Duke Realty Corp. (NYSE: DRE) Q3 2020 earnings call dated Oct. 29, 2020.
Corporate Participants:
Ron Hubbard — Investor Relations
James B. Connor — Chairman and Chief Executive Officer
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Nick Anthony — Executive Vice President and Chief Investment Officer
Mark A. Denien — Executive Vice President and Chief Financial Officer
Analysts:
Eric Frankel — Green Street Advisors — Analyst
Blaine Heck — Wells Fargo Securities — Analyst
James Feldman — Bank of America Merrill Lynch — Analyst
David Rodgers — Robert W. Baird & Co. — Analyst
Omotayo Okusanya — Mizuho Americas — Analyst
Brent Dilts — UBS — Analyst
Richard Anderson — SMBC Nikko Securities America — Analyst
John Kim — BMO Capital Markets — Analyst
Caitlin Burrows — Goldman Sachs — Analyst
Ki Bin Kim — Truist — Analyst
Mike Mueller — J.P. Morgan — Analyst
Emmanuel Korchman — Citi — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Duke Realty Third Quarter Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded.
I will now turn the conference over to your host, Ron Hubbard. Please go ahead.
Ron Hubbard — Investor Relations
Thank you, Josh. Good afternoon everyone and welcome to our third quarter earnings call. Joining me today are Jim Connor, Chairman and CEO; Mark Denien CFO; Steve Schnur, Chief Operating Officer; and Nick Anthony, Chief Investment Officer.
Before we make our prepared remarks, let me remind you that certain statements made during this conference call may be forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks and other factors could adversely affect our business and future results. For more information about those risk factors, we would refer you to our 10-K or 10-Q that we have on file with the SEC and the company’s other SEC filings.
All forward-looking statements speak only as of today, October 29, 2020, and we assume no obligation to update or revise any forward-looking statements. A reconciliation to GAAP of the non-GAAP financial measures that we provide on this call is included in our earnings release. Our earnings release and supplemental package were distributed last night after the market closed. If you did not receive a copy, these documents are available in the Investor Relations section of our website at dukerealty.com. You can also find our earnings release, supplemental package, SEC reports and an audio webcast of this call in the IR section of our website as well.
Now for our prepared statement, I’ll turn it over to Jim Connor.
James B. Connor — Chairman and Chief Executive Officer
Thanks, Ron and good afternoon everyone. First of all, I hope you and all of your families are healthy and safe as we all endeavor to get through this pandemic. We had a great quarter and the outlook for our business is very bright. Demand for our state-of-the-art logistic space continues to remain resilient amidst the volatile economic environment and the uneven recovery that’s underway.
The consumer remains relatively healthy on the spending front with advanced August and September retail sales numbers, up 4% and 6% year-over-year, respectively. E-commerce sales were up over 40% in Q2 and estimates for full year growth 2020 are north of 30%. Online sales activity remains robust with e-commerce penetration rate as a percentage of total retail sales rising 6 to 7 [Phonetic] percentage points so far in 2020 and expected to maintain at that penetration rate going forward.
Numerous cargo transportation indices have also turned positive recently with rail cargo and truck tonnage both up about 5% year-over-year and now only slightly below peak levels. Also, the last two months of inbound west coast container traffic has been up 11% to 14%, each of the last two months, all good indicators for the holiday season and perhaps the inventory restocking themes we’ve been talking about. Nationwide real estate fundamentals for the quarter also ended up relatively strong, given the surge in leasing, primarily from e-commerce or omni channel oriented firms, as well as third-party logistics firms. The result was the 47th straight quarter of net absorption, despite many forecast predicting the opposite.
Even more encouraging has been the resiliency and performance of our portfolio. For the third quarter, we achieved 32% rent growth in rental rates on a GAAP basis and 17% on a cash basis. We started four development projects totaling $261 million with solid value creation margins. We have a strong pipeline of build-to-suit prospects, which in total is back above pre-COVID levels. We signed 7.3 million square feet of leases, which contributed to a 30 basis point increase in total portfolio occupancy to 95.6%. Leasing was fairly broad-based across industries with about 30% of it tied to e-commerce. And our monthly rent collections remains very strong at 99.9% for the quarter, including executed deferral agreements.
The end result is our year-to-date performance and full year expectations now exceed our beginning of the year expectations. Based on these results and our optimism for the balance of the year, we have raised the dividend and revised our guidance metrics. Mark will go over these changes in detail momentarily.
Now, let me turn it over to Steve to cover our real estate operations in more detail.
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Thanks, Jim. In the third quarter, the U.S. demand was 57 million square feet and for deliveries were 68 million square feet. This resulted in a flat vacancy rate from the previous quarter of 4.7%. For the full year, the major research firms project deliveries in the mid-200 million square foot range and demand to be 160 million square feet to 170 million square feet.
Given this outlook, we expect the high-4% to maybe 5% vacancy rate nationally. On the rent side, CBRE estimates nationwide rent growths for this year to be in the mid-single-digit range. For next year, early projections for demand and deliveries remain in the 250 million square foot range, with an historically high pre-leasing estimate of those deliveries. This bodes very well for the market to remain in balance.
As I noted on our last call, and per recent CBRE and GLL forecasts, the intermediate and long-term demand situation is very favorable for our sector. We had an excellent quarter on the demand front with total leasing volume, as Jim mentioned, of 7.3 million square feet for our portfolio. Our team did a great job of pushing rents with rental rate growth on new leases of 32% on a net effective basis and 17% on a cash basis.
As you saw from our press release last night, our lease renewal rate of 46% or 67% when including backfills was lower than historical levels. Part of the story here is, one, just the sheer volume of leasing was considerably lower than average and, two, our high occupancy levels and strong rent collections. We’re continuing to aggressively push rents. So that also has some impact on the number.
