. But you add one or two or more of those, and I think you could see an appreciable increase.

On your development land bank, you're saying now we could accommodate 3 years of development starts at your current run rate because the run rate has gone up. What's your ability to source more land in your Tier 1 markets and have development yields kind of remain attractive to you?

Yes. I believe this reflects the strength of our team. Over the last three years, specifically from 2019 to 2021, we have maintained a lower land bank number while our development starts have remained consistent. As we mentioned earlier, our land bank is positioned to support this level of starts for the next three years. There are always various sites that are under contract or in the due diligence phase. Our team excels in this area, and I think we have been very effective in managing it.

Yes. For perspective, John, we had almost double the land now that we had a year ago. And to Steve's point, we've been doing this level of development all along. Now a lot of that land is covered land. It's generating income, which is even better. But we've been buying about the same amount we've been monetizing every year. We've been doing it through this whole cycle.

Right. But development starts are going up. So it's just the visibility on developments, it doesn't seem as strong as it did before. So I was wondering, on the second part of the question, multi-store development in Tier 1 markets or non-Tier 1 markets doing developments there, when do these become more attractive?

Yes, I believe that the land we have either recorded or controlled is in the right submarkets across all our various markets. The margins in our development pipeline have consistently been above 50%. Therefore, I can say that there is a strong opportunity for value creation throughout the entire portfolio. This is not a matter of differentiating between markets or changing our strategy; we have plenty of opportunities available across the board.

I had another follow-up question on development. I guess initial '22 development start guidance was low versus '21, but you did revise it higher. And some of your peers have discussed issues with labor and materials impacting developments potential. So just wondering if you could comment to what extent you've been impacted by current labor or material headwinds impacting your development potential?

Yes, Caitlin, I'd tell you, we're closely monitoring what's going on with materials. I'd tell you, our processes have changed a bit in terms of when we're starting design, how quickly or how far out in front we're procuring materials. I would tell you, all of our 2022 starts are locked in, in terms of our start dates and design and our permitting as well as our early long-lead material items. Labor hasn't been as big of an issue, but materials have been. But again, I think this is where we're able to use our size and our balance sheet and our 50 years of experience to stay out in front of us.

Yes, Caitlin, I would add to Steve's comment. I think what's helping us drive our guidance on the development side isn't related to labor or material costs, it's the land that we have in the portfolio when those sites are entitled and ready to go, and it's the leasing of our spec portfolio. And we've come out of the first quarter and most of the way through April much stronger than I think even we anticipated. So I think that's given us the confidence to go ahead and increase development guidance once again.

Yes. And actually, my second question was going to be on that speculative side. I was just wondering, it does seem like speculative development at this point definitely makes sense. But wondering what metrics you look at to gauge what speculative development is warranted and you're open to it versus something that might be considered more risky.

Well, I don't know what we can do; this is more risky than speculative development. I'm open to ideas, I suppose. So what we look at is a number of metrics. What's the percentage leased in the development pipeline? And even with the increase in the amount of speculative development we're doing versus build-to-suits, that number is still at roughly 50%, which is a number we're very comfortable with. We look at leasing volume. As Steve cited earlier, this is the, I think, eighth consecutive quarter that we're above 7 million square feet. And we look at the overall occupancy of the portfolio, the in-service and the total portfolio, both of which are above 99%. So I think the combination of all three of those metrics would tell you that we need to be doing more speculative development and bring more space into the portfolio.

Got it. Yes, no, I was saying that in certain market conditions, speculative development might be considered more risky, but based on those metrics you're talking about, it seems that's not necessarily the case.

I was hoping to get, Mark, in terms of the rent spreads that you're assuming in guidance for the rest of the year on a GAAP and cash basis.

Yes, Nick, I think they'll be quite similar to what we reported in the first quarter. The mark-to-market on our portfolio was around 48%, which is very close to the 49% from Q1. Steve noted that only 18% of that role was in coastal markets, which aligns with our expectations for the last nine months of the year. There isn't a significant amount of coastal roll expected in that time frame. So, you might see some fluctuations from quarter to quarter, possibly a bit higher or lower. Overall, for the remainder of the year, I anticipate rent growth on deals will be very much like the first quarter. Moving into next year, we won't provide guidance just yet, but I can say that the coastal role we have for next year is a bit over 30% compared to 18% this year. Therefore, as of now, I expect conditions to improve next year.

