Q1 2024 Boston Properties Inc Earnings Call
Operator: Good day, and thank you for standing by. Welcome to BXP's first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode.
Okay.
Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised.
Speaker Change: Good day and thank you for standing by welcome to be X, Keith first quarter 'twenty 'twenty four earnings conference call.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: After the Speakers' presentation, there'll be a question and answer session.
Speaker Change: Ask a question during the session you will need to press star one one on your telephone you will then hear an automated message of buys in your hand as race.
Speaker Change: Your question. Please press star one again.
Speaker Change: Please be advised that today's conference is being recorded.
Operator: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Helen Han, Vice President of Investor Relations. Please go ahead.
Speaker Change: I would now like to hand, the conference over to your first Speaker, Alan Hahn, Vice President of Investor Relations. Please go ahead.
Helen Han: Good morning and welcome to BXP's first quarter 2024 earnings conference call. The press release and supplemental package were distributed last night and filed on Form 8K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the investor section of our website at investors.bxp.com.
Alan Hahn: Good morning, and welcome to Dxp's first quarter 2024 earnings Conference call. The press release and supplemental package were distributed last night and furnished on form 8-K in the supplemental package DXP has reconciled all non-GAAP financial measures most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy these.
Alan Hahn: Documents are available in the investors section of our website at investors <unk> DXP Dot com a webcast of this call will be available for 12 months.
Helen Han: A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Security Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time in BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements.
Alan Hahn: At this time, we would like to inform you that certain statements made during this conference call, which are not historical may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act, although DXP believes the expectations reflected in any forward looking statements are based on reasonable assumptions. It can give no assurance that its expectations.
Alan Hahn: Will be attained factors and risks that could cause actual results to differ materially from those expressed or implied by forward looking statements were detailed in yesterday's press release and from time to time in <unk> filings with the SEC.
Alan Hahn: BSP does not undertake a duty to update any forward looking statements.
Helen Han: I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer, Doug Linde, President, and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchie, Senior Executive Vice President, and our regional management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to one question. If you have any additional queries or follow up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks. Thank you, Helen, and good morning, everyone.
Speaker Change: I'd like to welcome Owen Thomas Chairman, and Chief Executive Officer, Doug Linde, President and Mike Labelle, Chief Financial Officer during the Q&A portion of our call Ray Ritchey Senior Executive Vice President and our regional management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call.
Speaker Change: To please limit yourself to one question. If you had any additional query or follow up please feel free to rejoin the queue I would now like to turn the call over to Owen Thomas for his formal remarks.
Owen David Thomas: BXP's performance in the first quarter continued to defy the negative market sentiment for the commercial office sector. Our FFO per share was in line with our forecast and market consensus for the first quarter. We completed just under 900,000 square feet of leasing, which is 35% greater than the first quarter of 2023, when we leased 660,000 square feet. And this is a more relevant comparison than to the fourth quarter of 2023 given the elevated leasing activity associated with a quarter at year end.
Owen David Thomas: Thank you Helen and good morning, everyone.
Owen David Thomas: <unk> performance in the first quarter continued to defy the negative market sentiment for the commercial office sector.
Owen David Thomas: Our <unk> per share was in line with our forecast and market consensus for the first quarter. We completed just under 900000 square feet of leasing, which is 35% greater than the first quarter of 2003, when we leased 660000 square feet.
Speaker Change: And this is a more relevant relevant comparison than to the fourth quarter of 'twenty three given elevated leasing activity associated with a quarter at year end.
Owen David Thomas: Our weighted average lease term on leases signed this past quarter was also notable at 11.6 years. In comparison, the leases we signed in 2023 had a weighted average lease term of 8.2 years. Our occupancy remains stable.
Speaker Change: Our weighted average lease term on leases signed this past quarter was also notable at 11 six years in comparison the leases we signed in 2023 had a weighted average lease term of eight two years.
Speaker Change: Our occupancy remains stable.
Owen David Thomas: We closed the previously announced joint venture with Norges at 290 Binney Street, our lab development in Cambridge that is fully leased to AstraZeneca. This transaction mitigates $534 million of development funding for BXP by raising property level equity for the company on attractive terms. Now moving to macro market conditions, the two most important external factors impacting BXP's performance are long-term interest rates and Corporate Earnings Growth. Lower interest rates would improve our cost of capital, spark more transaction activity and investment opportunities in our sector, reduce the cost of new development, and be a tailwind for our clients' earnings growth. Much has been written and forecasted about the trajectory of interest rates, which we believe will come down over time, but we can only speculate on the exact timing.
Speaker Change: We closed the previously announced joint venture with Norges at $2 90, Binney Street, our lab development in Cambridge that it's fully leased astrazeneca.
Speaker Change: This transaction mitigates $534 million of development funding for DXP by raising property level equity for the company on attractive terms.
Speaker Change: Now moving to macro market conditions. The two most important external factors impacting dxp's performance, our long term interest rates.
Speaker Change: And corporate earnings growth.
Speaker Change: Lower interest rates would improve our cost of capital sparked more transaction activity and investment opportunities in our sector reduce the cost of new development and be a tailwind for our clients earnings growth.
Speaker Change: <unk> has been written and forecasted about the trajectory of interest rates, which we believe will come down over time.
Speaker Change: Can only speculate on the exact timing.
Owen David Thomas: Companies generally do not hire new employees and increase their office space requirements unless their earnings are growing. Over time, the S&P 500 earnings grow around 10% per year. But in 2023, that growth rate was 0%. And in 2022, it was 5%.
Speaker Change: The companies generally do not hire new employees and increased their office space requirements unless the earnings are growing over time, the S&P 500 earnings grow around 10% per year.
Speaker Change: In 2023 that growth rate with zero percent and in 2022, it was 5%.
Owen David Thomas: Though the U.S. economy is growing and unemployment remains low, only about 7% of the jobs created are in office-using categories versus a long-term average of over 25%. S&P 500 earnings are projected to grow 11 to 13 percent per annum over the next two years, which should be constructive to BXP's leasing activity. Many technology clients, a critically important sector driving space demand post the global financial crisis, over committed to space during the pandemic and are currently in a digestion process, which has curtailed demand. However, there are exceptions, such as net demand for space from the AI sector in San Francisco.
Speaker Change: The U S economy is growing and unemployment remains low only about 7% of the jobs created our in office using categories versus a long term average of over 25%.
Speaker Change: S&P 500 earnings are projected to grow 11% to 13% per annum over the next two years, which should be constructive to <unk> leasing activity.
Speaker Change: Many technology clients are critically important sector driving space demand post the global financial crisis over committed space during the pandemic and are currently in a digestion crops process, which has curtailed demand there.
Speaker Change: There are exceptions, such as net demand for space from the AI sector in San Francisco.
Owen David Thomas: Over the long term, we expect many tech companies will experience strong earnings growth and return to requiring more office space. Premier Workplace is defined as the best 6% of buildings representing 13% of total space in our five CBD markets that continue to materially outperform the broader market. Direct vacancy for Premier Workplaces is 11.2% versus 17.9% for the broader market.
Speaker Change: Over the long term, we expect many tech companies will experienced strong earnings growth and return to requiring more office space.
Speaker Change: Premier workplaces defined as the best 6% of buildings, representing 13% of total space and our five CBD markets continue to materially outperform the broader market direct vacancy for Premier workplaces is 11, 2% versus 17, 9% for the broader market like.
Owen David Thomas: Likewise, net absorption for premier workplaces has been a positive 7 million square feet over the last 13 quarters versus a negative 30 million square feet for the broader market. Asking rents for premier workplaces are 50% higher than the broader market, a widening gap from prior quarters. This outperformance is evident in BXP's portfolio, where 89% of our NOI comes from assets located in CBDs that are predominantly premier workplaces. These CBD assets are 91% occupied and 93% leased as of the end of the first quarter.
Speaker Change: <unk> net absorption for Premier workplaces has been a positive 7 million square feet over the last 13 quarters versus a negative 30 million square feet for the broader market.
Speaker Change: Asking rents for Premier workplaces are 50% higher than the broader market a widening gap from prior quarters. This outperformance is evident and dxp's portfolio were 89% of our NOI comes from assets located in CBD is that are predominantly premier workplaces.
Speaker Change: These CBD assets are 91% occupied and 93% leased as of the end of the first quarter.
Owen David Thomas: Regarding the real estate private equity capital markets, office sales volume in the first quarter was down was $8.7 billion, down 3% from the prior quarter and up 32% from a low base one year ago. Office sales as a percentage of total commercial real estate transaction volume continued to rise to over 20 percent. Transaction activity for premier workplaces was very limited.
Speaker Change: Regarding the real estate private equity capital markets office sales volume in the first quarter was down was $8 7 billion down 3% from the prior quarter and up 32% from a low base one year ago.
Speaker Change: Office sales as a percentage of total commercial real estate transaction volume continue to rise to over 20% <unk>.
Speaker Change: Transaction activity for Premier workplaces was very limited.
Owen David Thomas: BXP's overriding goal is to leverage our competitive advantages to preserve and build FFO per share over time. The key advantages for BXP are our commitment to the office asset class and our clients as many competitors disinvest in the sector, a strong balance sheet with access to capital in the secured and unsecured debt and private equity markets, and one of the highest quality portfolios of premier workplaces in the U.S. assembled over several decades of intentional development acquisitions and disposition.
Speaker Change: Dxp's overriding goal is to leverage our competitive advantages to preserve and build a <unk> <unk> per share over time are key advantages for BSP, our commitment to the office asset class and our clients as many competitors disinvest in the sector.
Speaker Change: <unk> balance sheet with access to capital in the secured and unsecured debt and private equity markets and one of the highest quality portfolio as a premier workplaces in the U S assembled over several decades of intentional development acquisitions and dispositions.
Owen David Thomas: Today, clients and their advisors are more focused than ever on building quality, as well as the financial stability and long-term commitment of their building owners, all strong competitive advantages for BXP. Last quarter, I spoke about three priorities for BXP in 2024, leasing space, new investments, and development. Doug will provide more details on leasing.
Speaker Change: Today clients and their advisors are more focused than ever on building quality as well as the financial stability and long term commitment of their building owners all strong competitive advantages for DXP.
Speaker Change: Last quarter I spoke about three priorities for DXP in 2020 for leasing space, new investments and development.
Owen David Thomas: We're off to a good start in the first quarter and see a growing pipeline of opportunities for later this year in 2025. On new investment activity, as you know, we pivoted to offense late last year and early this year through buying joint venture interest in three significant in-service assets at attractive prices. We remain in active pursuit of opportunities in our core markets and asset types with primarily two types of counterparty. Lenders to highly leveraged assets that require recapitalization and institutional owners seeking to diversify from the office asset class. To date, there has been limited market transaction activity for high quality office assets. With lenders, there are fewer premier workplaces that are struggling with leverage.
Speaker Change: So Doug will provide more details on leasing we're off to a good start in the first quarter and see a growing pipeline of opportunities for later this year in 2025.
Douglas T. Linde: Our new investment activity as you know, we we pivoted to offense late last year and early this year through buying joint venture interest in three significant in service assets at attractive prices.
Speaker Change: We remain in active pursuit of opportunities in our core markets and asset types with primarily two types of counterparties lend.
Speaker Change: Lenders to highly leveraged assets that require recapitalization.
Speaker Change: And institutional owners seeking to diversify.
Speaker Change: From the office asset class.
Owen David Thomas: And in the few cases involving premier workplaces, lenders are generally electing borrowers who agree to invest modestly in their assets. However, institutional owners are less interested in selling their highest quality assets, and there remains a material bid-ask spread given assets have, in most cases, not been marked down to market clearing levels. Notwithstanding these current challenges, our expectations are that transactions and our investment activity will increase in the coming quarters given the volume of maturing financings, continued markdowns on institutional portfolios, and higher for longer interest rates.
Speaker Change: To date, there has been limited market transaction activity for high quality office assets with lenders there are fewer premier workplaces that are struggling with leverage and in the few cases involving premier workplaces lenders are generally electing.
Speaker Change: <unk> agreed to invest modestly in their assets.
Speaker Change: Institutional owners are less interested in selling their highest quality assets and there remains a material bid ask spread given assets have in most cases not been marked down to market clearing levels.
Speaker Change: Notwithstanding these current challenges our expectations are that transactions and our investment activity will increase in coming quarters, given the volume of maturing financings continued markdowns in institutional portfolios and higher for longer interest rates.