One of the more notable leases signed this quarter was a 1.1 million square foot new lease for 100% of our speculative project under construction in the Inland Empire, California. This facility is not expected to go into service until the second quarter of 2021. It’s a great example of our team’s success and leasing speculative developments well ahead of our underwriting.
As we noted on our last call and as referenced by CBRE research, there continues to be a post pandemic trend to larger lease sites. In our own portfolio, during the pandemic, we realized an increase in the average leases transacted by about 38%. As we’ve emphasized before, we believe the size and term of our transactions, our modern portfolio features, and the credit profile of our tenants represents an element of differentiation and stability in terms of our portfolio cash flow.
And speaking of cash flow, I’ll give you an update on rent collections. As most of you are aware and per numerous sell side research reports, we’ve reported some of the very best collection rates in the entire REIT industry since the onset of the pandemic. Our monthly collections have trended better every month since the start of the pandemic and amounts due under deferral agreements have been fully collected. Some tenants have even repaid their deferred rent ahead of schedule to avoid interest charges. For the third quarter, and including the month of October as well, our overall collections have averaged 99.93% including the executed deferral agreements.
On the new development front, as we noted on our late July earnings call, the demand for newly developed logistics space was coming back strong and then we plan to commence new projects very soon. During the third quarter, we started four new projects totaling $261 million in costs that were 28% pre-leased on average. Two of the starts were speculative projects totaling 1.4 million square feet in Southern California and Seattle markets. We also started a 220,000 square foot project in Miami that is 72% pre-leased. The fourth development was a build-to-suit project totaling 415,000 square feet in Eastern Pennsylvania for Reckitt Benckiser Health. This is our second build-to-suit project for Reckitt who’s a global manufacturer of Lysol, wipes and other healthcare products.
In summary, the third quarter was a great reflection of the health of logistics market and the strength of our portfolio. I’ll now turn the call over to Nick to discuss the acquisitions in this new environment.
Nick Anthony — Executive Vice President and Chief Investment Officer
Thanks, Steve. On acquisitions, we continue to be strategic and selective and had a lot of good investment activity during the third quarter. We closed on four transactions to acquire a total of five facilities totaling 680,000 square feet for a total cost of $112 million. The assets are all located in coastal Tier 1 markets with three facilities in Northern California, one in the Seattle market and one in Northern New Jersey. We were working on three of the four transactions pre-COVID and we’re able to transact at a slightly lower purchase prices, discounts that are not available in the market today. All these transactions have certain attractive long-term return characteristics such as below market rents, the potential for redevelopment, and/or were likely marketed.
Overall, we believe we acquired these assets below replacement cost, with unlevered IRR expectations in the low-7% range. This quarter is also an example of how our acquisition opportunities can be lumpy quarter-to-quarter, as well as an example that we are mainly focused on single-asset transactions with the potential to capture a yield premium.
On the disposition side, we closed on the sale of a 280,000 square foot building in Indianapolis for $18.5 million at a 5% cap rate. As implied by our 2020 disposition guidance of a $300 million midpoint, we have a number of disposition transactions expected to close in the fourth quarter. These deals are all in the final mortgage stages or under agreement. Some of these assets, as well as future dispositions, include Amazon as a tenant as we manage our overall exposure, given the significant amount of business we continue to transact on with this key customer.
I’ll now turn it over to Mark to discuss our financial results and guidance update.
Mark A. Denien — Executive Vice President and Chief Financial Officer
Thanks, Nick. Good afternoon, everyone. Core FFO for the quarter was $0.40 per diluted share compared to $0.38 per diluted share in the second quarter of 2020 and $0.37 per share in the third quarter of 2019. The increase to Core FFO in the third quarter of 2020 compared to the second quarter was driven by higher occupancy and rental rate growth. As a result of favorable collections history and updated credit reviews, we reversed approximately $486,000 of reserves on straight line receivables during the quarter or reporting nearly no cash bad debt expense.
We reported FFO as defined by NAREIT of $0.39 per diluted share for the third quarter of 2020 compared to $0.33 per diluted share in the second quarter of 2020. The increase in the third quarter is the result of losses on debt extinguishment recognized during the second quarter, as well as the same factors that drove the increase to Core FFO. FFO as defined by NAREIT was $0.37 cents per diluted share in the third quarter of last year.
AFFO totaled $135 million for the third quarter of 2020 compared to $120 million for the comparable period of 2019. This increase in AFFO is due to the earnings growth that drove the increase in Core FFO and overall continued improvements in leasing economics.
Same property NOI growth on a cash basis for the three and nine months ended September 30, 2020 compared to the same periods in 2019 was 5.0% and 5.5%, respectively. Same property NOI growth for the quarter was driven by increased occupancy, rent growth and the expiration of some free rent periods. Same property NOI growth on a GAAP basis was 3.6% for the third quarter and 2.7% on a year-to-date basis.
From a capital standpoint, our leverage metrics remain very conservative with debt-to-EBITDA on a trailing 12-month basis at 5 times, consistent with the midpoint of our guidance. Our current quarter annualized debt-to-EBITDA was 4.6 times. Coupled with our substantial leverage neutral funding capacity, we have multiple levers to pull for raising new growth capital at very attractive pricing with the current state of the capital markets and state of the investment sales market. I’ll remind everyone that the capital deployment to developments is at a strong pre-leasing level.
For example, of the 3 million square feet of projects being delivered in the next two quarters, they are an aggregate 93% pre-leased with a mid-5% expected stabilized yield, and thus are immediately accretive to earnings. Also, our near-term development prospects are heavily tilted towards highly pre-leased and build-to-suit projects.