Okay. Great. That's helpful. Just second question is on development. If you could talk a little bit more about the yield for the deliveries in the first quarter higher than it's been. You had a 67% expected cash yield there, kind of what's driving that. And then also, I guess going back to the yield that you quote on the development pipeline underway, 5.8%, how we should think about ultimately that yield once you deliver since you did raise your market rent forecast. And so I don't think you're trending rents in your development yields. So maybe you can just give us a feel for how that could play out.

I'll start with the first question and perhaps pass it on to others. Our yields have increased for two main reasons. We are leasing our speculative projects as soon as they come into service. Over the past 12 months, we began these speculative projects at a 3% yield, and now they are nearly 100% leased upon delivery. We've been leasing them up in about two months or less. We typically account for a year's worth of carry costs in our initial yield calculations, which slightly reduces the yields. Therefore, leasing them out 10 or 12 months earlier positively impacts the yields. Additionally, the second factor contributing to this rise is rent growth. We don’t project future rents during our underwriting process; instead, we base our assessments on current rents at the start and only adjust for signed deals. The agreements we are securing, reflecting current market rents, are significantly underwritten. These two elements are driving the substantial increase in yields from initial estimates to actual delivery. Looking ahead, if this trend continues, we can expect to see sustained results.

You talked a bit about the drivers that have greater inventory resiliency and e-commerce growth. But I wanted to dig into a little bit about reshoring. Do the shutdowns in China escalate this conversation again? And this driver kind of takes a little bit maybe longer than some of the others to kind of realize in demand. So when can we really start to see this as a major contributor to demand going forward?

Yes. I think people are now focused on making their supply chains more resilient and future-proof. This is a trend we're observing in New Mexico and Central America regarding manufacturing, and we are seeing some of it in specific sectors in the U.S. However, the more immediate effect for us is simply an increase in products arriving on our shores. So yes, I believe this is definitely a priority for all of our customers.

Yes, Michael, I would agree that Steve is absolutely correct. The immediate effect is that our customers are working to build up their safety stock in their logistics and supply chains. The influence of onshoring and nearshoring will likely be a bit slower but will progress steadily over the next five to seven years. Rebuilding or reengineering manufacturing, processing, and assembly operations requires more time compared to merely shifting the logistics aspect of the business. Therefore, I believe that this will serve as a stronger mid-term and long-term driver for our industry.

Got it. And as a follow-up, last year, you had more renewals than expected as people looked to renew early. What are you seeing on that this year? How do those lease negotiations differ from traditional expirations? What sort of escalators are you currently getting in your renewals?

Yes, it's Steve. I would say that we have customers who are trying to secure space earlier, given the current environment. A good brokerage firm would advise them to do this if it’s critical to their supply chain. We will listen to customers and have conversations with them. However, it is currently a landlord's market, so we generally don't negotiate rents too far in advance. Regarding escalators, we have focused on this area. In late 2021, we increased our escalators to over 3% for what we were signing at that time. In the first quarter of 2022, this number has risen to 3.6%. I expect this trend to continue throughout the year. There are inflation figures suggesting that our annual escalators in leases could increase even further.

Just a quick one on inventory. And I know it's announced a lot of different ways, but when you're speaking to tenants, can you just give us a sense of what they're saying about their inventory levels? And are they happy? How much more do they need? Just any color or commentary would be really helpful because we keep hearing about inventory comment, and I'm wondering what you guys are seeing in your portfolio.

Sure. We conduct a space utilization exercise biannually with our tenants, and they are using space at nearly record levels, around 90%. Regarding the resiliency and inventory rebuild, we pay close attention to the inventory-to-sales ratio. There has been significant discussion about breaking this down by category, and we have done that analysis. We believe that there is still a 5% to 10% rebuild needed to return inventory levels for our customers to pre-pandemic standards. This suggests that there is an additional demand of 300 million to 400 million square feet that needs to be accommodated in warehouses.

Understood. That makes sense. I have another question regarding the broader topic of recession, which is currently a subject of debate in the market. It's clear that you are not experiencing it as you continue to allocate more capital. However, could you provide some insight into what signs you would look for in your businesses to indicate a potential slowdown? This could relate to build-to-suits or tenant commitments to capital. How do you assess the leading indicators in your businesses for when things may begin to slow down, if they do?