Owen David Thomas: We also have interest from institutional investors in co-investing with us for select opportunities. On development, we commenced our 121 Broadway residential tower in Kendall Center as part of the 1 million square feet of commercial entitlements we received from the city of Cambridge to build 290 Binney Street and a future to be determined commercial building, comprising 37 stories and 439 units 121 Broadway will be the tallest building in Cambridge with a state-of-the-art design and amenities setting a new quality standard for residential offerings in the Kendall Square neighborhood. Earlier this month on Boston Marathon weekend we celebrated the grand opening for and delivered into service the 118,000 square foot Dick's House of Sports store on Boylston Street at Prudential Center.
Speaker Change: We also have interest from institutional investors and co investing with us for select opportunities.
Speaker Change: On development, we commenced our 121 Broadway residential tower in Kendall Center as part of the 1 million square feet of commercial entitlements. We received from the city of Cambridge to build 290 Binney Street in our future to be determined commercial building.
Speaker Change: Comprising 37 stories and 439 units 121 Broadway will be the tallest building in Cambridge with a state of the art design and amenities setting a new quality standards for residential offerings in the Kendall square neighborhood.
Speaker Change: Earlier this month on Boston Marathon weekend, we celebrated the Grand opening four and delivered into service. The 118000 square foot Dick's House of sports store on Boylston Street at Prudential Center.
Owen David Thomas: We continue to push forward with several residential projects under control that are being entitlementd and designed for which we intend to raise joint venture equity capital in the second half of the year. For office development, we have been approached by multiple clients and all our core markets who are interested in occupying new space and anchoring development projects. Given escalated material, labor, and capital costs, anchor clients must pay a premium to market rent today to justify the launch of a new development project, which is a challenging dynamic exacerbated by the earnings growth issue previously described. Though BXP's new office development activity has slowed, there will also be very limited new office development for the foreseeable future in our core markets, which is favorable for our existing portfolio.
Speaker Change: We continue to push forward with several residential projects under control that are being entitled and design for which we intend to raise joint venture equity capital in the second half of the year.
Speaker Change: For office development, we have been approached by multiple clients in all our core markets, who are interested in occupying new space and anchoring development projects.
Speaker Change: Given escalated material labor and capital costs, the anchor clients must pay a premium to market rent today to justify the launch of a new development project, which is a challenging dynamic exacerbated by the earnings growth issue previously described.
Speaker Change: Those <unk> New office development activity has slowed there will also be a very limited new office. There will also be very limited new office development for the foreseeable future in our core markets, which is favorable for our existing portfolio.
Owen David Thomas: As vacancies continue to decline for premier workplaces, rents should rise, which will ultimately bridge the economic gap to justify new development. Though we believe buying is a better opportunity than selling in the current market environment, we are interested in raising capital through asset sales if attractive opportunities present themselves. We have a handful of small dispositions, defined as under $30 million, we are currently exploring. VXP continues to execute a significant development pipeline with 11 office, lab, retail and residential projects underway as of the end of the first quarter.
Speaker Change: As vacancies continue to decline for Premier workplaces rents should rise, which will ultimately bridge the economic gap to justify new development.
Speaker Change: But we believe buying as a better opportunity than selling in the current market environment. We are interested in raising capital through asset sales if attractive opportunities present themselves. We have a handful of small dispositions defined as under $30 million.
Speaker Change: We're currently exploring.
Speaker Change: DXP continues to execute a significant development pipeline with 11 office lab retail and residential projects underway as of the end of the first quarter. These.
Owen David Thomas: These projects aggregate approximately 3.2 million square feet and $2.4 billion of BXP investment, with $1.3 billion remaining to be funded and are projected to generate attractive yields in the aggregate upon delivery. So to summarize, in the face of strong negative market sentiment, BXP continues to display resilience and stability in occupancy, FFO, and dividend levels. BXP is well positioned to continue to gain market share in both assets and clients during this time of market dislocation. The prospect of lower interest rates and stronger corporate earnings also provides a backdrop for renewed growth. Let me turn the call over to Doug. Thanks, Owen. Good morning, everybody.
Speaker Change: These projects aggregate approximately $3 2 million square feet and $2 4 billion of DXP investment with $1 $3 billion remaining to be funded on our projected to generate attractive yields in the aggregate upon delivery.
Speaker Change: So to summarize in the face of strong negative market sentiment DXP continues to display resilience and stability in occupancy <unk> and dividend at level DXP is well positioned to continue to gain market share in both assets and clients. During this time of market dislocation.
Speaker Change: The prospect of lower interest rates and stronger corporate earnings also provides the backdrop for renewed growth, let me turn the call over to Doug. Thanks, Paul and good morning, everybody I hope what youre going to hear today from me is youre going to view as a pretty constructive perspective on what's going on in our markets and what's going on with our our revenue picture in our leasing picture as.
Douglas T. Linde: I hope what you're going to hear today from me is a pretty constructive perspective on what's going on in our markets and what's going on with our revenue picture and our leasing picture. As we sit here at the end of the first quarter, in spite of the absence of a broad pickup in office-using jobs, BXP continues to lease space. We are leasing space. There's momentum in the economy despite persistently high interest rates.
Douglas T. Linde: We sit here at the end of the first quarter in spite of the absence of a broad pickup in office using jobs.
Douglas T. Linde: DXP continues to lease space, we are leasing space there is.
Douglas T. Linde: Momentum in the economy, despite persistent high interest rates.
Douglas T. Linde: Overall earnings growth for our clients and potential clients appears to be improving, and we're pretty optimistic it's going to lead to employment and space additions. And while we are not going to see broad reports of shrinking availability across any market until there is a pickup in white-collar job formation, there are pockets of supply constraints in select submarkets where we are seeing competition for space and improving economic conditions. As reported in our supplementary, the mark-to-market of the leases that commenced this quarter was up 7%, and the transaction cost averaged $8.60 per year, which is lower than it' The overall mark to market of the starting cash rents on leases executed this quarter relative to the previous in place cash rent was up about 2%.
Douglas T. Linde: Overall earnings growth for our clients and potential clients appears to be improving and we're pretty optimistic its going to lead to employment in space additions.
Douglas T. Linde: And while we are not going to see broad reports of shrinking availability across any market until there is a pickup in white collar job formation. There are pockets of supply constraint in select sub markets, where we're seeing competition for space and improving economics.
Douglas T. Linde: As reported in our supplemental the mark to market of the leases that commenced this quarter was up 7% and the transaction costs averaged $8 60 per year, which is lower than it's been the last few quarters.
Douglas T. Linde: The overall mark to market of the starting cash rents on leases executed this quarter relative to the previous in place cash rent was up about 2%.
Douglas T. Linde: The starting cash rents on leases we signed this quarter on second generation space were up about 22% in Boston, down 6.5% in Manhattan, down 3% in DC, and up 8% on the West Coast, with San Francisco CBD up 12%. Boston's increase is in large part due to a replacement of a tenant that was in default and had stopped paying. Adjusting for the transaction, the Boston numbers would have been up about 6%.
Douglas T. Linde: The starting cash rents on leases, we signed this quarter on second generation space were up about 22% in Boston down six 5% in Manhattan down 3% in D C and up 8% on the West Coast with San Francisco CBD up 12% Boston is increasing is in large part due to a replacement of it.
Douglas T. Linde: Tenant that was in default and had stopped paying adjusting for the transaction the Boston.
Douglas T. Linde: Numbers would have been up about 6%.
Douglas T. Linde: As Owen stated, the seasonal trend line of BXP leasing activity in the first quarter of 24 picked up relative to what we experienced in the first quarter of 23. This quarter, we completed 61 transactions, 32 new leases for 494,000 square feet, and 29 renewals encompassing 399,000 square feet. We had three expansions totaling 18,000 square feet and four contractions totaling 44,000 square feet. As a point of comparison, in the first quarter of 23, there were 57 leases, 29 leases were with new clients for $410,000, and 28 renewals for $250,000. There were 10 expansions and three contracts.
Douglas T. Linde: As Owen stated this seasonal trend line of Dxp's leasing activity in the first quarter of 'twenty four picked up relative to what we experienced in the first quarter of 'twenty three.
Douglas T. Linde: This quarter, we completed 61 transactions 32, new leases for 494000 square feet and 29 renewals encompassing 399000 square feet.
Douglas T. Linde: We had three expansions totaling 18000 square feet and four contractions totaling 44000 square feet.
Douglas T. Linde: As a point of comparison in the first quarter of 2003, there were 57 leases 29 leases with new clients for 410000.
Douglas T. Linde: In 2008 renewals for 250000, there were 10 expansions and three contractions last quarter fourth quarter of 2003, we signed 37 lease renewals and 37 leases with new clients and there were eight contractions and nine expansions among our existing clients.
Douglas T. Linde: Last quarter, the fourth quarter of 23, we signed 37 lease renewals and 37 leases with new clients, and there were eight contractions and nine expansions among our existing clients. This quarter, new leases comprise 55% of the volume. Activity was across the entire portfolio, with 178,000 square feet in Boston, 225,000 square feet in the New York region, 154,000 square feet from the West Coast, and D.C. lit a pack with 336,000 square feet. And to give you some additional color on this activity, there was only one transaction greater than 60,000 square feet, which was a 215,000 square foot long-term law firm extension that included a 25,000 square foot contraction in D.C. Princeton made up 38% of New York activity this quarter, almost all new clients.
Douglas T. Linde: This quarter, new leases encompasses 55% of the volume.
Douglas T. Linde: Activity was across the entire portfolio with 178000 square feet in Boston 225000 square feet in New York Region, 154000 square feet from the West Coast and D. C led the pack with 336000 square feet and.
Douglas T. Linde: And to give you some additional color on this activity there was only one transaction at greater than 60000 square feet, which was a 215000 square feet long term law firm extension that included a 25000 square foot contraction in D. C. Although that same law firm took an additional 7600 square feet in our Reston portfolio.
Douglas T. Linde: New clients made up 90% of the leasing volume in Boston and in New York, while renewals captured 73% of the West Coast and DC market. Equally important is our pipeline. Post March 31st, we have over 875,000 square feet of active leases under negotiation, which we define as a transaction that is being documented by our legal teams, and some of these transactions have been completed. This is consistent with the level of in-process leases we've managed for the last few quarters.
Douglas T. Linde: Princeton made up 38% of the New York activity this quarter, almost all new clients new clients made up 90% of the leasing volume in Boston and in New York, while renewals captured 73% of the West Coast and DC markets.
Douglas T. Linde: Equally important is our pipeline.
Douglas T. Linde: Post March 31.
Douglas T. Linde: We have over 875000 square feet of active leases under negotiation, which we define as a transaction that is being documented by our legal teams and some of these transactions have been completed.
Douglas T. Linde: This is consistent with the level of in process leases, we've managed for the last few quarters.
Douglas T. Linde: These transactions include a multi floor expansion of an asset manager in our Midtown portfolio in New York, a full floor expansion by a law firm in Midtown, an asset manager taking a full floor at 360 Park Avenue South. Consumer Brand Company relocating to a building in Waltham, a multi-floor renewal of a law firm in San Francisco with no change in the premises, and a downsizing along with an extension of a technology company in Reston, Virginia and a similar transaction in Waltham.
Douglas T. Linde: These transactions include a multi floor expansion of an asset manager and our Midtown portfolio in New York of full floor expansion by a law firm in Midtown and asset manager, taking a full floor at $3 60 Park Avenue South <unk>.
Douglas T. Linde: Consumer brand company relocating to a building in Waltham.
Douglas T. Linde: <unk> renewal of a law firm in San Francisco with no change in the premises in a downsizing along with an extension of a technology company in Reston, Virginia, and a similar transaction and while we have seen an uptick in the number of active deals.
Douglas T. Linde: We have seen an uptick in the number of active, At the end of the quarter, we had signed leases that had yet to commence on the in-service vacancy, totaling approximately 817,000 square feet, which includes 624,000 square feet that is anticipated to commence in 2024. We also have signed leases with new clients for another 534,000 square feet of currently occupied space. These leases have yet to commence, but they are reflected in the reduction of our rollover exposure shown in our supplement. The strongest user demand continues to come from asset managers, including private equity venture hedge funds, specialized fund managers, and their financial and legal advisors.
Douglas T. Linde: At the end of the quarter, we had signed leases that have yet to commence on the in service of vacancy totaling approximately 817000 square feet, which includes 624000 square feet that is anticipated to commence in 2024.
Douglas T. Linde: We also have signed leases with new clients for another 534000 square feet currently occupied space. These leases have yet to commence but they are reflected in the reduction of our rollover exposure shown in our supplemental.
Douglas T. Linde: The strongest user demand continues to come from the asset managers, including private equity venture hedge funds specialized fund managers and their financial and legal advisers. These organizations are the heart and soul of our New York and our back Bay activity and are an important driver of our San Francisco CBD demand in some instances these clients are growing their teams and.