I would now like to address the changes to our 2020 guidance that we’ve made, which are based on our better-than-expected third quarter results and a continuation of our optimistic outlook for demand and tenant credit worthiness. First, we’ve increased our guidance for Core FFO to a range of $1.50 to $1.54 per diluted share from the previous range of $1.48 to $1.54 per diluted share, which equates to a $0.01 per share increase to the midpoint compared to our last guidance update in July. The increased guidance for Core FFO is driven by our strong leasing results thus far, as well as a lower estimate of bad debt expense for the remainder of the year. Page 16 of our supplemental information details our bad debt expense estimates.
For similar reasons to Core FFO, we have also increased our guidance for NAREIT FFO to a range of $1.38 to $1.44 per diluted share from the previous range of $1.35 to $1.43 per share. Also, driven by the same factors as our updated guidance for Core FFO, we’ve increased our guidance for the growth in adjusted funds from operations on a share adjusted basis to range between 4.6% and 7.7% compared to the previous range of 3.1% to 7.7%.
For same-property NOI growth on a cash basis, we have increased our guidance to a range of 4.7% to 5.1% from the previous range of 3.5% to 4.5%. This increase in guidance is a result of our leasing progress to date, continued rental rate growth and lower expectations for bad debts for the remainder of the year.
Based on our continued progress in leasing up our speculative developments, as well as our solid pipeline and build-to-suit prospects, we’ve increased guidance for 2020 development starts. Our revised guidance is between $650 million and $850 million compared to the previous range of $350 million to $550 million. Also as Nick’s team has been successful at finding some one-off acquisitions in coastal Tier 1 markets, we’ve increased our guidance for acquisitions to $225 million to $325 million compared to the previous range of $50 million to $250 million.
We’ve updated a couple more — a couple of other components of our guidance based on our more optimistic outlook as detailed in a range of estimates exhibited included in our supplemental information on our website. Now, I’ll turn it back over to Jim for a few closing remarks.
James B. Connor — Chairman and Chief Executive Officer
Thanks, Mark. Our quarterly results were strong, highlighted by solid leasing, particularly in the speculative development pipeline, the achievement of 32% rental rate growth and a rebound in our development starts. While we are mindful of continuing macroeconomic and political risks, our resilient performance in the last two quarters and the continuing strong demand themes should provide opportunities for us to continue to drive earnings growth. This confidence was reflected in last night’s announcement that our Board of Directors has approved to raise quarterly dividend by $0.02 a share or over 8.5% over the previous dividend rate.
With that, we’ll now open up the lines to the audience. I would ask that participants keep the dialog to one question or perhaps two short questions and you, of course, are welcome to get back in the queue. Josh, you may open up the lines and we are ready to take our first question.
Questions and Answers:
Operator
[Operator Instructions] And our first question is from the line of Eric Frankel with Green Street. Please go ahead.
Eric Frankel — Green Street Advisors — Analyst
Thank you. Just a couple of short questions, if you will. First is regarding your leasing activity this quarter. Obviously, it is a relatively low leasing volume. Can you just comment maybe on the lease term? That does seem to be a little bit shorter than usual, especially for the renewals.
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Yeah. Eric, this is Steve. No, I think overall activity for the quarter, anytime we’re over 7 million feet in our portfolio, we feel pretty good about it. Obviously, our occupancy levels are fairly high as well. So — and then in terms of the shorter term, there’s not a lot to read into there. I think we’re — it’s still year-to-date, we are on par with where we were at ’19, the quarter was a little shorter, a little over three years, but that’s just a couple of transaction in sample size.
Eric Frankel — Green Street Advisors — Analyst
Thanks. And just another quick follow-up, just regarding your capital allocation activity. Can you — how are you thinking now about acquisitions and dispositions going forward? You’re obviously able to find, as you said, a couple of pre-COVID deals and bringing them across the finish line. I mean, do you plan to kind of match — still kind of plan to match fund acquisitions with dispositions or is it going to be more programmatic, you think, over the next couple of quarters to next year?
Nick Anthony — Executive Vice President and Chief Investment Officer
Hi, Eric. This is Nick. Yeah, I would say, generally, we are going to match fund. We continue to be very opportunistic on the acquisition side and very focused geographically on the coastal Tier 1s, but I think you’ll see the acquisition disposition volumes, kind of be equal to each other.
Eric Frankel — Green Street Advisors — Analyst
Okay, thanks, guys.
Operator
Our next question is from the line of Blaine Heck with Wells Fargo. Please go ahead.
Blaine Heck — Wells Fargo Securities — Analyst
Great, thanks, good afternoon. Nick, just a follow-up on acquisition strategy. Can you talk about whether you’re looking for core buildings in those markets that you want to increase allocation to, which kind of looks like was part of the drive behind some of the acquisitions this quarter, or is the focus going to be more on deals with vacancy, upcoming roll, any other value-add component and how much of a differential, if any, is there in pricing for core versus value-add at this point?
Nick Anthony — Executive Vice President and Chief Investment Officer
Well, Blaine, first of all, I would tell you that most of the acquisitions are going to be focused on lease products, because most of the vacancy that we take on, we do on the development side. And basically we’re teaming up with our development teams to find assets that are below market, we can buy below replacement costs or if there is — happens to be a redevelopment play going forward. So that’s generally what we’re focused on. We’d love to buy some core — some Class A newly developed assets in very infill markets, but the pricing on those have been pretty aggressive recently. Most notably, there was a deal in Southern California that traded at a sub 3.5% cap rate. So we’re still being prudent with our capital and just trying to find assets that aren’t quite as fully marketed as some of the others.