So Ron, I believe we would first notice it in our leasing volumes and renewal discussions. If we analyze the deals we are making and the capital our customers are investing, a reduction in their capital investment inside their buildings could serve as a strong economic indicator. This is one of the reasons we closely monitor our renewal percentages, leasing volumes, and the status of our development pipeline to gauge the demand we are experiencing. Additionally, we've mentioned before that build-to-suits are significant leading economic indicators in our discussions with clients for the next 18 to 24 months. These projects involve designing, permitting, and constructing buildings that won't be completed until 2024 or even 2025. If clients face challenges in their logistics and supply chains, they are likely to hesitate in making such commitments. Currently, we have many opportunities in this area.

Could you provide your lease mark-to-market on a cash basis and also share how that differs between some of your top markets?

Yes. Vince, it's Mark. We're leasing at 48% on a GAAP basis and 35% on cash. And then as far as the markets, I would tell you, it's pretty well spread. It's pretty even across all the markets with the two main outliers being Southern California and New Jersey. Obviously, our coastal markets are a little bit better overall. But if you pull back in on the coastal markets, Southern Cal and New Jersey are the biggest. And you've got to keep in mind, those are the two newest markets for us as well, and that's why we're only rolling 18% this year versus the 45% plus exposure that we have on those coasts. And that's why we're still bullish on our future outlook of this mark-to-market continuing to only get better. But it's spread out pretty well other than those two markets, are clearly at the top of the class.

No, that makes sense. Is there anything you can just quantify that a little bit? Just like how much higher is Southern California and New Jersey compared to the likes of Dallas, Chicago, Atlanta? Like what order of magnitude roughly?

Double, literally double. Keep in mind, in places like Dallas and Chicago, we have newer, fresher leases included in that number. So, hypothetically, if Dallas is at 45% and Southern California is double that at 90%, part of the reason for that is that Southern California has to retain our leases in the portfolio because we haven't rolled them yet, while Dallas has already been rolled. Therefore, we don't have as much churn remaining in Dallas. You also need to consider the maturity, but yes.

No, that's really helpful color. One more for me, switching gears. Had your asset mix in terms of what's targeted for disposition this year changed at all given the higher rates? And do you think pricing has moved for properties that are longer lease, lower growth profile?

We haven't observed it yet. What we have noticed is a slight decrease in the buyer pool for the assets. We have only listed a few assets for sale, and one of them is currently under agreement at a price we expected to achieve, below 4 in a non-Tier 1 market. So we are monitoring the situation closely. There is quite a bit of discussion around it, but I don’t believe anyone has truly seen it yet. We will remain opportunistic regarding sales and assess each case as we proceed. If we believe the price is appropriate, we will proceed with the transaction; if not, we will refrain from it.

Just going back to your land bank commentary. You mentioned about three years of runway. I'm assuming you included the options that you have available. But if you look at the land, I mean, half of that if you include options, is actually in Columbus, Ohio, which I'm sure you can develop there. But I was just curious, from a practical standpoint, is it really three years? Because I can't imagine you guys doing a bunch of Ohio developments all of a sudden. Or should we expect you guys to continuously reload that land bank at a pretty strong pace?

Ki Bin, why do you take it on Columbus, Ohio for, man? No, to your point, just to clarify, I think this is detailed in the supplemental. The only place we have a long-term land option agreement is at Rickenbacker Airport in Columbus, Ohio. So everything else supporting the numbers that Steve put out is land that we have either under contract, under agreement, covered land plays or already owned it on the books. So the Columbus option land is a very small piece. It does not represent the lion's share of our development pipeline for the next three years.

Thank you for the clarification. Regarding demand, I've heard that one of your competitors mentioned e-commerce is no longer driving demand, with other segments taking the lead. I understand that this is influenced by economic and population growth, but there is always a steady demand. However, how advanced are corporate users in securing the necessary space, and does it seem like the upcoming demand may be somewhat weaker?