Douglas T. Linde: These organizations are the heart and soul of our New York and Back Bay activities and are an important driver of our San Francisco CBD demand. In some instances, these clients are growing their teams and capital under management, but in all cases, they want to occupy premier workplaces. We continue to see significantly more client demand in our East Coast portfolio versus the West Coast due to the disproportionate concentration of technology and media content related demand on the West Coast.
Douglas T. Linde: Capital under management, but in all cases, they want to occupy premier workplaces.
Douglas T. Linde: We continue to see significantly more client demand in our east coast East coast portfolio versus the West coast due to the disproportionate concentration of technology and media content related demand on the West coast.
Douglas T. Linde: However, there have been some subtle and encouraging trends across much of the portfolio. Our Back Bay Boston and Park Avenue-centric New York City portfolios continue to have outsized demand relative to our availability. While concessions are still at elevated levels, we've been able to increase our taking rents when we actually have clients that we cannot accommodate due to a lack of available space in certain buildings. In the last 90 days, there's been a strong pickup of client activity in our urban edge wealth management portfolio.
Douglas T. Linde: However, there have been some subtle and encouraging trends.
Douglas T. Linde: Across much of the portfolio.
Douglas T. Linde: Our backstage Boston and Park Avenue centric, New York City portfolio continue to have outsized demand relative to our availability while concessions are still at elevated levels, we've been able to increase our taking rents and we actually have clients that we cannot accommodate due to a lack of available space in certain buildings.
Douglas T. Linde: In the last 90 days there has been a strong pickup of client activity in our urban edge Waltham portfolio.
Douglas T. Linde: We have an 80,000 square foot tech client expiring in 2024 with a planned downsize to 16,000 square feet. This quarter, we completed a lease for 45,000 square feet and are in negotiations with two other clients, new ones, for another 37,000 square feet of that expiration, and the existing client will stay with us but relocate within the building. Additionally, in a different urban edge building, we're negotiating a 45,000 square foot lease with an existing subtenant to extend when their prime lease expires in 20. We're negotiating a 25,000 square foot lease with a lab user for a portion of our availability on 2nd Avenue, and we're negotiating a 55,000 square foot lease with a non-tech company in a different building. None of these transactions, more than 220,000 square feet, were in our pipeline on 12-31-2023.
Douglas T. Linde: We have an 80000 square foot tech client expiring in 2024 with a plan to downsize to 16000 square feet.
Douglas T. Linde: This quarter, we completed a lease for 45000 square feet in our niche.
Douglas T. Linde: Negotiations with two other clients new ones for another 37000 square feet of that exploration.
Douglas T. Linde: And the existing client will stay with us, but relocate within the building.
Douglas T. Linde: Additionally, in a different urban edge building, we're negotiating a 45000 square foot lease with an existing subtenant to extend when their prime lease expires in 'twenty five we're negotiating at 25000 square foot lease with a lab user proportion of our availability on second Avenue Ameren negotiating a 55000 square foot lease with a non tech company in a different building.
Douglas T. Linde: None of these transactions more than 220000 square feet were in our pipeline on 12 31 2023 all of this occurred in the last 90 to 120 days.
Douglas T. Linde: All of this occurred in the last 90 to 120 days in the District of Columbia and Northern Virginia. We continue to see more buildings with over-leveraged capital structures, unwilling to provide capital for new transactions, and therefore, they have very few clients. On the other end of the spectrum, when the market caught wind of our lease extension at 901 New York Avenue and the anticipated enhancements that we're planning, the interest in the available space at 901 New York accelerated dramatically.
Douglas T. Linde: In the district of Columbia, and Northern Virginia.
Douglas T. Linde: We continue to see more buildings with over leveraged capital structures unwilling to provide capital for new transactions and therefore, they have very little client interest at the other end of the spectrum when the market got wind of our lease extension at 91, New York Avenue and the anticipated enhancements that we are planning the interest and the available space at <unk>.
Douglas T. Linde: Europe 91, Europe accelerated dramatically.
Douglas T. Linde: Reston continues to house the largest concentration of our Washington regional portfolio. It's the headquarters for VW, Bechtel, Leidos, SEIC, Periton, Kaki, Metron, Comscore, Mandiant, and the College Board, and it's also home to a number of large technology companies like Microsoft. Because of the environment of the town center, with seven days a week food, beverage, and shopping, and there's also a natural location for small businesses and financial services and legal.
Douglas T. Linde: Reston continues to have the largest concentration of our Washington regional portfolio.
Douglas T. Linde: If the headquarters for VW Bechtel lay those SAIC paradigm khaki Metra in Comscore mandate in the College Board and it's also the home to a number of large technology companies like Microsoft.
Douglas T. Linde: Because of the environment of the town center with seven days, a week food beverage and shopping and there's also a natural location for small businesses and the financial services and legal industries. This quarter, we completed a 58000 square foot lease with a new technology client at rest of the next that's moving from a total building an expansive for a law firm.
Douglas T. Linde: This quarter, we completed a 58,000 square foot lease with a new technology client at Reston Next, that's moving from a tow row building, an expansion for a law firm, and we are seeing a pickup in small tenant activity relative to 23, as well as large users looking to upgrade their premise. The AI organizations in the city of San Francisco continue to look for additional space, which will continue the positive absorption story.
Douglas T. Linde: And we are seeing a pickup in small tenant activity relative to 'twenty three as well as large users looking to upgrade their premises.
Douglas T. Linde: The AI organizations in the city of San Francisco continue to look for additional space, which will continue the positive absorption story.
Douglas T. Linde: They continue to focus, however, on built inexpensive space. While there is an abundance of available space in the city, there continues to be outsized demand for view space north of Market relative to the available supply. We completed a 35,000 square foot lease with a boutique financial advisor at Embarcadero Center this quarter that was only interested in view space north of Market.
Douglas T. Linde: They continue to focus however, unbuilt inexpensive space.
Douglas T. Linde: We're negotiating six transactions with new clients totaling 40,000 square feet, as well as an 80,000 square foot renewal with a law firm that's retaining their existing space. Today, the Seattle CBD is almost exclusively a lease expiration-driven market, and there has been a material pickup in the level of activity. The number of tenant tours that we have conducted has picked up in the last two quarters. We completed a lease with a new client on a 10,000 square foot pre-built suite and are in negotiations with a law firm for a partial floor and discussions with a technology company for a full floor. West LA, however, continues to be the market where activity remains light.
Douglas T. Linde: While there is an abundance of available space in the city. There continues to be outsized demand for abuse based north of market relative to the available supply.
Douglas T. Linde: We completed a 35000 square foot lease with a boutique financial adviser at Embarcadero Center. This quarter that was only interested in view space North of market. We're negotiating six transactions with new clients totaling 40000 square feet as well as an 80000 square foot renewal with a law firm that's retaining their existing footprint.
Douglas T. Linde: Today, the Seattle CBD is almost exclusively a lease expiration driven market and there has been a material pickup in the level of activity. The number of tenant tours that we've conducted is picked up in the last two quarters, we completed a lease with a new client on a 10000 square foot prebuilt suite and are in negotiations with a law firm for <unk>.
Douglas T. Linde: So floor and discussions with a technology company for a full floor west.
Douglas T. Linde: West L. A however continues to be the market where activity remains light while century city is seeing great demand and strong rents at financial and professional services firms head west from the downtown market. Those clients are not yet prepared to take space in low rise buildings in Santa Monica.
Douglas T. Linde: While Century City is seeing great demand and strong rents as financial and professional services firms head west from the downtown market, those clients are not yet prepared to take space in low-rise buildings in Santa Monica. There continues to be pressure from streaming profitability, industry consolidation, and job reduction in the gaming and media space that is impacting overall demand growth in the West LA area. As we forecast during our last call, our occupancy declined oh so slightly from 88.4% to 88.2% during the quarter, with a known expiration of 230,000 square feet in Princeton, where, as I mentioned, we have signed 80,000 square feet of new client deals this quarter that will commence this year.
Douglas T. Linde: There continues to be pressure from streaming profitability industry consolidation and job reduction in the gaming and media space that is impacting overall demand growth in the west L. A area.
Douglas T. Linde: As we forecast during our last call our occupancy declined slightly from $88 four to 88, 2% during the quarter with a known exploration of 230000 square feet in Princeton, where as I mentioned, we have signed 80000 square feet of new client deals this quarter that will commence this year.
Douglas T. Linde: We have two additional large lease expirations across the portfolio in 24 that will occur during the second quarter. 200,000 square feet at 680 Folsom in San Francisco and 230,000 square feet at Seven Times Square, where we own 55%.
Douglas T. Linde: We have two additional large lease expirations across the portfolio in 2000 and for that will occur during the second quarter 200000 square feet at 680, Folsom and San Francisco and 230000 square feet at seven times square, where we own 55%.
Douglas T. Linde: Occupancy will drop in the second quarter and recover as we move into the fourth quarter. Mike's going to spend some time discussing changes to our interest expense outlook in his remarks. The issue of the day is the level of inflation, and I thought I'd make a few brief comments on how inflation is impacting our business. We are not seeing any deflation in our base building costs as we build, as we bid potential stick-frame residential projects, the projects Owen was describing earlier, but escalation assumptions are now normalized.
Douglas T. Linde: Occupancy will drop in the second quarter and recover as we move into the fourth quarter.
Douglas T. Linde: Mike's going to spend some time discussing changes to our interest expense outlook in his remarks. The issue of the day is the level of inflation and I thought I'd make a few brief comments on how inflation is impacting our business. We are not seeing any deflation in our base building cost as we build as we bid potential stick frame residential projects Owen was describing earlier.
Michael E. LaBelle: But escalation assumptions are now normalized no more 8% to 9%.
Douglas T. Linde: No more eight to nine percent. The changes to the building and energy codes, along with the elevated level of interest expense associated with any construction financing, continue to pressure project costs and make new starts very challenging. However, we are seeing costs come down on tenant improvement jobs, which is a reflection of reduced demand on the group of contractors and subcontractors that focus on interiors work, who are looking to maintain a consistent book of business. However, new high-rise tower construction costs are unlikely to deflate in the longer term interest rate environment.
Douglas T. Linde: The changes to the building and energy codes, along with the elevated level of interest expense associated with any construction financing continue to pressure project costs and make new starts very challenging. However, we are seeing costs come down on tenant improvement jobs, which is a reflection of reduced demand on the group of contractors and subcontractors.
Douglas T. Linde: Tractors that focus on interiors work, who are looking to maintain a consistent book of business.
Douglas T. Linde: New high rise tower construction costs are unlikely to deflate.
Douglas T. Linde: And the longer term interest rate environment.
Douglas T. Linde: And the longer long-term interest rates remain at their elevated levels, the longer it's going to be before we see market rents approach the levels necessary to rationalize new office building, leasing economics, and corresponding new development. We are experiencing an operating environment where leasing available space is primarily driven by gaining market share. That's the world that we are living in.
Douglas T. Linde: And the longer long term interest rates remain at the elevated level the longer it's going to be before we see market rents approach the levels necessary to rationalize new office building leasing economics and corresponding new development.
Douglas T. Linde: And we're winning. As clients choose premier properties in sound financial conditions, operated by the best property management team, BXP will continue to be successful in doing just that. I'll stop there and turn it over to, Great. Thank you, Doug. Appreciate it. Good morning, everybody.
Douglas T. Linde: We are experiencing an operating environment, where leasing available space is primarily driven by gaining market share that's where the world that we're living in and we're winning as clients choose premier properties in sound financial condition operated by the best property management teams DXP will.
Douglas T. Linde: Continue to be successful in doing just that I will stop there and turn it over to Mike.
Michael E. LaBelle: This morning, I plan to cover the details of our first quarter performance and also the updates to our 2024 full-year guidance. We've also been active in the debt markets this quarter, so I'm going to start with a summary of some of the changes in our debt structure. In early February, we paid off $700 million of unsecured notes with available cash.
Michael E. LaBelle: Greg Thank you Doug I appreciate it.
Douglas T. Linde: Everybody.
Michael E. LaBelle: Morning, I plan to cover the details of our first quarter performance and also the updates to our 2020 for full year guidance.
Michael E. LaBelle: We've also been active in the debt markets. This quarter, so I'm going to start with a summary of some of the changes in our debt structure.
Douglas T. Linde: In early February we paid off $700 million of unsecured notes with available cash that was in line with our plan.
Michael E. LaBelle: That was in line with our plan. We also entered into a $500 million unsecured commercial paper program. This program offers an additional market for us to tap beyond the bank market, the mortgage, and unsecured bond markets that we currently actively utilize. We started issuing under the program last week, and we've raised the full $500 million for terms ranging from overnight to one month at a weighted average rate of SOFR plus 25 basis points.
Douglas T. Linde: We also entered into a $500 million unsecured commercial paper program. This program offers an additional market for us to tap beyond the bank market mortgage and unsecured bond markets that we currently actively utilized.