Blaine Heck — Wells Fargo Securities — Analyst
Great, that’s helpful. And just a follow-up on that. Cold storage has seen a lot of positive momentum from the pandemic. You guys bought a cold-storage facility in the second quarter last year, but I’m not sure you’ve done anymore since then. Can you just talk about whether you guys would consider expanding that part of the business and, I guess, your appetite for cold storage going forward?
Nick Anthony — Executive Vice President and Chief Investment Officer
Well, we like the product, we like the asset we purchased. We have pursued and probably will do some cold storage on the development side. There is not a lot of opportunities, though, I would tell you. So it’s never going to be a large part of our business. As we’ve said before, we’re not intending to be operators of that product type. So we’re really looking for assets that you can actually lease back to other operators. And, frankly, it’s tougher to find those assets in the coastal Tier 1 markets.
Blaine Heck — Wells Fargo Securities — Analyst
Got it. Thanks.
Operator
Our next question is from the line of Jamie Feldman with Bank of America. Please go ahead.
James Feldman — Bank of America Merrill Lynch — Analyst
Thank you. I appreciate your color on the expected supply next year, I think you said 250 million square feet, which would be about the same as this year. How do you think about your development pipeline? Do you think it would be pretty similar as well as you’re kind of starting to pencil out what’s possible for the next 12 month?
James B. Connor — Chairman and Chief Executive Officer
Yeah, Jamie, I’ll let Steve add some color. I think, clearly, we’re feeling much more comfortable about the development business in ’21 than we were even just a quarter ago. Our — the performance of our portfolio has allowed us to start building speculative again and that’s always been roughly 40% of our development pipeline. So if we can continue to do speculative development, I think you’ll see us return to historical levels that you saw us operate in ’17, ’18 and ’19. I don’t know, Steve, you want to add any other color?
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Yeah, Jamie. The only other thing I would add is, you’ve heard us talk in the past about our build-to-suit pipeline and the attention we pay to that in terms of the confidence of our customers and what that pipeline looks like. I’ll tell you that pipeline today is as high as it’s been in this cycle in terms of active prospects we’re looking at. So we feel good about — we feel good about where the direction is headed for development for us.
James Feldman — Bank of America Merrill Lynch — Analyst
Yeah, I guess you had commented about even your fourth quarter starts sound like they’d be pretty heavily weighted towards build-to-suit. I mean, do you think that you’ll continue on with that pipeline and then get back to a 40% and kind of 60% [Phonetic] spec meaning like even incremental over what’s in the pipeline or you’ll kind of keep the same size and it will just be more build-to-suit for a while longer?
James B. Connor — Chairman and Chief Executive Officer
Well, I think the answer lies somewhere in between. I think the message Steve is trying to convey is the build-to-suit pipeline’s as strong as it’s been in the last four or five years. So obviously we see a lot of significant opportunity there. I think you can plan on us continuing spec at a slightly more elevated rate than we are this quarter, again, as long as the market will bear, our portfolio performs well and the markets continue to perform well. So we’re not in a hurry to ramp that back up, it’s not like we’re trying to achieve a certain specific number or target. I think we’re very comfortable with the revised guidance that we gave, given everything that we see in the marketplace. And I think next year, as long as the trend holds true, again, should recover nicely.
James Feldman — Bank of America Merrill Lynch — Analyst
Okay, great. Thank you.
Operator
Our next question is from the line of Dave Rodgers with Baird. Please go ahead.
David Rodgers — Robert W. Baird & Co. — Analyst
Yeah, good afternoon guys. Nick, maybe just another one on investment sales. What do you see kind of going into the end of the year? Is activity kind of coming back to normal for the fourth quarter in terms of investment sales transactions just nationally and your ability to participate in those, and your thoughts around cap rates heading into the end of the year and into early 2021?
Nick Anthony — Executive Vice President and Chief Investment Officer
Yeah, Dave. It’s going to be very active in the fourth quarter for us and everyone else. Everybody took a pause earlier in the year and now everybody is racing to the finish line to get a bunch of deals closed by year-end. As I’ve mentioned before, cap rates clearly have compressed, we’re seeing trades now proving that out. And I would say it’s pretty broad-based. We’ve seen sub-3.5% in Southern California, sub-4.5% in Atlanta and we’ve seen some sub-5% — well below sub-5% in Indianapolis. And it’s a good mix. A lot of them were Amazon transactions, but there is a mix of plenty of others out there to prevent those cap rates to compress. But there’s a lot of demand from investors, either investors getting back into industrial, rotating out of other product types and obviously the interest rates are also fueling that activity as well.
David Rodgers — Robert W. Baird & Co. — Analyst
Okay, that’s helpful. And then maybe just to stick with the development theme. Can you talk about construction costs, land costs, what you’re seeing out there and then in terms of kind of where you think you can achieve in terms of development margin on the projects that you’re starting here in the second half of the year?
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Sure, Dave. This is Steve. I think, land prices have continued to be sticky but increasing, right, certainly in the markets we want to invest in. Construction costs, I’d say, are historically moderating in terms of their increases, probably in the low single-digits on an annual basis in terms of costs. And then margins — on the development side, we’ve been pretty consistent with our margins. I think we’ve been north of 30% on our margins as Jim indicated, mixing in the build-to-suit’s, we like the risk adjusted returns on those deals and we’ve been pretty consistent in our portfolio for use of margins that are 30% or better.
David Rodgers — Robert W. Baird & Co. — Analyst
All right, great. Thanks, Steve.
Operator
Our next question is from the line of Omotayo Okusanya with Mizuho. Please go ahead.
Omotayo Okusanya — Mizuho Americas — Analyst
Yes, good afternoon, everyone. In regards to speculative development. Could you talk a little bit about where you would expect those development starts to be over the next six to nine months?