I'll make a few comments, and then I think Steve can provide additional insights. There has been speculation about Amazon scaling back after their deal last year, but we still saw record demand nationwide. While Amazon may see some moderation in demand due to their supply chain build-out progress, most of our other clients are still trying to catch up. We expect continued demand in e-commerce from companies other than Amazon. Many businesses have yet to invest adequately in their e-commerce facilities, and the development of material handling systems and robotics is still in its early phases. Recently, there was a report that Amazon is investing $1 billion in robotics, indicating that e-commerce and its adaptation in the U.S. have significant growth potential ahead. This is promising for us.

Yes, Ki Bin, I would just add that 3PLs continue to be the most active users in the market. We observed this in the first quarter and last year. Retail e-commerce for us has likely dropped to about the third category regarding overall demand. As Jim mentioned, most of our customers are still in the early stages of developing their own e-commerce platforms.

You've talked about how some of your noncoastal markets are showing increasing strength here. Can you maybe go into some more detail there? Which markets do you want to highlight? And how has the supply environment involved in some of those noncoastal markets?

Yes. It's challenging to pinpoint a weak area in the current market. However, Houston has been a bit of a softer market for us. In contrast, this past quarter, markets such as Minneapolis, Raleigh, Chicago, Dallas, and Atlanta performed well in terms of rent growth and overall activity. Nashville has also been strong for us lately. Overall, it's difficult to identify a market that isn't performing well right now.

Got it. Maybe one more. I guess in terms of lease mark-to-market, how should we think about that during a possible recession? How sticky do you think current rents are, looking back at prior recessions? Maybe not COVID, but other recessions, how did lease mark-to-market or overall rents trend? And how should we think about that risk over the next few years?

I'll begin by saying that we expect the situation to improve, especially since we do not anticipate rents to decline in the near future. If rents were to remain flat, which would be a significant reduction from the growth we've seen in recent years, we are still factoring in a 48% increase in our projections. We feel confident that even if there is a period of instability and rent growth halts, we can maintain that 48% increase. It's hard to predict how much lower rents could go, but anything is possible. However, we are reassured that the 48% figure will improve. In a more pessimistic scenario, albeit not the worst case, it could remain at 48%.

How did rents trend in 2008 and 2001? Just curious as someone newer to the space.

I believe you need to consider the different starting point. In 2008, we were at a 3% vacancy rate leading into that year. I'm not sure we can always rely on historical patterns in the current environment to draw accurate conclusions. That's my perspective. Jim, do you have anything to add?

Yes. I don't know off the top of my head, but I think to your point, even if market rents fell and went truly negative, even if they fell 15% or 20%, we've still got a 48% mark to market. So I can't imagine a scenario even in 2008 through 2010, rents didn't fall 50%.

The other thing I would highlight is that today, 44% of our NOI is derived from Coastal Tier 1 markets with a 1% vacancy rate and no available land. In 2008, that figure was less than 1%. This represents a significant change.

I have a couple of quick follow-up questions. Many of my earlier questions have been answered. However, I want to clarify something you mentioned earlier about e-commerce being the third largest in terms of leasing activity in the first quarter. Could you also provide a breakdown of the industries? I may have missed that information.

Yes. Our top category was third-party logistics, which accounted for nearly half of our overall activity. The next category would be consumer packaged goods, followed by retail e-commerce, and then what we refer to as manufacturers' assembled goods.

And how has that changed over the past couple of years?

I would say that e-commerce and third-party logistics have likely evolved. Consumer products have consistently ranked among the top categories in our portfolio. Over the last three to five years, Amazon's actions have kept e-commerce prominently positioned.

Rich, I would say you got to take that with a little bit of grain of salt. I'm not trying to make excuses, but the consumer products companies, how much of what they're doing is to support their e-commerce and how much is to support their more traditional supply chain, that's kind of the gray area that moves back and forth. It's pretty easy to track Amazon and Wayfair.com because that's purely an e-commerce platform. So there's a little gray area in there. But I think to Steve's point, it's been pretty consistent all along.

I had a quick question on just the drivers. Can you comment a bit about the rising costs? How does that impact your development starts?

Yes. Increased materials, increased labor certainly impact us. We're certainly aware of cost increases that we've seen across the board. We've done a great job of planning and forecasting. We're still acutely aware of those factors. But up until now, we've been able to manage that within the margins. It does present some challenges. But I think we've done a decent job navigating through those waters.

I would like to thank everyone for joining the call today. We look forward to engaging with many of you throughout the year. Operator, you may disconnect the line.