Douglas T. Linde: We started issuing under the program last week and we've raised the full $500 million for terms ranging from overnight to one month at a weighted average rate of sulfur plus 25 basis points.
Michael E. LaBelle: The all-in rate, including fees, is approximately five and three-quarters percent. We've used the proceeds to pay down our term loan from $1.2 billion to $700 million, which will reduce our borrowing costs on $500 million by 75 basis points, or about a penny per share in 2024. In addition, we increased our corporate line of credit by $185 million to $2 billion.
Douglas T. Linde: The all in rate, including fees is approximately five and three quarters percent.
Douglas T. Linde: We've used the proceeds to pay down our term loan from $1 2 billion to $700 million.
Douglas T. Linde: Which will reduce our borrowing costs on $500 million by 75 basis points or about a penny per share in 2024.
Douglas T. Linde: In addition, we increased our corporate line of credit by $185 million to $2 billion.
Michael E. LaBelle: Our banks continue to be strong supporters of BSP, even as they evaluate their global commercial real estate exposure and exit certain relationships. Now I would like to turn to our first quarter earnings results. Despite the difficult real estate operating conditions and the stagnant office using job growth statistics, our portfolio is demonstrating strength and stability. As Owen and Doug described, portfolio occupancy has been relatively steady for the past six quarters. Our revenues continue to grow with top line total revenue up again this quarter by $10 million or 1.3%. And our share of portfolio NOI is also higher of $6 million or 1.2% from last quarter. High interest rates are our biggest earnings challenge.
Douglas T. Linde: Our banks continue to be strong supporters of DXP, even as they evaluate their global commercial real estate exposure and exit certain relationships.
Michael E. LaBelle: This quarter, our interest expense increased $7 million to... It's important to point out that more than half of this increase was due to higher non-cash fair value interest expense related to below market debt on our recent acquisition. We reported funds from operation of $1.73 per share for the quarter that was in line with our guidance for the first quarter. And it was equal to our first quarter FFO from one year ago, again demonstrating the stability of our income statement.
Douglas T. Linde: Now I would like to turn to our first quarter earnings results. Despite the difficult real estate operating conditions in the stagnant office using job growth statistics, our portfolio is demonstrating strengthened stability.
Douglas T. Linde: As Owen and Doug described portfolio occupancy has been relatively steady for the past six quarters.
Douglas T. Linde: Our revenues continue to grow with top line total revenue up again, this quarter by $10 million or one 3% and our share of portfolio. NOI is also higher up $6 million or one 2% from last quarter.
Douglas T. Linde: High interest rates, our biggest earnings challenge this quarter, our interest expense increased $7 million sequentially.
Douglas T. Linde: It's important to point out that more than half of this increase was due to higher noncash fair value interest expense related to below market debt on our recent acquisitions.
Douglas T. Linde: We reported funds from operation of $1 73 per share for the quarter that was in line with our guidance for the first quarter.
Douglas T. Linde: And it was equal to our first quarter <unk> from one year ago again, demonstrating the stability of our income statement.
Michael E. LaBelle: Portfolio NOI exceeded our expectations by about two cents per share. The majority of this was from lower than anticipated net operating expenses that we expect will be deferred to later in 2024. This was offset by higher than projected net interest expense of $0.02 per share, primarily from higher non-cash, fair value interest expense related to the acquisition.
Douglas T. Linde: Portfolio NOI exceeded our expectations by about <unk> <unk> per share. The majority of this is from lower than anticipated net operating expenses that we expect will be deferred to later in 2024.
Douglas T. Linde: This was offset by higher than projected net interest expense of <unk> <unk> per share primarily from higher noncash fair value interest expense related to the acquisitions.
Michael E. LaBelle: And we also booked lower than projected interest income due to changes in the timing of closing our 290 Benny Street joint venture. So moving to the full year, since providing our initial 2024 guidance, we finalized the assumptions utilized in valuing the in-place debt and interest rate swaps for our 901 New York Avenue and Santa Monica Business Park acquisition. For 901 New York Avenue, we increased our assumption for the interest rate on the debt by 70 basis points to 7.7%.
Douglas T. Linde: And then we also book to lower than projected interest income due to changes in the timing of closing or $2 90, Binney Street joint venture.
Michael E. LaBelle: And for the interest rate hedge at Santa Monica Business Park, we determined that the change in market value will be amortized through our interest expense for the remaining term of the loan that expires in 2025. These adjustments result in an additional $0.05 per share of non-cash, fair value interest expense in 2024, relative to the estimate we used when we provided our guidance last quarter. This non-cash adjustment impacts our full year guidance and is the primary reason we have reduced our FFO guidance for 2024.
Douglas T. Linde: So moving to the full year since providing our initial 2024 guidance, we finalized the assumptions utilized in valuing the in place debt and interest rate swaps for our 901, New York Avenue in Santa Monica Business Park acquisitions.
Douglas T. Linde: For 91, New York Avenue, we increased our assumption for the interest rate on the debt by 70 basis points to seven 7% and for the interest rate hedge at Santa Monica business Park, we determined that the change in market value will be amortized through our interest expense for the remaining term of the loan that expires in 2025.
Douglas T. Linde: These adjustments result in additional <unk> <unk> per share of noncash fair value interest expense in 2024 relative to the estimate we used when we provided our guidance last quarter.
Douglas T. Linde: This noncash adjustment impacts our full year guidance and is the primary reason, we have reduced our <unk> guidance for 2024.
Michael E. LaBelle: Other interest expense assumptions have also been impacted by the changing expectations for rate cuts in 2024. Last quarter, we forecasted four rate cuts commencing in the second quarter, which was actually conservative to market expectations at the time. We've now pushed out any rate cuts to late in 2024. The impact on our floating rate debt is partially offset by the lower cost of our commercial paper program.
Douglas T. Linde: Other interest expense assumptions have also been impacted by the changing expectations for rate cuts in 2024 last quarter, we forecasted for rate cuts commencing in the second quarter, which was actually conservative to market expectations at the time.
Douglas T. Linde: We've now pushed out any rate cuts to late in 2024, the impact on our floating rate debt is partially offset by the lower cost of our commercial paper program.
Michael E. LaBelle: But overall, we expect two cents of dilution from higher short-term interest rates compared to our prior guidance. The operating assumptions for the portfolio, occupancy, and same-store NOI remain relatively unchanged from our prior forecast. As Doug described, we do expect occupancy to decline slightly this quarter and in the second quarter before improving in the back half of the year. Our assumption for same property NOI growth of negative one to three percent is unchanged.
Douglas T. Linde: But overall, we expect <unk> <unk> of dilution from higher short term interest rates compared to our prior guidance.
Douglas T. Linde: The operating assumptions for the portfolio occupancy and same store NOI remained relatively unchanged from our prior forecast as Doug described we do expect occupancy to decline slightly this quarter. We did expect occupancy to decline slightly this quarter and in the second quarter before improving in the back half of the year.
Douglas T. Linde: Okay.
Douglas T. Linde: Our assumption for same property NOI growth of negative 1% to 3% is unchanged.
Michael E. LaBelle: Other modifications to our guidance include reducing our assumption for 2024 G&A expense by a penny per share and a modest reduction in our fee income projection. So, in summary, we are reducing and narrowing our 2024 full-year guidance for FFO to $6.98 to $7.10 per share. This represents a reduction of 6 cents per share at the midpoint from our prior guidance. The primary reasons for the reductions are $0.05 of higher non-cash fair value interest expense and $0.02 of higher interest expense from higher short-term interest rates, offset by $0.01 of lower G&A expense.
Douglas T. Linde: Other modifications to our guidance include reducing our assumption for 2020 for G&A expense, but any per share and a modest reduction in our fee income projections.
Douglas T. Linde: So in summary, we are reducing and narrowing our 2020 for full year guidance for <unk> to $6 98 to $7 10 per share. This represents a reduction of six cents per share at the midpoint from our prior guidance.
Douglas T. Linde: The primary reasons for the reductions are five cents of higher noncash fair value interest expense and <unk> <unk> of higher interest expense from higher short term interest rates.
Douglas T. Linde: Offset by <unk> <unk> of lower G&A expense.
Michael E. LaBelle: The last item I would like to mention is that we published our 2023 Sustainability and Impact Report, and it can be found on our website. The report contains a wealth of information on our sustainability efforts and the progress towards achieving our critical goals of reducing our energy use intensity, carbon emissions, and achieving net zero carbon operations for scope one and two greenhouse gas emissions by 2025. We invite you to join us for our sustainability and impact webcast on May 15th. If you've not received an invitation, please reach out to Helen and our investor relations team.
Douglas T. Linde: The last item I would like to mention is that we published our 2023 sustainability and impact report and it can be found on our website.
Douglas T. Linde: <unk> contains a wealth of information on our sustainability efforts.
Douglas T. Linde: And the progress towards achieving our critical goals of reducing our energy intensity carbon emissions and achieving net zero carbon operations for scope, one and two greenhouse gas emissions by 2025.
Douglas T. Linde: We invite you to join us for our sustainability and impact webcast on May 15th if you have not received an invitation please reach out to Alan and our Investor Relations team.
Michael E. LaBelle: That completes our formal remarks. Operator, can you open up the line for questions? Thank you, sir. As a reminder, to ask a question, you would need to press star 11 on your telephone. To withdraw your question, please press star one one again.
Douglas T. Linde: That completes our formal remarks, operator can you open up the line for questions.
Speaker Change: Thank you Sir.
Douglas T. Linde: As a reminder to ask a question you will need to press star one on your telephone to reach our your question. Please press star one again.
Operator: We ask that you please limit yourselves to one question, and if you have any follow-up questions, please feel free to rejoin the Q&A. Please stand by while we compile the Q&A room. And I will introduce our first question, which comes from the line of Nick Yulico from Scotiabank. Please go ahead.
Douglas T. Linde: We ask that you. Please limit yourself to one question and if you have any follow up questions. Please feel free to rejoin the queue.
Douglas T. Linde: Please standby, while we compile the Q&A roster.
Speaker Change: And I show our first question.
Speaker Change: Comes from the line of Nick <unk> from Scotiabank. Please go ahead.
Nicholas Philip Yulico: Thanks. Yeah, I guess just a bigger picture question, maybe for Owen, you know, how you're thinking about all the different, you know, opportunities out there, you know, you mentioned that there could be some acquisition opportunities, you did just launch 121 Broadway, which is a substantial, you know, capital commitment, you have, you know, a stock price, I'm sure maybe you're not, you know, happy about and so I'm just trying to understand like how we should think about, you know, the investment focus right now for the company and, and, you know, how you expect to fund that via, you know, what you're looking to issue equity, would you buy back stock? You know, anything along those lines would be helpful. Thanks.
Nick: Thanks, Yes, I guess, just a bigger picture question maybe for Owen.
Nick: How you are thinking about all the different opportunities out there you mentioned that there could be some acquisition opportunities.
Nick: Did just launched 121 Broadway, which is a substantial capital commitment you have.
Nick: Mark price Im sure maybe youre not happy.
Owen David Thomas: Happy about and so I'm just trying to understand like how we should think about the investment focus right now for the company in and how do you expect to fund that.
Owen David Thomas: And what Youre looking to issue equity would you buy back stock.
Speaker Change: Anything along those lines would be helpful. Thanks.
Owen David Thomas: Yeah. Yeah, so, Nick, a couple things I would say first, let me start with 121 Broadway. It's a fantastic new building, residential building that we're building in Cambridge. But it was also launched as part of the requirements to achieve a million square feet of commercial entitlements in Cambridge.
Speaker Change: Yes so.
Speaker Change: Nick a couple of things I would say first let me start with 121 Broadway.
Speaker Change: Fantastic New building residential building that we're building in Cambridge.
Speaker Change: But it was also launched as part of the requirements to achieve 1 million square feet of commercial entitlements in Cambridge. It was a requirement of that.
Owen David Thomas: It was a requirement of that, of receiving those entitlements, and those entitlements allowed us to commence the 290 Binney Street development. And we still have FAR available for one or two additional commercial buildings. But again, you have to think about that development as tied into the 290 development that we commenced last year. In terms of new investment opportunities, as I described in my remarks, there is a tremendous amount of dislocation going on in the office sector.
Speaker Change: Of receiving those entitlements and those entitlements allowed us to commence the $2 90, Binney Street development and we still have.
Speaker Change: Our available for one or two additional commercial.
Speaker Change: Commercial buildings, but again you have to think about that development is tied into the 290 development that we commenced.
Speaker Change: Last year in terms of new investment opportunities as I described in my remarks.
Speaker Change: A tremendous amount of dislocation going on in the office sector, you've got lots of over leveraged assets and you have.