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Sure. I would tell you, we like the coastal Tier 1 markets, there is — that’d be Southern California, Northern California, Seattle, New Jersey, Miami. There’s a handful of other submarkets in some of the other cities we operated in that we’ve got good positions, if we think the opportunity is right, we’ll pull the trigger on that, but certainly those five markets from a broad perspective.
Omotayo Okusanya — Mizuho Americas — Analyst
Okay, great. And if I could just ask one quick follow-up. Cash, thanks to NOI, 5.5% year-to-date, midpoint of full year guidance, that’s 4.9% should imply the deceleration in 4Q 20. Could you talk a little bit about that?
Mark A. Denien — Executive Vice President and Chief Financial Officer
Sure. There is a few moving pieces there and I think part of it is just timing from quarter to quarter. A couple of those moving pieces, if you look at our — in the third quarter of ’20 compared to the third quarter of ’19 and really the whole first nine months, we’re up about 60 basis points in occupancy. So we’ve had a big uplift in same property NOI because of occupancy. But then when we get out to the fourth quarter, we had a really high occupancy comp in the fourth quarter of last year. So we’re really projecting occupancy to be pretty flat quarter-over-quarter in the fourth quarter. So that’s part of the reason there. Another one that’s really impacting the third quarter positively and negatively in the fourth quarter is free rent burn off. We had a little bit of free rent burn off in the third quarter of this year compared to last year.
So that was an uplift, not significant, but a little bit, really turning the other way in the fourth quarter. We have a little bit of extra free rent in the fourth quarter this year compared to the fourth quarter last year, so it’s a little bit of a negative. So I just look at that as a little bit of timing. And then the final part — final reason is bad debt expense. And as I mentioned earlier, we had no bad debt expense in the third quarter of this year. We have in our guidance about $500,000 of bad debt expense in the fourth quarter. Hopefully, that doesn’t happen but that’s baked in the guidance. So a lot of little moving pieces that no one individually is a big factor and most of it is timing.
Omotayo Okusanya — Mizuho Americas — Analyst
Great. Thank you.
Operator
Our next question is from the line of Brent Dilts with UBS. Please go ahead.
Brent Dilts — UBS — Analyst
Hi, thanks. I heard your comments on improved rail and ship volumes. So could you just talk about how well you think supply chains are prepared for an acceleration in the pandemic this fall and winter, just assuming that pace of acceleration keeps up for a little bit?
James B. Connor — Chairman and Chief Executive Officer
Yeah, I can give you some high level and Steve can add some color as well. There is a couple of components. I mentioned in my remarks the inventory restocking and obviously with the amount of goods that have just moved thus far year, there is a tremendous amount of restocking of inventory. And then second to that is the concept that we’ve all been talking about for the last couple of quarters, which is the safety stock to our increased levels of inventory of the U.S. and I think both of those are driving what we’re seeing in terms of demand and that would be supported by the increased transportation numbers that we’re seeing more recently. So, Steve, you can add some color to that.
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Yeah, I think the only thing I would add is we’re as engaged with our customers today as we probably ever have been, given what all of us have gone through. There is a lot of talk out there about supply chain resiliency, about where products are coming from. There is articles day about delivery times from e-commerce and fulfillment centers. There is a lot being done on the restocking side of things. If you look at inventory to sales in the retail category, that’s as low as its been, maybe ever in the history, down at 1.2 times. So there is a lot of talk going on and I think we’ll continue to see this drive volume in our sector for the near future.
Brent Dilts — UBS — Analyst
Great, thanks. And then just one quick one on tenant concentration both in regards to Amazon, but just more broadly, how you’re thinking about that as the business moves towards greater penetration of e-commerce?
James B. Connor — Chairman and Chief Executive Officer
Well, if you ask me today, I like Amazon. Given everything that’s going on in the world, we’re pretty comfortable having an A-rated company as a client that’s growing as rapidly as they are. But all kidding aside, we recognize that concentration. We have been looking at a number of alternatives. We have mentioned in the past selling some Amazon individual assets as we have historically done over the last few years. And so I think you’ll continue to see us focus on managing it at the corporate level through those types of vehicles.
Brent Dilts — UBS — Analyst
Okay, great, thanks guys.
Operator
Our next question is from the line of Rich Anderson with SMBC. Please go ahead.
Richard Anderson — SMBC Nikko Securities America — Analyst
Hey, thanks, good afternoon, everyone.
James B. Connor — Chairman and Chief Executive Officer
Hey, Rich.
Richard Anderson — SMBC Nikko Securities America — Analyst
So I asked this question to one of your peers last week, I think, but what do you make of the idea that post-COVID things actually start to slow down for your space? You’re kind of fast-tracking e-commerce, it’s like shotgunning a beer instead of shipping it quietly, nicely. And a lot of the good stuff is coming through like a firehose at the moment. Is there a chance that this — beyond this environment, which we’re all hoping for quickly, could actually slow your business down on the other side of this?
James B. Connor — Chairman and Chief Executive Officer
Rich, I’ll start out. There is always a risk, but I think one of the things that comes out of situations like these is these trends never completely reverse themselves. So I don’t think people are going to go back to not doing any online grocery shopping or going back to pre-pandemic levels. I think e-commerce companies feel very comfortable about the level of conversion that they’ve had in the last couple of quarters, that they think they can keep the vast majority of those clients.
And the other thing I would point to is, let’s go back to pre-COVID, we’ve been on a pretty good run, a lot of that, obviously, driven by a strong and growing economy, but a lot of that is also supply chain revitalization, existing retailers and consumer products company having to invest heavily in their supply chain to compete with the e-commerce companies. We’ve talked before about the need to be able to get product to the customer inside of 48 hours and if your supply chain doesn’t allow for that, that’s a problem. We’ve talked in the last couple of quarters about reshoring or nearshoring, given some of the issues with China that don’t appear to be going to go away anytime soon. A lot of our customers have been seeking alternative sources and trying to get product closer to the U.S., if not within the U.S. to alleviate some of those issues.
