DUKE REALTY CORPORATION The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand our operations and our present business environment. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the notes thereto contained in Part I, Item 1 of this Report, and the consolidated financial statements and notes thereto contained in Part IV, Item 15 of our 2020 Annual Report. Cautionary Notice Regarding Forward-Looking Statements Certain statements contained in or incorporated by reference into this Report, including, without limitation, those related to our future operations and those related to our expectations concerning the effects of the COVID-19 pandemic on our future operations and balance sheet, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. The words "believe," "estimate," "expect," "anticipate," "intend," "plan," "strategy," "continue," "seek," "may," "could" and similar expressions or statements regarding future periods are intended to identify forward-looking statements, although not all forward-looking statements may contain such words. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this Report or in the information incorporated by reference into this Report. Some of the risks, uncertainties and other important factors that may affect future results include, among others: •The impact of the COVID-19 pandemic on our business, our tenants and the economy in general, including the measures taken by governmental authorities to address it; •Changes in general economic and business conditions, including the financial condition of our tenants and the value of our real estate assets; •Changes toU.S. laws, regulations, rules and policies, including changes that may be forthcoming as a result of the change in administration in theU.S. ; •TheGeneral Partner's continued qualification as a REIT forU.S. federal income tax purposes; •Heightened competition for tenants and potential decreases in property occupancy; •Potential changes in the financial markets and interest rates; •Volatility in the General Partner's stock price and trading volume; •Our continuing ability to raise funds on favorable terms, or at all; •Our ability to successfully identify, acquire, develop and/or manage properties on terms that are favorable to us; •Potential increases in real estate construction costs; •Our real estate asset concentration in the industrial sector and potential volatility in this sector; •Our ability to successfully dispose of properties on terms that are favorable to us; •Our ability to successfully integrate our acquired properties; •Our ability to retain our current credit ratings; •Inherent risks related to disruption of information technology networks and related systems and cyber security attacks; •Inherent risks in the real estate business, including, but not limited to, tenant defaults, potential liability relating to environmental matters and liquidity of real estate investments; and •Other risks and uncertainties described herein, as well as those risks and uncertainties discussed from time to time in our other reports and other public filings with theSecurities and Exchange Commission (the "SEC"). 24 -------------------------------------------------------------------------------- Although we presently believe that the plans, expectations and anticipated results expressed in or suggested by the forward-looking statements contained in or incorporated by reference into this Report are reasonable, all forward-looking statements are inherently subjective, uncertain and subject to change, as they involve substantial risks and uncertainties, including those beyond our control. New factors emerge from time to time, and it is not possible for us to predict the nature, or assess the potential impact, of each new factor on our business. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any of our forward-looking statements for events or circumstances that arise after the statement is made, except as otherwise may be required by law. The above list of risks and uncertainties is only a summary of some of the most important factors and is not intended to be exhaustive. Additional information regarding risk factors that may affect us is included in our 2020 Annual Report and in Part II, Item 1A, "Risk Factors" in this report. The risk factors contained in our 2020 Annual Report are updated by us from time to time in Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings that we make with theSEC . Business Overview The General Partner and Partnership collectively specialize in the ownership, management and development of industrial