Owen David Thomas: You've got lots of over leveraged assets, and you have also a number of institutional owners that want to decrease their exposure to office. And this is going to create opportunities for us. You know, when we look back at prior down cycles in real estate and in office real estate, those were periods of time where BXP significantly enhanced its portfolio with acquisitions like 200 Clarendon Street, GM Building, and others. So we want to participate. We think that's going to happen again this cycle, and we want to participate in it.
Speaker Change: A number of.
Speaker Change: Institutional owners that want to decrease their exposure to office and this is going to create opportunities for us.
Speaker Change: When we look back at prior down cycles.
Speaker Change: In real estate and an office real estate those were periods of time, where DXP significantly enhanced its portfolio with acquisitions like 200, Clarendon Street, GM building and others. So we want to participate we think thats going to happen again, this cycle and we want to participate in it and as we do that we are paying very close.
Owen David Thomas: And as we do that, we are paying very close attention to obviously accreting our earnings over time and also watching our leverage. And, you know, I think each transaction will have to stand on its own in terms of how we fund it. Thank you. And I take our next question comes from the line of Steve Sakwa from Everco ISI. Please go ahead.
Speaker Change: Attention to obviously of creating our earnings over time and also watching our leverage and I think each transaction, we will have to stand on its own in terms of how we fund it.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Steve Sacra from Evercore ISI. Please go ahead.
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Stephen Thomas Sakwa: Great. Thanks, Doug I guess I wanted to just maybe follow up on your positive commentary on leasing and just maybe get a sense for.
Stephen Thomas Sakwa: How much of this is for the existing portfolio how much of this is for the development pipeline.
Stephen Thomas Sakwa: And I realize we're getting close to the middle of the year. So any of the leases being signed are probably really more of a 25 beneficiary than they are going to be at 24, but just how do you think about building up the occupancy on the existing portfolio and as importantly, filling up the vacancy within the development pipeline.
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Speaker Change: Yeah, Thanks, Steve So.
Speaker Change: The activity that we have in our pipeline.
Speaker Change: I'll give you two different sort of pipeline numbers. So of the 875000 square feet of stuff that we have going on.
Douglas T. Linde: About 20,000 square feet of that is development, and the rest of it, the other 865,000 square feet are all existing portfolio deals, and the majority of it is on available existing space. So, so the world, the world, as I sort of think about it is we have the leases that we signed this quarter, then we have our pipeline of stuff in process, and then I have a, what I have is sort of my, my tracking list, and my tracking list right now has another 1.7 million square feet of deals that we are, that are active in our teams across the region. And these are not, you know, a tenant is looking at the market and might call up, these are papers moving back and forth. And there is a legitimate opportunity potentially for a deal to occur.
Speaker Change: About 20000 square feet of that is development in the rest of it the eighth in the other 865000 or.
Speaker Change: 55000 square feet are all existing portfolio deal and the majority of it is on available existing space.
Speaker Change: Yes.
Speaker Change: So the world the world as I sort of think about it is we have leases that we signed this quarter. Then we have our pipeline of stuff in process and then I have a what I have is sort of my by tracking list and my tracking list right. Now has another one 7 million square feet of deals that we are that are active in our teams across the <unk>.
Speaker Change: Regions and these are not a tenant is looking at the market and might call up. These are paper is moving back and forth and there is a legitimate opportunity potentially for a deal to occur again on all of that it's almost exclusively on our in service portfolio. So if you think about our development.
Douglas T. Linde: Again, on all of that, it's almost exclusively our in-service portfolio. So if you think about our development pipeline today, it really consists of 350 Park Avenue South, and Hilary can comment on activity there, and then the life science buildings that we have in Waltham, of which there's no active conversation going on that's part of my pipelines, and then the building that we have in our joint venture in South San Francisco. And again, there's really nothing going on there as well.
Speaker Change: Pipeline today.
Speaker Change: It really consists of 350 Park Avenue, South and Hilary can comment on activity. There and then the life science buildings that we have in Waltham of which there are no active conversation going on that part of my pipelines and then the building that we have in our joint venture in South San Francisco and again there is nothing.
Speaker Change: Really going on there as well and so the vast majority of the activity that we have is about increasing first maintaining and then increasing albeit slowly the occupancy and the existing in service DXP core portfolio.
Douglas T. Linde: And so the vast majority of the activity that we have is about increasing, first maintaining, and then increasing, albeit slowly, the occupancy in the existing in-service BXP core portfolio. Hilary Rado, if you want to comment on 360 Park Avenue South. Sure. Thanks, Doug. Hi, Steve.
Stephen Thomas Sakwa: And Hillary Eric do you want to comment on 360 park having itself.
Hilary J. Spann: In terms of the leasing activity in Midtown South, I think we saw a slowdown in the first part of this year. I will say that we are starting to see more activity as 360 Park Avenue South has come online, and clients can actually see the very high quality of the finishes and the lobbies, the common areas, and the amenities that we've put in place. And so we are starting to see a pickup in tour activity there. However, it remains the case that the businesses that are interested in locating at 360 Park Avenue South span across industry sectors.
Hilary J. Spann: Sure Thanks, Doug Hi, Steve.
Hilary J. Spann: In terms of the leasing activity in Midtown South I think we saw a slowdown in the first part of this year I will say that we are starting to see more activity is $3 60 Park Avenue South has come online and clients can actually see the very high quality of the finishes and the lobbies and common areas and amenities that we put in.
Hilary J. Spann: In place and so we are starting to see a pickup in tour activity there.
Stephen Thomas Sakwa: It remains the case that the businesses that are interested in locating at $3 60 Park Avenue, south span across industry sectors, and so while Midtown South in general has historically been home to Tech and media Tenancies, we are seeing everything from corporate to financial services and as Doug mentioned in asset management.
Hilary J. Spann: And so while Midtown South, in general, has historically been home to tech and media tenancies, we're seeing everything from corporations to financial services and, as Doug mentioned, an asset management firm come into that building and show an interest in occupying that building. I think, you know, anecdotally, while the leasing activity is picking up a bit, it remains to be seen where that will settle out in terms of executed leases in the coming quarters.
Stephen Thomas Sakwa: <unk> term.
Speaker Change: Come in.
Stephen Thomas Sakwa: That building and show interest in occupying that building I think anecdotally while the.
Stephen Thomas Sakwa: Leasing activity is picking up a bit.
Stephen Thomas Sakwa: It remains to be seen where that will settle out in terms of the executed leases in the coming quarters, but we feel encouraged by the fact that the volume.
Hilary J. Spann: But we feel encouraged by the fact that the volume of interest in the building has stepped up meaningfully since we've completed it and opened it. Thank you. And I assure you, our next question comes from the line of Anthony Paolone from J.P. Morgan. Please go ahead.
Stephen Thomas Sakwa: Interest in the building has stepped up meaningfully principally completed and opened up.
Stephen Thomas Sakwa: Okay.
Stephen Thomas Sakwa: Yes.
Speaker Change: Thank you.
Stephen Thomas Sakwa: And I show. Our next question comes from the line of Anthony <unk> from JP Morgan. Please go ahead.
Anthony Paolone: Yeah, thanks. I guess my question is, you mentioned earlier some demand from the AI space, and at the same time, just tech companies having overexpanded and shedding some space. Just wondering if you could put some more dimensions around, you know, how that nets out, exactly how big is the AI demand, and maybe perhaps, you know, how much more is there to go before the rest of tech is right-sized? Yeah, so I'm going to give you what I would refer to as a simplistic view of it, and I'll let Rod Diehl give you a more comprehensive view.
Anthony: Yeah. Thanks I.
Anthony: I guess my question is you mentioned earlier some demand from the AI space and at the same time just Tech company is having over expanded and shedding some space I'm. Just wondering if you could put some more dimensions around how that nets out exactly how big is the AI demand and maybe perhaps.
Anthony: How much more is there to go before the rest of tech is right sized.
Anthony: So I'm going to I'm going to give you I'm going to give you.
Speaker Change: And what I would refer to as a simplistic view of it and I'll, let rod deal and give you a more comprehensive view so the simplistic view of it is.
Douglas T. Linde: So, the simplistic view of it is, on the East Coast, where there really isn't much in the way of incremental AI demand, net-net, most technology companies are, when they're renewing a lease, taking less space. On the West Coast, predominantly in the greater San Francisco marketplace, and then skewing down into the CBD of San Francisco, there is more incremental absorption overall in technology, and it's all coming from AI. And I would say it's taking the place of what were traditional technology companies. But Rod, you can you can sort of flush that out a little bit more. Yeah, thanks, Doug.
Speaker Change: On the East coast, where there really isn't much in the way of incremental AI demand net net most technology companies are when they are renewing a lease taking less space.
Anthony: On the West coast predominantly in the greater San Francisco marketplace, and then skewing down into the CBD of San Francisco, There is more incremental absorption overall in technology, it's all coming from AI and I would say is it's taking the place of what were traditional.
Anthony: Technology companies, but rod you can.
Rod: Sort of flesh that out a little bit more.
Rodney C. Diehl: So yes, last year, of course, was a big year for AI in San Francisco; there were two very large leases that were completed. I believe that made up about 27% of the overall leasing activity for the year, which was pretty substantial. So coming into 24, there's still been activity on the AI front.
Rod: Yeah. Thanks, Doug So yes last year of course was a big year for AI in San Francisco. There was two very large leases that were completed.
Rod: That made up about 27% of the overall leasing activity for the year, which was pretty substantial so.
Rodney C. Diehl: There's one of those larger tenants that did the deal last year is also in the market again for more space, so we're watching that closely to see where that goes. So I think it's definitely a bright spot. And, and, you know, these different companies often define themselves as AI, but it's broad across the spectrum of that technology, as you see down in Silicon Valley. In fact, there are some AI companies, many of them, which are tied into the automotive industry. We have a couple of them in our own portfolio.
Rod: Coming into 'twenty four there has still been activity on the AI front.
Rod: There is one of those larger tenants that did the deal last year is also in the market again for more space. So we're watching that closely to see where that goes.
Rod: So I think it's definitely a bright spot in these different companies often define themselves as AI, but it's broad across the spectrum of that technology is do you see that down in the Silicon Valley and in fact, there are some AI companies many of them, which are tied into the automotive industry. We have a couple of them in our own portfolio and some of those are in the market as well.
Rodney C. Diehl: And some of those are in the market as well. So it's definitely a consistent point of additional optimism and demand for the Bay Area. Thank you. And I take our next question comes from the line of John Kim from BMO Capital Markets. Please go ahead.
Rod: Definitely.
Rod: Distant point of additional optimism and demand for the Bay area.
Speaker Change: Thank you.
Rod: And I show. Our next question comes from the line of John Kim from BMO Capital markets. Please go ahead.
John P. Kim: Thank you. You've been making a very compelling case for the bifurcation between Premier Workspace and Commodity Office in the CBD portfolio, which really benefits BXP. But that same bifurcation exists in your portfolio between CBD and suburbs, where there's a 15 percentage point occupancy gap. So I'm wondering, just given that performance difference, does that make you reconsider your commitment to the suburbs? So this is, let me, let me start. This is Doug, and I'll let Owen, you know, make a comment as well.
John P. Kim: Thank you Eva.
John P. Kim: Been making a very compelling case between.
John P. Kim: The bifurcation between Premier workspace, and commodity office, and the CBD portfolio, which really benefits.
John P. Kim: <unk>.
John P. Kim: But that same verification exists in your portfolio between CBD and suburban where theres, a 15 percentage point.
John P. Kim: C GAAP.
John P. Kim: I'm wondering just given that performance difference does that make you reconsider.
John P. Kim: Your commitment to the centers.
John P. Kim: So this is Glenn let me let me start this is Doug and I'll, let alone make a comment as well we are committed to the <unk>.
Douglas T. Linde: We're committed to the geographic locations that we currently are in, have occupancy and vacancy. The truth of the matter is that the majority of our availability is in suburban areas. Part of it was self-inflicted, so part of it was between 2020 and 2022 when we were looking at the highest and best use for some of our Waltham Suburban assets and our Lexington Suburban assets. We deemed that the value of those assets over the long term as life science facilities would be better than as quote unquote traditional office facilities.
John P. Kim: The geographic locations that we currently are occupancy have occupancy in vacancy.
Douglas T. Linde: The truth of the matter is that the majority of our availability is in suburban part of it was self inflicted so part of it was during 2020 to 2022, when we were looking at the highest and best use for our some of our Waltham suburban assets are Lexington suburban assets.
Douglas T. Linde: We deem that the value of those assets.
John P. Kim: Over the long term as life science facilities would be better than as quote unquote traditional office facilities and so we effectively cleared out some buildings. So $10 50 Winter Street as an example, and reservoir place and the other Bay colony buildings.