So I think the combination of all of those things would tell you that we’re in a pretty good spot going forward. There is always the risk that you mentioned, but I really don’t think that’s very significant. I think we will continue to go in the direction we’re going.
Richard Anderson — SMBC Nikko Securities America — Analyst
Okay. And then one of the problem — if it’s a problem, I don’t know, about your business is, it’s hard sometimes to know exactly how much e-commerce is playing a role in your leasing activity, in your tenants, and all that sort of stuff. Does this environment sort of excavate out some observations about how much e-commerce is really playing a role, and do you actually become smarter about your tenants in the aftermath of all this, because of what has happened?
James B. Connor — Chairman and Chief Executive Officer
Well, I would answer your question this way, the answer is yes. E-commerce is probably a bigger driver than people give it credit for. First, you have the Amazon’s and the true e-commerce companies that are out there consuming a large amount of space. Nobody is denying that. We talked about e-commerce being roughly 30% of our volume last quarter. That’s absolutely true. The other component is you’ve got our omnichannel customers that are doing distribution to other retail clients, they are doing their own online sales, maybe they’re doing distribution to their own retail stores. That component, again being driven by e-commerce and changes is forcing those companies to make investment.
And then the other is the traditional retailers, whether you’re talking about Target or Walmart or Home Depot or Lowe’s or any of these companies are investing heavily in their supply chain to match what e-commerce can do. So I think, aside from pure e-commerce consumption of our space and the sector, it’s driving a lot of additional consumption of our space and sector.
Richard Anderson — SMBC Nikko Securities America — Analyst
Okay, great, thanks very much.
Operator
Our next question is from the line of John Kim with BMO. Please go ahead.
John Kim — BMO Capital Markets — Analyst
Thanks, good afternoon. That 30% e-commerce market share of leasing that you just mentioned was up from 20% last quarter and I’m just wondering if you expect that percentage to continue to increase. And then also what other industries do you see increasing demand and conversely what industries do you see waning demand?
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Sure. I think we’ll see e-commerce continue to be a big chunk of the activity we’re doing and that may vary. And as Jim said, between retail and omni channel and 3PLs that are doing work with e-commerce, sometimes it is hard to decipher how deep that goes. But clearly, it’s the largest driver in our business right now. Outside of that, I mentioned 3PLs whether that’s e-commerce-related, retail-related, suppliers, manufacturing, assembly, we see that being a good driver of space, consumer goods. I mentioned our build-to-suit with Reckitt Benckiser, yeah, that’s somewhat consumer good — healthcare-related, and then the final one, which someone mentioned earlier in a comment or question was the food and beverage side, not just cold storage but dry goods as well. Food and beverage continues to be a very active segment for us and the sector as a whole.
John Kim — BMO Capital Markets — Analyst
On the acquisition opportunities that you guys mentioned focused on Tier 1 markets, can you share any other characteristics as far as what you’re looking at, as far as small box versus big box, stable asset versus assets with development opportunities and so forth?
Nick Anthony — Executive Vice President and Chief Investment Officer
Yeah, I’ll give you — this is Nick. I’ll give you a little bit of color on this quarter’s activity, which I think will be similar to what we’ll see going forward. For example, we transacted on an asset in Northern California where we did a short-term sale leaseback that we expect to redevelop at 20% margins in the future. Over at New Jersey we found an asset that was leased way below market, about 50% to 60% below market. It does — it is encumbered by a long-term lease, but we are buying it at well below land cost. So we’ll be able to get a good return from it with good bumps, then hopefully that will be a redevelopment at some point in the future potentially.
We also bought a transaction in Oakland that has good access, the I-880 and frontage to it as well. Those assets are well-positioned, slightly below market, below replacement cost. And we’ll probably hold and lease those on a long-term basis. So that’s kind of what we’re looking for. Like I said earlier, we haven’t done — taken on a lot of vacancy risk on our acquisition since we did the Bridge transaction, largely because most of that is — we take that risk on the development side.
John Kim — BMO Capital Markets — Analyst
That’s great color. Thanks.
Operator
Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead.
Caitlin Burrows — Goldman Sachs — Analyst
Hi, everyone, good afternoon. I think you introduced disclosures regarding short-term leasing and early renewals last quarter and as of 3Q, it looks like the year-to-date short-term leasing is already higher than full year 2019 in square footage and net early renewals are also significantly higher than 2019 level. So I was just wondering what’s driving these increases and how should we think about them?
Mark A. Denien — Executive Vice President and Chief Financial Officer
Hey, Caitlin. It’s Mark. I’ll cover the early renewals and maybe Steve can talk about the lease term. The main driver of the early renewals were to basically extend some lease terms on some assets that we’re looking to transact on from a disposition perspective. So these are assets that will probably close either yet this year or early next year. And it’s really just to lock the tenant in the longer-term leases to increase our value on the disposition side. So that’s really the driver of the early renewals and then I’ll let Steve comment on the lease terms.
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Yeah, the lease terms — some of the short-term leasing, I think, it was done in the second and third quarter where there was a little bit more uncertainty in the market, early — late in the second quarter and early in the third quarter. I think you’ll see that taper off again. Some of those were larger transactions that wind up holding over an extra month or two. But I wouldn’t read anything into it from an overall macro trend for us or the market.