real estate. The General Partner is a self-administered and self-managed REIT that began operations in 1986 and is the sole general partner of the Partnership. The Partnership is a limited partnership formed in 1993, at which time all of the properties and related assets and liabilities of the General Partner, as well as proceeds from a secondary offering of the General Partner's common shares, were contributed to the Partnership. Simultaneously, the Partnership completed the acquisition ofDuke Associates , a full-service commercial real estate firm operating in the Midwest whose operations began in 1972. We operate the General Partner and the Partnership as one enterprise, and therefore, our discussion and analysis refers to the General Partner and its consolidated subsidiaries, including the Partnership, collectively. A more complete description of our business, and of management's philosophy and priorities, is included in our 2020 Annual Report. AtSeptember 30, 2021 , we: •Owned or jointly controlled 536 primarily industrial properties, of which 509 properties totaling 151.7 million square feet were in service and 27 properties totaling 8.4 million square feet were under development. The 509 in-service properties were comprised of 469 consolidated properties totaling 138.7 million square feet and 40 unconsolidated joint venture properties totaling 12.9 million square feet. The 27 properties under development consisted of 25 consolidated properties totaling 7.3 million square feet and two unconsolidated joint venture properties totaling 1.2 million square feet. •Owned directly, or through ownership interests in unconsolidated joint ventures (with acreage not adjusted for our percentage ownership interest), approximately 300 acres of land and controlled approximately 900 acres through purchase options. Our overall strategy is to continue to increase our investment in quality industrial properties primarily through development, on both a speculative and build-to-suit basis, supplemented with acquisitions in higher barrier markets with the highest growth potential. COVID-19 Although the COVID-19 pandemic is ongoing, the economy continues to gradually improve through the first three quarters of 2021. However, there have been and continue to be significant supply chain disruptions that have resulted in the need for additional warehouse space to meet increasing safety stock levels and to support the continued shift in consumer demand toward e-commerce. As a result, we realized substantial leasing activity through the first three quarters of 2021, as well as maintained our high tenant retention rates. We have also continued a robust level of new development activity across the markets in which we operate, with speculative development focused primarily on coastal infill markets. 25 -------------------------------------------------------------------------------- Key Performance Indicators Our operating results depend primarily upon rental income from our Rental Operations. The following discussion highlights the metrics that drive the performance of our Rental Operations, which management uses to operate the business, and that we consider to be critical drivers of future revenues. Occupancy Analysis Occupancy is an important metric for management and our investors for understanding our financial performance. Our ability to maintain high occupancy rates is among the principal drivers of maintaining and increasing rental revenue. The following table sets forth percent leased and average net effective rent information regarding our in-service portfolio of rental properties atSeptember 30, 2021 and 2020, respectively: Total Square Feet Percent of (in thousands) Total Square Feet Percent Leased* Average Annual Net Effective Rent** Type 2021 2020 2021 2020 2021 2020 2021 2020 Industrial 138,534 140,437 99.8 % 99.8 % 97.7 % 97.0 %$5.64 $5.18 Non-reportable Rental Operations 211 211 0.2 % 0.2 % 93.1 % 80.5 %$22.63 $24.27 Total Consolidated 138,745 140,648 100.0 % 100.0 % 97.7 % 97.0 %$5.66 $5.21 Unconsolidated Joint Ventures 12,935 11,109 96.0 % 97.5 %$4.61
Total Including Unconsolidated Joint Ventures 151,680 151,757 97.6 % 97.0 %
* Represents the percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced. **Average annual net effective rent represents average annual base rental payments per leased square foot, on a straight-line basis for the term of each lease, from space leased to tenants at the end of the most recent reporting period. This amount excludes additional amounts paid by tenants as reimbursement for operating expenses.