Douglas T. Linde: And so we effectively cleared out some buildings. So 1050 Winter Street is an example, and Reservoir Place and the other Bay Colony buildings, which are where the predominant amount of our availability is, were effectively cleared out for those purposes. And unfortunately, the market has not been helpful to us.
John P. Kim: Which are where the predominant amount of our availability is where we're effectively cleared out for those purposes and unfortunately the market.
Douglas T. Linde: And so we're managing that availability. But quite frankly, we've had the opportunity to lease some of that space to office companies, and we've made the decision, at least in one case, that we were better off holding off that building and doing it as a life science building when the appropriate economic model makes sense, aka we have a tenant that wants to pay the right rent for that building. Then our other large availability is in Princeton, and our Princeton portfolio is premier property defined by the other assets in the greater Princeton area.
John P. Kim: It has not been helpful to us and so we're managing that availability, but quite frankly, we've had the opportunity to lease some of that space to two office companies and we've made the decision and at least in one case that we think are better off holding off that building and doing it as a life science building when the appropriate.
John P. Kim: Economic model makes sense AK, we have a tenant that wants to pay the right rent for that building than our other large availability is in Princeton and our Princeton portfolio is premier property defined by.
John P. Kim: The other assets in the greater <unk>.
Douglas T. Linde: And we probably have, on an activity level, more activity in Princeton right now than we do anywhere else in our New York portfolio on a relevant basis. I can't explain why the pickup has occurred during the first and the second quarters of 2024, but it has. It's predominantly associated with the pharmaceutical and life science industries, but not laboratories.
John P. Kim: Princeton area and we are we have probably on a on an activity level more activity in Princeton right now than we do anywhere else in our New York portfolio on a relative basis I cant explain why the pickup as occurred during the first and the second quarters of 2024, but it has its predominantly.
John P. Kim: Associated with.
John P. Kim: The pharmaceutical and life science industries, but not lab.
Douglas T. Linde: It's companies that are in that business that have an SG&A function. And Hillary, you can comment on the Princeton market, and I'll let Brian comment on the Walton market. Sure, thanks, Doug.
John P. Kim: <unk> that are in that business, but that have an SG&A functions.
John P. Kim: Hilary you can comment on that.
Hilary: The Princeton market and I'll, let Brian comment on the Waltham market.
Hilary J. Spann: As Doug said, we've seen an incredible pickup in leasing activity in the Princeton market in the first and second quarters. While, you know, and that includes signed leases, but also leasing activity that continues now, and we expect to be executed in the second and third quarters. A lot of it, as referenced, is new activity, but some of it includes clients that exist in the portfolio of Carnegie Center today and who have expressed needs to expand, both from consolidation of business units or expansion of lines of business and from an increased experience of return to office. And so it's a pretty diverse set of reasons that people are expanding. But to Doug's point, the campus is pretty highly concentrated with pharmaceuticals and, in particular, foreign pharmaceuticals.
Hilary: Sure. Thanks, Doug.
Hilary: As Doug said, we've seen any credible pickup and.
Hilary: Leasing activity in the Princeton market in the first and second quarters.
Hilary: While and that includes signed leases, but also leasing activity that continues now and we expect to be executed in the second and third quarters.
Hilary: Lot of it as referenced is new activity. Some of it includes clients that exist in the portfolio.
John P. Kim: <unk> center today, and you'll have express needs to expand.
John P. Kim: Both from consolidation of business units, our expansion of lines of business and from an increased experience have returned to office.
Hilary J. Spann: And that is where the bulk of the demand is coming from. And so we're incredibly encouraged by the amount of leasing activity. And we expect to see additional signed leases coming out of it in the coming quarters. This is Bryan Koop for Waltham.
John P. Kim: And so it's a pretty diverse set of reasons that people are expanding but to doug's point.
John P. Kim: The.
John P. Kim: Campus is pretty highly concentrated with pharmaceuticals, and in particular foreign pharmaceuticals, and that is where the bulk of the demand is coming from.
John P. Kim: So we're incredibly encouraged by the amount of leasing activity and we expect to see additional signed leases coming out of it in the coming quarters.
Bryan J. Koop: I'll continue to echo what Doug talked about, and we intentionally call it an urban edge market because it is less than 10 miles from downtown Boston, and that's an attribute that shouldn't be taken lightly in terms of the commute and also the density of the population surrounding that Waltham market. Some further color on what Doug brought up, we are seeing a difference between the east side of I-95, which is all the attributes of an urban project, and maybe for the analysts who are very familiar with this, attributes that we have in rest, and others.
John P. Kim: This is Bryan koop for Walt them all.
John P. Kim: I'll continue to Echo, what Doug talked about and we intentionally Colorado urban edge market because it is less than 10 miles from downtown Boston and that's natural Butte that shouldn't be taken lightly in terms of the commute and also the density of the population surrounding that Walt their market.
John P. Kim: Some further color on what Doug brought up we are seeing a difference between or the east side of our 95, which has all the attributes of urban project and maybe for the analysts who are very familiar with this attributes that we have in reston taller.
Bryan J. Koop: We are seeing more amenities, taller buildings, et cetera. We continue to see that access on the highway is going to improve there. We put in a new ramp last year, and there is a forecast for more there. Where we are seeing some weaknesses in those assets that Doug mentioned, like the Bay Colony, which have attributes that are very similar to the conventional suburban office building spread out. It feels more rural, but the location is actually very close.
John P. Kim: Tolerability things more amenities et cetera, and we continued to see access on the highway is going to improve there we put a new ramp in last year and there is forecast for more there where we are seeing some.
John P. Kim: Weaknesses in those assets that Doug mentioned like the Bay colony, which have attributes that are very similar to the conventional suburban office buildings spread out.
John P. Kim: Feels more rural but exit location is very close.
Bryan J. Koop: That is where there is a little bit of weakness, but we continue to believe that Waltham is an urban edge market and quite different than the conventional suburbs that most real estate people would describe. Thank you. And I see our next question comes from the line of Blaine Heck from Wells Fargo. Please go ahead. Great, thanks. Good morning.
John P. Kim: That's where there's a little bit of weakness, but we continue to believe that Walt them is an urban edge market in quite different than the conventional suburbs that most real estate people with described.
John P. Kim: Okay.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Blaine Heck from Wells Fargo. Please go ahead.
Blaine Matthew Heck: Just following up on an earlier question, and maybe taking out the element of timing on occupancy, and just focusing on the lease rate this year and potential progression there, you talked about the large expirations still remaining at 680 Folsom and 7 times square, but when you think about those in conjunction with your leasing pipeline, which Doug, you said was 875,000 square feet plus, and Owen's characterization of the pipeline is growing in the back half of the year and into 2025, I guess, how much do you think you can move the lease rate up by as you look towards the end of the year? So when you use the word lease rate, you're talking about occupancy rate, right? Not economic rent rate, I'm assuming.
Blaine Matthew Heck: Great. Thanks. Good morning, just following up on an earlier question and maybe taking out the element of timing on occupancy and just focusing on the lease rate this year and potential progression there and you've talked about the large exploration still remaining at 680 Folsom. It's at the times square, but when you think about those in conjunction with your leasing pipeline.
John P. Kim: Which Doug you said was 875000 square feet, plus and Owens characterization of the pipeline is growing in the back half of the year and into 2025 I guess, how much do you think you can move the lease rate up.
John P. Kim: As you look towards the end of the year.
Speaker Change: So you wouldn't use the word lease rate youre talking about occupancy rate right not not economic rent rate I'm, assuming so again I think that it's going to be slow and steady so our projections. When we gave our guidance during the call in the first quarter was that we were going to hopefully be flat to where we ended 2020.
Douglas T. Linde: So again, I think that it's going to be slow and steady. So our projections when we gave our guidance during the call in the first quarter were that we were going to hopefully be flat to where we ended 2023 at the end of 2024. And then we'll continue to make additional progress on that. If you look at our expiration schedules, they're pretty manageable, right?
John P. Kim: <unk> three at the end of 2024, and then we will continue to make additional progress on that if you look at our expiration schedules, they're pretty manageable right. I mean, we have 5% to 6% expiring every year for the next four or five or six years and so we don't we need to lease space.
Douglas T. Linde: I mean, we have, you know, five to six percent expiring every year for the next four or five or six years. And so, you know, we don't we need to leave space. We need to gain market share, which is, again, my sort of point. And we are gaining market share in our markets. But it's, you know, when we do have technology companies expiring, we have to fight that, you know, that water coming at us.
John P. Kim: We need to gain market share, which is again my sort of point and we are gaining market share in our markets, but it's.
John P. Kim: When we do have technology company is expiring we have to fight that that water coming at us.
Douglas T. Linde: And so it's it's a it's a challenge to dramatically increase occupancy in the short term. But we are getting to the point where we believe occupancy will continue to moderate upward. Thank you. And I assure you our next question comes from the line of Michael Goldsmith from UBS. Please go ahead. Good morning.
John P. Kim: It is.
John P. Kim: It's a challenge to dramatically increase occupancy in the short term, but we are getting to the point, where we believe occupancy will continue to moderate upward.
John P. Kim: Okay.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Michael Goldsmith from UBS. Please go ahead.
Michael Goldsmith: Thanks a lot for taking my question. What are the economics of the new multifamily development? And how do you think about your cost of capital? And then, along the same lines? What is your thought process on the new commercial paper program? And what operational upsize options do you have?
Michael Goldsmith: Good morning, Thanks, a lot, particularly my question what are the economics of the new multifamily development. How do you think about your cost of capital and then along the same lines.
Michael Goldsmith: What is the thought process on the new commercial paper program and what ops upsize options do you have.
Michael E. LaBelle: Let's let Mike answer the commercial paper question, and then I want to answer the question on our return expectations for multifamily. So, you know, we decided to enter in this commercial paper program because we, you know, we're always looking for additional markets to access, especially in this environment. And it's the cheapest form of floating rate paper that we can issue.
Speaker Change: Let's let Mike answer the commercial paper question on O&M answer the question on the return expectations for multifamily.
Michael E. LaBelle: So we decided to enter into this commercial paper program.
Michael E. LaBelle: Because we.
Speaker Change: We're always looking for additional markets to access.
O&M: Especially in this environment and the cheapest form of floating rate.
O&M: On paper that we can issue.
Michael E. LaBelle: Historically, we've been primarily fixed rate. We're going to continue to be primarily fixed rate, but I think we will have a moderate amount of floating rate debt on a consistent basis over the foreseeable future. You know, right now, we have about a billion dollars of unsecured floating rate debt, and we have about seven hundred million dollars of joint venture unsecured debt. I think it will go down from there going forward, but we view using this commercial paper program as a consistent piece of our debt structure over the next several years.
O&M: Historically, we've been primarily fixed rate, we're going to continue to be primarily fixed rate.
O&M: But I think we will have a moderate amount of floating rate debt on a consistent basis over the foreseeable future.
O&M: Right now we have about 1 billion to of unsecured.
O&M: Floating rate debt and we have.
O&M: $700 million.
O&M: The joint venture unsecured debt.
O&M: I think it will.
O&M: Go down from there going forward.
O&M: But we view using this commercial paper program as a consistent piece of our debt structure over the next several years.
Michael E. LaBelle: And, you know, because we can save, you know, seventy five basis points by using it, it's a very liquid marketplace. We've got high credit ratings, so our access has been good. And now we've experienced it for the first couple of weeks, which has been very, very positive.
O&M: And because we can save 75 basis points by using it its a very liquid marketplace.
O&M: Got high credit ratings. So our access has been good and now we've experienced it for the first couple of weeks.
Owen David Thomas: So we're building an investor base in it. So it just felt like, you know, an additional arrow in our quiver from a capital perspective and a lower cost of capital. Both drove that.
O&M: She has been very very positive. So we're building an investor base on it.
O&M: So we just felt like.
O&M: Additional arrow in our quiver from a capital perspective.
O&M: And lower cost of capital both drove that decision.
Owen David Thomas: Yeah, it's Oh, and let me address the 121 Broadway development. You know, as I described in my remarks, this is a notable building, it's the tallest building in Cambridge. And it's also a very high quality residential tower given the finishes and our design and planning. Due to coordination with the development of the vaults for Eversource, The project is not expected to deliver its first units until late 2027 and expected to stabilize not until the second quarter of 2029.
O&M: Yes.
Speaker Change: Let me address the 121 Broadway development as I described in my remarks. This is a notable building it's the tallest.
Speaker Change: Building in Cambridge, and it's also a very high quality residential tower, given the finishes in our design and planning.
Speaker Change: Due to coordination with the development of the vault for ever source.
Speaker Change: The project is not expected to deliver its first units until late 2027 and expected to stabilize not until the second quarter of 2029.