Caitlin Burrows — Goldman Sachs — Analyst
Got it. And then another, I think, straightforward one. In terms of bad debt, I know that the 3Q was lower than expected and the 2020 guidance now implies just $500,000 of bad debt in 4Q. So is it that there were specific tenants that you had been watching? And if so, then I’m wondering kind of what’s the outlook for them and are they out of the woods, or was it just that you had kind of an amount to be conservative and you did not end up needing that?
James B. Connor — Chairman and Chief Executive Officer
I would say that there is really nothing new out there from — that troubles me. In fact, I continue to be surprised by some of the folks I’ve been watching that get caught up, we even had tenants that we gave deferrals to, that are paying them off early to avoid interest charges. So I continue to be pleasantly surprised overall from a collection standpoint. The ones that we’re watching that made up the majority of the reserves we took and are sort of baked in that potential fourth quarter are the industries that are really impacted by COVID, you think, like travel, leisure, entertainment, hospitality, event planning, companies like that that truly are — really suffered from COVID. They continue — a lot of them, most of them continue to pay us. But they’re the ones that we kind of watch the most. It’s not like we have a lot of exposure to those industries, but that’s really what’s been on our watch list and continues to be there.
Caitlin Burrows — Goldman Sachs — Analyst
Got it. Okay. Thanks.
James B. Connor — Chairman and Chief Executive Officer
The only thing I would add to that is most all of those, in addition to the industries they’re in, typically are on the smaller tenant side as well. So they just worry me a little bit from their overall wherewithal to withstand if there was another shutdown or something like that. But most of them actually continue to be current on their rents.
Caitlin Burrows — Goldman Sachs — Analyst
Got it, thanks.
James B. Connor — Chairman and Chief Executive Officer
Yeah.
Operator
Our next question is from the line of Ki Bin Kim with Truist. Please go ahead.
Ki Bin Kim — Truist — Analyst
Thanks. Hey, guys. So I’m looking at your development pipeline for the projects that you’ve delivered over the past couple of years. The yields have ranged from like 6.5% to 7% and the current projects that are under construction that yielded 6% now. There is obviously a mix issue and you’re doing a lot more in California so the yields, by nature, should be lower. But then looking at your land bank which you’ve been eating into and as you have to reload that land bank with more market price land, I’m just curious about what the next couple of rounds of development, what kind of yields we should expect and if there should be further compression that we should just be thinking about.
James B. Connor — Chairman and Chief Executive Officer
Ki Bin, let me start on the land piece. I mean, you’re obviously, right. If you are reloading at market level pricing, that drives costs up. But what I would tell you is in the markets where we’ve been doing the — on the coastal markets where we’ve been doing land, it’s all at market, because as soon as we buy that land, it really goes right into production, I mean, as soon as we can get it entitled. So it’s not like our yields in the past have been inflated based on lower land prices, if you will. We always — the yields in those markets are always with land prices at the market. And then I’ll let Nick or Steve add to that.
Nick Anthony — Executive Vice President and Chief Investment Officer
Well, clearly the change in yields is based on our geography, the mix of the assets. We obviously were doing more development in the other major markets at [Indecipherable] yields and as we’ve updated you, more coastal Tier 1 development, that’s what’s driven down the yields there. We continue to see good margins but land is getting expensive and it’s something that we deal with every day in our business and we’ll continue to manage going forward.
Ki Bin Kim — Truist — Analyst
Okay, thank you.
Operator
Our next question is from the line of Mike Mueller with J.P. Morgan. Please go ahead.
Mike Mueller — J.P. Morgan — Analyst
Yeah, hi. I was just wondering, have you been seeing anything different in terms of development lease-up times compared to prior years, maybe ignoring what happened during the lockdown, but just thinking about now and kind of going forward?
Steven W. Schnur — Executive Vice President and Chief Operating Officer
No, this is Steve. I would tell you, we, as a standard practice, we underwrite one-year lease-up time frame on all of our new developments that are spec. We’ve averaged — we beat that by about three or four months on average. So I would tell you, we continue to see good pre-leasing activity in our portfolio. We were just talking today about Southern California and I think we’ve done 10 projects in and around the Inland Empire, 10 spec buildings and we’ve pre-leased nine of those before the end of construction. So I think we see that as a good sign for the health of our markets.
Mike Mueller — J.P. Morgan — Analyst
Okay, great. That was it. Thank you.
Operator
Our next question is from the line of Eric Frankel with Green Street. Please go ahead.
Eric Frankel — Green Street Advisors — Analyst
Thank you. I just want to get back to the leasing questions, if you don’t mind. First, I should have asked this earlier, but your early lease — early renewals — excuse me, that was affecting your cash rent growth, was it?
Mark A. Denien — Executive Vice President and Chief Financial Officer
It is not, Eric. I mean, we don’t count those. These are — our early renewals are deals that are renewed two years before they are up. So, even if we were to count them, it would be misleading a hand because you wouldn’t get to that pop for two more years. And like I mentioned on an earlier question, we’ll actually never get the growth anyway on those because they were done in connection with assets held for sale. So they’re not included in this forecast.
Eric Frankel — Green Street Advisors — Analyst
Okay, great. Good to know. Then related to that, on the cash rent growth figure itself, can you provide a rough geographic mix of kind of where that’s checking out, maybe were there a few more coastal market leases that rolled during the quarter and then maybe that maybe gives also trend you just discussed on how rents are generally trending? I know you said you’ve been — you’re thinking that coastal market rents are paid and continue to grow, but maybe you can talk about what you’ve seen for the last couple of quarters?