The higher leased percentage in our industrial portfolio atSeptember 30, 2021 , compared toSeptember 30, 2020 , was due to leasing up speculative developments. Vacancy Activity The following table sets forth vacancy activity, shown in square feet, from our in-service rental properties for the nine months endedSeptember 30, 2021 (in thousands): Unconsolidated Joint Total Including Unconsolidated Consolidated Properties Venture Properties Joint Venture Properties Vacant square feet at December 31, 2020 3,716 150 3,866 Vacant space in completed developments 901 - 901 Expirations 3,806 667 4,473 Early lease terminations 191 87 278 Property structural changes/other (360) - (360) Leasing of previously vacant space (5,067) (380) (5,447) Vacant square feet at September 30, 2021 3,187 524 3,711 26
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Total Leasing Activity
Our ability to maintain and improve occupancy and net effective rents primarily
depends upon our continuing ability to lease vacant space. The volume and
quality of our leasing activity is closely scrutinized by management in
operation of the business and provides useful information regarding future
performance. The initial leasing of development projects or vacant space in
acquired properties is referred to as first generation lease activity. The
leasing of such space that we have previously held under lease to a tenant is
referred to as second generation lease activity. Second generation lease
activity may be in the form of renewals of existing leases or new leases of
previously leased space. The total leasing activity for our consolidated and
unconsolidated industrial rental properties, expressed in square feet of leases
signed, is as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
New Leasing Activity - First Generation 3,074 2,406 6,322 5,440
New Leasing Activity - Second Generation 973 1,405 3,650 2,978
Renewal Leasing Activity 2,979 899 9,120 3,494
Early Renewal Leasing Activity * 919 1,265 1,963 2,576
Short-Term New Leasing Activity ** 200 125 418 1,194
Short-Term Renewal Leasing Activity ** 283 677 1,846 1,615
Non-Reportable Rental Operations Leasing
Activity - - - 1
Total Consolidated Leasing Activity 8,428 6,777 23,319 17,298
Unconsolidated Joint Venture Leasing Activity 1,086 561 1,271 1,689
Total Including Unconsolidated Joint Venture
Leasing Activity 9,514 7,338 24,590 18,987
* Early renewals represent renewals executed more than two years in advance of a lease's originally scheduled end date. ** Short-term leases represent leases with a term of less than twelve months.
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Second Generation Leases
The following table sets forth the estimated costs of tenant improvements and
leasing costs, on a per square foot basis, that we are obligated to fulfill
under the second generation industrial leases signed for our rental properties
during the three and nine months ended September 30, 2021 and 2020:
Square Feet of Leases Percent of Expiring Leases
(in thousands) Renewed Average Term in Years Estimated Tenant Improvement Cost per Square Foot Leasing Commissions per Square Foot
Concessions per Square Foot
2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020
Three Months
Consolidated - New Second Generation 973 1,405 4.1 6.4 $2.47 $1.78 $2.12 $3.76 $0.20 $-
Unconsolidated Joint Ventures - New
Second Generation 296 257 5.5 1.0 3.86 - 2.13 0.38 - -
Total - New Second Generation 1,269 1,662 4.5 5.6 $2.80 $1.51 $2.12 $3.23 $0.15 $-
Consolidated - Renewal 2,979 899 81.2 % 42.3 % 5.3 3.5 $1.14 $0.72 $1.38 $0.92 $0.25 $-
Unconsolidated Joint Ventures - Renewal - 131 - % 100.0 % - 1.0 - - - 0.29 - -
Total - Renewal 2,979 1,030 71.5 % 45.7 % 5.3 3.2 $1.14 $0.63 $1.38 $0.84 $0.25 $-
Nine Months
Consolidated - New Second Generation 3,650 2,978 5.3 5.2 $1.75 $2.02 $2.61 $2.79 $0.18 $0.02
Unconsolidated Joint Ventures - New
Second Generation 310 257 5.6 1.0 4.17 - 2.27 0.38 - -
Total - New Second Generation 3,960 3,235 5.3 4.8 $1.94 $1.87 $2.58 $2.60 $0.16 $0.02
Consolidated - Renewal 9,120 3,494 81.5 % 59.9 % 5.6 4.6 $0.72 $1.01 $1.56 $1.45 $0.26 $0.02
Unconsolidated Joint Ventures - Renewal 40 628 6.2 % 90.2 % 5.0 3.7 2.49 0.38 2.96 1.42 - -
Total - Renewal 9,160 4,122 77.4 % 63.2 % 5.6 4.5 $0.72 $0.91 $1.56 $1.45 $0.25 $0.02 Growth in average annual net effective rents for new second generation and renewal leases, on a combined basis, for our consolidated and unconsolidated industrial rental properties, is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
Ownership Type 2021 2020 2021 2020
Consolidated properties 35.3 % 32.3 % 32.8 % 28.9 %
Unconsolidated joint venture properties 23.0 % 29.5 % 21.7 % 39.0 %
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