Owen David Thomas: So again, you have to think about this project as part of the overall East Cambridge development that we've been working on and talking to all of you about for the last two or three years. So the forecast returns on the 121 Broadway development alone are below our typical thresholds for a development.
Speaker Change: So again you have to think about this project as part of the overall East Cambridge development that we've been working on and talking to all of you about for the last two or three years. So the forecast returns on the 121 Broadway development alone.
Speaker Change: Below our typical thresholds for a development. However, if you look at the yields that we're receiving from the entire entitlement package. So that includes 121 Broadway. It includes $2 90, Binney Street and it includes what we think we can get with the remaining commercial entitlements that we still.
Owen David Thomas: However, if you look at the yields that we're receiving from the entire entitlement package, so that includes 121 Broadway, it includes 290 Benny Street, and it includes what we think we can get with the remaining commercial entitlements that we still have, those projected returns do meet our development hurdles. And then to the extent that we are looking at new stick builds, are our expectations that those returns are going to be meaningfully higher than in urban development.
Speaker Change: Have those projected returns do meet our development hurdles.
Speaker Change: And then to the extent that we are looking at new stick built.
Speaker Change: Our expectation that those returns are going to be meaningfully higher than in urban development and so we're talking about yields and well in excess of 6%.
Owen David Thomas: And so we're talking about yields well in excess of six percent. And that's what we need to consider starting a new residential development in 2024-2025. Thank you. And I assure you our next question comes from the line of Ronald Kamdem from Morgan Stanley. Please go ahead. Hey, thanks so much.
Speaker Change: And that was that's what we need to consider starting a new residential development in 2020 for 2025.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Ronald Camden from Morgan Stanley. Please go ahead.
Ronald Kamdem: Just a quick two-parter. The first is on occupancy expectations for a pickup in the back half of the year. You talked about sort of the strength in back bay and Park Avenue. Uh, but those markets are, you know, have relatively higher, Transcribed by https://otter.ai. That's part one. Part two is just a quick, any sort of update on life sciences demand. Obviously, we're seeing a better fundraising environment. Curious what you guys are seeing on the ground. So the answer to your first question is, it's pretty what I would refer to as granular.
Ronald Kamdem: Hey, Thanks, so much just a quick two parter. So the first is on the occupancy expectations for a pickup in the back half of the year.
Ronald Kamdem: <unk> talked about sort of the strength in back Bay and Park Avenue.
Ronald Kamdem: But those markets are relatively higher occupancy versus the rest of the portfolio. So I guess I'm trying to understand where is the biggest sort of occupancy gains expectations in the back half is it the stronger markets or is it other parts of the portfolio like the suburban.
Ronald Kamdem: That's part one part two is just a quick any sort of update on life Sciences demand. Obviously, we're seeing a better fund raising environment curious what you guys are seeing on the ground.
Speaker Change: So the answer to your first question.
Speaker Change: It's pretty what I would refer to as granular.
Douglas T. Linde: It includes occupancy pickups in buildings like the General Motors building, where we are in active conversations with tenants right now to take some space pretty quickly in 2024. It's in Princeton, where, as Hilary described, we have a pipeline of activity. And we believe some of those transactions will happen in 2024. They are in the greater, you know, metropolitan Washington, D.C. market, primarily in Reston, Virginia, where we have a significant pipeline of active smaller deals that are going to occur in 2024.
Speaker Change: It includes occupancy pickups in buildings like the General Motors building, where we are in active conversations with tenants right now to take some space pretty quickly in 2024.
Speaker Change: It's in Princeton, whereas Hilary described we have a pipeline of activity.
Speaker Change: And we believe some of those transactions will happen in 2024, it's in the greater Metropolitan Washington D. C market, primarily in Reston, Virginia, where we have a significant pipeline of active smaller deals that are going to occur in 2024.
Douglas T. Linde: It's the activity that I described in WALFAM; almost all of that activity is expiring or vacant space, and the majority of that will land in 2024. So it's kind of everywhere. And there's not really anything I would refer to as the ticket that's going to dramatically change things one way or the other.
Speaker Change: The activity that I described in Waltham, almost all of that activity is.
Speaker Change: Expiring or vacant space and the majority of that will land in 2024.
Speaker Change: So it's kind of everywhere and Theres, no really what I would refer to as <unk>.
Speaker Change: Big.
Speaker Change: Ticket, that's going to dramatically change things, one way or the other.
Douglas T. Linde: And so, you know, again, that's why we're saying we think we're going to get back to where we were, which is effectively, you know, the 88 plus or minus percent occupancy by the end of 2024. And look, I hope that we see some positive surprises in addition to that where tenants move into space earlier. The lease, we believe the leases will get signed. But the question and you know, you've heard me say this before, is we just don't necessarily have a good handle on what the timing is going to be for when we can start recognizing revenue relative to whether the space has been demolished or we're doing a turnkey build up where we're in control of it and getting decisions made by the you know, by our clients in terms of what they want in the space and having all that work to the point where they're actually physically able to occupy the space in 2024, which would mean that it would it would be able to be in part of our occupancy role, you know, numbers.
Speaker Change: And so again, that's why we're saying we think we're going to get back to where we were which is effectively the <unk>.
Speaker Change: 88, plus or minus percent occupancy by the end of 2024 and look I hope that we see some positive surprises in addition to that where tenants move into space earlier. The lease we believe the leases will get signed.
Speaker Change: Question and you've heard me say this before is we just don't necessarily have a good handle on what the timing is going to be for when we can start recognizing revenue relative to whether the space has been demolished or we're doing a turnkey buildout. We're we're in control of it and getting decisions made by the by our clients in terms of what they want in this space and having all that work.
Speaker Change: To the point, where theyre actually physically able to occupy the space in 2024, which would mean that it would it would be able to be in part of our occupancy roll numbers.
Douglas T. Linde: On life science, I think life science demand is relatively slow. I'll let Bryan describe the life science demand in the greater Boston market. And I'll let Rod take a poke at, you know, talking about what's going on in South San Francisco.
Speaker Change: Yeah.
Speaker Change: On life Science, I think life science demand is relatively slow I'll, let Brian described the life science demand in the greater Boston market and I'll, let Rob take a focus at all.
Speaker Change: Thinking about what's going on in South San Francisco.
Bryan J. Koop: So in the Waltham market, which is the only spot we have vacancy; we don't have any in Cambridge. I'd say it's the same as it was in the previous quarter, but maybe a little bit more encouraging. Where we are encouraged is, as you noted, yes, there is more funding coming back into the life science sector. But also, when we talk to clients, we are encouraged by the fact that they are producing the things that they said they were going to do to their investors, and there is encouragement in terms of the possibility of products down the pipeline.
Speaker Change: So in the Walter end market, which is the only spot we have vacancy we don't have any in.
Speaker Change: Cambridge.
Speaker Change: I'd say, it's the same as it was in the previous quarter, but maybe a little bit more encouraging where we are encouraged as you noted was yes. There is more funding coming back into the life science sector, but also when we talk to clients. We are encouraged by the fact that they are.
Speaker Change: Producing the things that they said they were going to do to their investors and there is.
Speaker Change: Encouragement in terms of the possibility of products down the pipeline. So that's where we're getting most of our encouragement is that the clients. We have are very excited about what they have going on.
Bryan J. Koop: So that's where we're getting most of our encouragement is that the clients we have are very excited about what they have going. Yeah and out on the coast in South San Francisco our one project is the 651 Gateway building and that is the it's basically a converted office building 16 stories and that building is completed and we've done three deals in there three full floor deals and those tenants have are in various stages of moving in but in terms of new activity it's been very slow the few deals that are in the market tend to be smaller call them you know 10 to 20,000 feet not the 200,000 foot deals that were in the market several years back so that section has been in quiet but our buildings actually very well positioned to attract that demand that is in the market we have some space that is going to be built on a spec basis we're gonna do a full floor which is gonna be ready to accept that tenant when they're when they're out there so but the larger, Thank you. And I show our next question comes from the line of Richard Anderson from Wetbush Security. Please go ahead. Hey, thanks. Good morning, everyone.
Speaker Change: Yes.
Speaker Change: Just in South San Francisco are one project the 651 Gateway building and that is the right Thats basically converted office building 16 stories.
Speaker Change: And that building is completed and we've done three deals in the three full floor deals.
Speaker Change: And those tenants.
Speaker Change: We are in various stages of moving in but in terms of new activity, it's been very slow.
Speaker Change: The few deals that are in the market tend to be smaller.
Speaker Change: Column 10 to 20000 feet not the 200 thousands with deals that were in the market. Several years back so that section has been quiet.
Speaker Change: But our buildings actually very well positioned.
Speaker Change: Attract that demand that is in the market we have.
Speaker Change: That is going to be built on a spec basis, we're going to do a full floor, which we can be ready except that tenant when there.
Speaker Change: When they're out there, but the larger tenants are not yet.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Richard Anderson from Wedbush Securities. Please go ahead.
Rodney C. Diehl: If you know, first a comment, I'd say if you were most any other REIT, you would have normalized out your six cents or a lot of it and be up today, not down three percent. So I commend you for your commitment to FFO as defined by NAREIT. I think you'll be rewarded for that over time.
Richard Anderson: Hey, Thanks, good morning, everyone.
Richard Anderson: First the comment I'd say, if you were most any other REIT you would've normalized out your <unk> lot of it and be up today not down 3%. So I commend you for commitment to <unk> as defined by NAREIT I think it will be rewarded for that over time.
Richard Anderson: On to my question: you know, just take a peek at the CASEL data, and utilization in the office space is still sub-60 percent. I don't know how that compares to your premier asset type, but utilization is still not near where it was pre-pandemic. Is there a scenario where the BXP story can still work long term if we're looking at, you know, sort of a permanent condition of underutilization of office, or do you feel like you need to get fully back to have a long-term story to tell?
Speaker Change: On to my question.
Richard Anderson: Just taking a peek at the castle data and still utilization in the office space is sub 60%.
Richard Anderson: Don't know how that compares to your premier.
Richard Anderson: Asset type but.
Richard Anderson: Utilization is still not near where it was pre pandemic is there a scenario where the BSP story can still work long term. If we're looking at sort of a permanent condition of Underutilization of office or do you feel like you need to get fully back.
Richard Anderson: I'm just curious, you know, what you think about the, you know, so the very long term when it comes to your office utilization. Thanks. Yeah, let me tell you that it was a lot to unpack there.
Speaker Change: To have a long term story to tell I'm just I'm just curious.
Speaker Change: What you think about sort of the very long term when it comes to your office utilization.
Owen David Thomas: But let me take a stab at it. So first of all, CASEL data is highly used in the media, and I think in the financial community. And I think it's a very imperfect measure of office demand. It's a decent measure of perhaps footfall, you know, in an urban area over a period of time. So what do I mean by that? Many of the owners of Premier workplaces don't use CASEL systems in their buildings.
Speaker Change: Yes.
Speaker Change: Yes, let me.
Speaker Change: A lot to unpack there, but let me take a stab at it so first of all castle data.
Speaker Change: His highly used in the media and I think in the financial community and I think its a very imperfect measure of office demand if a decent measure of perhaps footfall in an urban area over a period of time, so what do I mean by that.
Owen David Thomas: So we're not really exactly sure which buildings are being measured. And it doesn't take into account that the office market is less occupied today from a leasing standpoint. And it also looks at data over the course of a whole week, which is less relevant for office occupancy. What you really need to focus on are peak days. So I know everybody uses it, but it's not really a reflection of our experience, which is the following.
Speaker Change: Many of the owners of Premier workplaces don't use capital systems and their building. So we're not really exactly sure.
Speaker Change: Which buildings are being measured it doesn't take into effect that the office market is less occupied today from a leasing standpoint, and it also looks at data over the course of a whole week, which is less relevant for office occupancy what you really need to focus on its peak days. So I know everybody uses it but it's not really a reflex.
Speaker Change: One of our experience which is the following.
Owen David Thomas: We have turnstile data for roughly half of our 55 million square feet under management, and we have carefully picked out same store data for buildings that are essentially the same level and have the same level of leasing as they did in March of 2020 as they do today. And when you look at that data in New York, our buildings are basically at the same level of turnstile swipes Tuesday to Thursday as they were in March of 2020.
Speaker Change: We have.
Speaker Change: Turnstile data for roughly half of our 55 million square feet under management and we have carefully picked out same store data for buildings that are essentially the same level. It has the same level of leasing as they did in March of 2020 as they do today and when you look at that data.
Speaker Change: In New York, our buildings are basically at the same level of turnstiles Swipes Tuesday Thursday as they were in March of 2000, and so New York is basically back the other thing that's interesting. It's Friday was already slow before the pandemic.
Owen David Thomas: So New York is basically back. The other thing that's interesting is Friday was already slow before the pandemic, and Monday is coming up. So there's I actually say New York is basically back to the way it was, certainly three days a week.