Mark A. Denien — Executive Vice President and Chief Financial Officer
Yeah, Eric, I’ll cover what’s in the current numbers and Steve can touch on what we’re seeing. Actually the leases making up our growth really for this quarter and really for the year is really pretty indicative of our overall portfolio. So it’s not heavily driven by any one market. So for example if our coastal market exposure is 35%, that’s about 2 [Phonetic] percentage of deals that’s in there from the coastal and the non-coastal conversely. So just — the only thing I would say that you got to remember that a lot of these non-coastal markets, while, maybe the year-over-year rent growth has not been quite as dramatic as the coastal markets, a lot of those leases we have rolled over vintage leases. So our mark-to-market on those is still very healthy. And then I’ll let Steve talk about where we’re seeing it.
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Yeah, I think, consistent with what Mark said, Eric, we’ve seen better rent growth in the high barrier coastal markets. Seattle, New Jersey, Southern California, in particular have been very strong markets for us in terms of the other markets that Mark covered. Again we’ve gotten pretty good growth. Probably the one that’s been a little challenging for us has been Houston. That would be the one market I’d point out where that’s been a bit of an outlier the other way.
Eric Frankel — Green Street Advisors — Analyst
Got you. Thanks for the color.
Operator
Our next question is from the line of Jamie Feldman with Bank of America. Please go ahead.
James Feldman — Bank of America Merrill Lynch — Analyst
Hi. I guess just a similar question, not rents, but just cap rates. Can you talk about where you’ve seen the most cap rate compression across the market?
Nick Anthony — Executive Vice President and Chief Investment Officer
Jamie, it’s been pretty widespread, I would tell you. Obviously we’ve seen — I would say it’s probably been 25 to 40 bps. As you see more deals — there’s a lot of rumor trades and then you actually see the trades. We’re going to look at more comps, how much it is compressing. Like I said earlier, we saw a sub-3.5% trade in Southern California. We’ve seen a sub-4.5% in Atlanta. And then we have seen, I think, a 4% — well, it hasn’t traded yet but it trades quite a bit lower than a 5% cap, closer to 4.5% on the east side of Indianapolis. So it’s been pretty widespread. Obviously, there’s still a broad range, not every deal is obviously that, those are the record cap rates. You’re still seeing some things higher depending on what it is and where it is and where the market rents are, but it’s pretty widespread.
James Feldman — Bank of America Merrill Lynch — Analyst
And the 25 bps to 40 bps, that’s over what time period?
Nick Anthony — Executive Vice President and Chief Investment Officer
I would say from pre-COVID to today.
James Feldman — Bank of America Merrill Lynch — Analyst
Okay. All right, great. Thank you.
Operator
Our next question is from the line of Emmanuel Korchman with Citi. Please go ahead.
Emmanuel Korchman — Citi — Analyst
Hey, guys, good afternoon. I was wondering if there is anything changing on the labor front either, one, from more demand, obviously as you open more facilities in the distribution space and, two, just getting people out to work, given the environment right now?
Steven W. Schnur — Executive Vice President and Chief Operating Officer
Yeah, Manny, this is Steve. It continues to be, if not the number one concern of our customers, it’s certainly in the top two, if they’re not complaining about how much rent is. The lack of labor is a problem. We do labor studies on all of our land acquisition opportunities that we look at, as well as any big vacancies. It’s sort of an insurance policy for us in the front end that there is enough labor there for what we’d like to do. Most of our customers ask for it in the very first showing. So that continues to be a problem. I think the thought was that may alleviate some with what we saw with the unemployment numbers but I don’t think that necessarily affected what you call the essential businesses as they’d opened during the pandemic. So continues to be a real problem for us and for our customers, I should say.
Emmanuel Korchman — Citi — Analyst
Thanks. And Nick, just going back to the conversation, whether it’d be an Amazon or any of your other well-leased assets, is there any desire to hold onto the assets, whether it’d be in a JV structure or are they — somehow hold on to them in a portfolio format or sell them in a portfolio format?
Nick Anthony — Executive Vice President and Chief Investment Officer
Manny, yes. There would be. We look at each individual asset and sort of think about how it fits long term into our overall strategy. And so you’re going to see some outright sales, you’re going to see some that are long term holds for us for various reasons. And then we may potentially entertain joint venture structure on some of them at some point in the future.
Emmanuel Korchman — Citi — Analyst
Great. That’s it from me. Thanks.
Operator
[Operator Instructions] Our next question is from the line of Dave Rodgers with Baird. Please go ahead.
David Rodgers — Robert W. Baird & Co. — Analyst
Yeah. Hey, Mark, just a quick follow-up on the straight-line rent reversal. You guys took a big write-down in the first quarter. You said you reversed about $0.5 million of that this quarter. I guess, one, what triggered that? And then, two, would we potentially see more of that based on whatever happened this quarter that gave you the confidence to bring that back on the balance sheet? Let me know. Thanks.
Mark A. Denien — Executive Vice President and Chief Financial Officer
Sure, Dave. Your second answer is, I hope so. We would love to get all that back. I’m not prepared to do that right now. I would just say there was no — it was not like there was any one big tenant or anything like that to cause a reversal. We’re continuing to look at our total portfolio and slice and dice it a bunch of different ways. I would say that, in short, the general reason that we reversed the $500,000 was just collection experience. I mean, we’re seven months through this thing and we’re just a whole lot better off today than where we thought we were going to be seven months ago. We’re not through it far enough for me to even entertain reversing the rest of that right now. But this time, next year, hopefully, we’re talking about the ability to do that, but time will tell.
David Rodgers — Robert W. Baird & Co. — Analyst
Okay, thanks.
Mark A. Denien — Executive Vice President and Chief Financial Officer
Yeah.
Operator
And we have no further questions at the moment.
James B. Connor — Chairman and Chief Executive Officer
Thanks, Josh. I’d like to thank everyone for joining the call today. We look forward to engaging with many of you over the next few months, such as at the NAREIT Conference in just three weeks. Operator, you may disconnect the line.
Operator
[Operator Closing Remarks]