Speaker Change: And Monday is coming up so there is I actually would say New York is basically back to the way it was.
Owen David Thomas: Boston is at about 75% on that measure, and the only place where it's really lagging is in San Francisco, which is about 45 or 50% for those peak days. And peak days are important because if you're a user of space, you need to have space for your people when they're all coming in. So it's not across the whole week. It's what it is on those peak days.
Speaker Change: Certainly three days a week Boston is at about 75% on that measure and the only place where it's really lagging is in San Francisco, which is about 45 or 50% for those peak days and peak days are important because if you are a user of space you need to have space for your people when they are all coming in so it's not across the whole week.
Speaker Change: It's what is it on the peak days.
Owen David Thomas: So again, we see improvement. As I tried to say over and over in my remarks, we think the issue, the reason our leasing is slower today is actually not because of work from home. It's because of the earnings growth of the clients that we serve. We're a provider of services to businesses, not consumers. Those businesses are not growing their earnings.
Speaker Change: So again, we see improvement.
Speaker Change: As I tried to say over and over in my remarks, we think the issue. The reason our leasing is slower today is actually not because of work from home, it's because of the earnings growth of the clients that we serve.
Speaker Change: We are a.
Owen David Thomas: And if they're not growing their earnings, they're not hiring people and they're not taking space. I think as earnings start to grow again, which frankly, we're seeing right now in the first quarter, our leasing will pick up. And I think Doug did a very good job of articulating some of those green shoots that we're already seeing that we should experience later this year.
Speaker Change: We're a provider of services to businesses not consumers those businesses are not growing our earnings and if they're not growing their earnings they are not hiring people and theyre not taking space I think as earnings start to grow again, which frankly, we're seeing right now in the first quarter, our leasing will pick up and I can Doug did a very good job of articulating some of those green shoots that we're.
Speaker Change: Already seeing that we should experience later this year.
Speaker Change: Rich just.
Douglas T. Linde: And it's just from a sort of macro thesis perspective, I think what is, 100% clear is that new construction is not part of the vernacular in 2024-2025, which means unlikely you're going to see buildings delivered that aren't already under construction. And there is stuff under construction, but you're not going to be seeing new buildings delivered in any of these metropolitan areas for the next five plus years, right? That's how long it takes to build a building.
Speaker Change: From a sort of macro thesis perspective, I think what is <unk>.
Speaker Change: 100% clear is that new construction is not part of the vernacular in 2020 for 2025, which means unlikely youre going to see buildings delivered that arent already under construction and there is stuff stuff under construction, but youre not going to be seeing new buildings delivered in any of these metropolitan areas for the next five plus years right. That's how long it takes to build a build.
Douglas T. Linde: You know, look at the timeframes associated with these press releases about a potential new building in Midtown Manhattan. And so, if our thesis continues to be accurate, and Owen has described the difference between the premier and sort of the other portions of the office, Inventory, there is going to become less and less premier space, and the premier space will continue to pick up its occupancy, its leased percentages, and we will see the fruits of that in the properties that we have in all of our marketplaces. And again, you know, I harp back to sort of this dislocation that's occurring.
Speaker Change: Look at the Timeframes associated with these press release releases about a potential new building in Midtown Manhattan.
Speaker Change: So if if our thesis is is continues to be accurate and O&M describe the difference between the premier and sort of other portions of the office.
Speaker Change: Inventory, there is going to become less and less premier space and the Premier space will continue to pick up.
Speaker Change: Its occupancy it's leased percentages and we will see the fruits of that in the properties that we have in all of our marketplaces and again.
Speaker Change: By harp back to sort of dislocation that's occurring what we're seeing in Washington, DC relative to the number of buildings that people would deem to be quote unquote a to a minus buildings that are in capable at this point of making a leasing transaction because there is no capital available because the buildings are quote unquote under.
Jake J. Stroman: What we're seeing in Washington, D.C., relative to the number of buildings that people would deem to be, quote unquote, A to A minus buildings that are incapable at this point of making a leasing transaction, because there is no capital available because the buildings are, quote unquote, underwater, defined as there's too much debt and the equity holders are saying, we're not prepared to put capital in for the benefit of the lender. It's changing the characteristics of how leasing is occurring.
Speaker Change: Or water defined as theres too much debt and the equity holders are saying, we're not prepared to put capital in for the benefit of the lender.
Speaker Change: It's changing the characteristics of how leasing is occurring and Jake maybe you can spend a minute talking about sort of the dynamic of where tenants can look if they want to go into a building in a market by the way, which has a very significant availability problems though.
Jake J. Stroman: And Jake, maybe you can spend a minute talking about the sort of dynamics of where tenants can look if they want to go into a building in a market, which, by the way, has a very significant availability problem. Yeah, I would just maybe second what Doug just noted in that we are seeing really great activity across all of the buildings in our D.C. and Northern Virginia portfolio. The weight of the troubled assets and the dislocation in our region is really kind of playing to our favor.
Jake: Yes, I would.
Jake: Maybe second what Doug just noted and that we are seeing really great activity across.
Jake: All of the buildings in our DC and Northern Virginia portfolio.
Jake: The weight of the troubled assets and the dislocation in our region is really kind of playing to our favor.
Jake J. Stroman: You know, most of our buildings, you know, are preeminent workplaces, and there's definitively a flight to quality, but there's also a real flight to certainty across the brokerage community, who want to do deals with somebody who can do deals. So we're seeing that playing out in our favor in our region for sure. Thank you. And I show our next question comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead. Hi, good morning.
Jake: Most of our buildings.
Speaker Change: Our preeminent workplaces and there is definitively a flight to quality, but there's also a real flight to certainty.
Speaker Change: The brokerage community, who wants to do deals with somebody who can do deals. So we're seeing that playing out in our favor in our region for sure.
Speaker Change: Thank you.
Caitlin Burrows: Maybe just occupancy at 535 Mission, which is a newer build, LEED Platinum, has fallen below 60%, I think, related to WeWork. So, Doug, I know you talked about how South of Market is lagging a bit, but can you talk about the demand for that vacancy and the bigger picture? How does that inform your view of the health of demand at the highest end of the market in SOMA ahead of first-generation leases rolling over at that building in Salesforce in the coming years? Sure, Caitlin.
Speaker Change: And I show. Our next question comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead.
Caitlin Burrows: Hi, Good morning, maybe just occupancy at $5 35 mission, which is newer builds LEED platinum has fallen below 60% I think related to <unk>.
Caitlin Burrows: So Doug I know you talked about how south of market is lagging a bit but can you talk about the demand at that vacancy and then bigger picture how does that inform your view of the health of demand at the highest end of the market in summer ahead of first generation leases rolling over at that building and sales force and the company, Yes sure sure Caitlin.
Douglas T. Linde: I'll make a brief comment and let Rod describe it. So, WeWork actually is in negotiation to remain in all the space that we have with them at that building, and we have an expiration with Zillow, truly a slash Zillow, their vac consolidation, which occurred earlier, and that's where the majority of the availability is. And, Rod, you can describe the sort of leasing prospects there and how things are looking in our portfolio at South of Market. Yeah, so that's right.
Douglas T. Linde: I'll make a brief comment let rob describe it. So we work actually is in negotiation to remain in all of the space that we have with them at that building and we have an exploration.
Douglas T. Linde: With Zillow Trulia <unk> zillow, there that consolidation, which occurred earlier and Thats, where the majority of the availability is and Brian you can describe sort of leasing prospects there and how things are looking at our portfolio of South America.
Rodney C. Diehl: The space that you're referring to is in the low rise of that building. And it's the former Zillow slash Trulia space. So we've had some activity on it. We've had better activity on a couple of floors up top.
Rob: Yes, so that's the space that you're referring to is in the low rise of that building and it's the former Zillow slash Trulia space. So we've had some activity on it better.
Rob: Better activity on a couple of floors of top in fact, we just completed a full floor of spec suites on the 11th floor, which is getting excellent.
Speaker Change: Response from the markets, we expect to get that leased up quickly.
Speaker Change: The balance of the summer portfolio I mean earlier on the call 680 Folsom.
Rodney C. Diehl: In fact, we just completed a full floor of spec suites up on the 11th floor, which is getting excellent response from the market. So we expect to get that leased up quickly. The balance of the SOMA portfolio, I mean, we earlier on the call, the 680 Folsom availability was mentioned. That's the 200,000 square feet. We just got that space back.
Speaker Change: <unk> ability as Matt mentioned, that's the 200000 square feet, we just got that space back.
Speaker Change: Technically today is the first thing we have is a vacant space.
Speaker Change: However, we've been marketing it for some time and we've had activity on that we've been trading paper with various groups.
Speaker Change: There is another tenant that we're chasing right now so that so we're getting good looks were getting our shots in these deals.
Speaker Change: I'd say that we've had more activity on north of market. So I'd say, our Embarcadero Center property, frankly is getting a little bit more attention and some of the south of market stuff is.
Rodney C. Diehl: Technically, today is the first day we have it as a vacant space. However, we've been marketing it for some time, and we've had activity on that. We've been trading paper with various groups. There's another tenant that we're chasing right now, so we're getting good looks.
Rodney C. Diehl: We're getting our shots at seeing these deals. I would say that we've had more activity on north of market. So I'd say our Embarcadero Center property, frankly, is getting a little bit more attention than some of the south of market stuff is. I think that's just the nature of where the demand's coming from. More of the traditional companies tended to be attracted to Embarcadero Center, whereas tech is still focused more south of market. There is some space that is on the sublease market at Salesforce Tower that Salesforce has, and they've been marketing it, and it's getting good looks as well. So I mean, there are groups out there.
Speaker Change: I think thats, just the nature of where the demand is coming from more of the traditional companies tended to be attracted to Embarcadero center, whereas tech is still focus more south south of market.
Speaker Change: There is some space that is on the sublease market at Salesforce tower that Salesforce has and they.
Speaker Change: Been marketing it and it's getting good looks as well so I mean there are.
Speaker Change: <unk> groups out there.
Speaker Change: So I'm very confident that we're going to basically start.
Speaker Change: Okay.
Speaker Change: Thank you.
Rodney C. Diehl: So I'm very confident that we're going to get that space leased up. Thank you. And I show our next question comes from the line of Vikram Malhotra from Mizuho. Please go ahead. Thanks for the question. Just two quick ones.
Speaker Change: Yes.
Speaker Change: And I show. Our next question comes from the line of Vikram Malhotra from Mizuho. Please go ahead.
Vikram L. Malhotra: One, just, I guess, Mike, I just want to clarify, you know, in what you outlined for the guidance adjustments. Do you mean just sort of where the curve has shifted overall? Or were you actually baking in sort of some sort of rate cut?
Vikram L. Malhotra: Thanks for taking the question just two quick ones one just.
Vikram L. Malhotra: Yes, Mike I just wanted to clarify.
Vikram L. Malhotra: In the what you outlined for the guidance adjustment.
Vikram L. Malhotra: Do you mean, just sort of where the curve has shifted overall or what are you actually baking in some sort of rate cuts.
Michael E. LaBelle: Unknown Speaker In your, in your guidance and then secondly, I guess, you know, just in terms of achieving that occupancy uptake in the second half, you know, is sort of the one cue leasing run rate. Do you also anticipate that to move up just given where expirations are? So on the interest rate expectation, we, you know, we have included an additional, a rate cut in our expectations late in the year. And I think if that rate cut does not occur, it won't have a meaningful impact on what our guidance range is because of when it is within the year.
Vikram L. Malhotra: In your in your guidance.
Vikram L. Malhotra: And then secondly, I guess just in terms of achieving that occupancy.
Vikram L. Malhotra: Uptick in the second half.
Vikram L. Malhotra: It is sort of the <unk> run rate you outside of speed that to move up.
Vikram L. Malhotra: Given where explorations are thanks.
Vikram L. Malhotra: So on the interest rate expectation.
Vikram L. Malhotra: We have included an additional a rate cut and our expectations late in the year and I think of that rate cut does not occur and won't have a meaningful.
Vikram L. Malhotra: Full impact on what our guidance ranges because of when it is within the year.
Michael E. LaBelle: So, we'll just have to see, you know, what happens with the inflation numbers in the Fed as we kind of think about where rates might be going both later this year and next year. But I don't think, you know, if there's no cuts this year, it's going to have a significant impact to our guidance. What was the other question was on leasing? I didn't.
Speaker Change: So we'll just have to see.
Speaker Change: What happens with the inflation numbers and the fed as we kind of think about where.
Speaker Change: Where rates might be going both later this year and next year, but I don't think.
Speaker Change: If theres no cuts this year, it's going to have a significant impact to our guidance.
Speaker Change: What was the other question was on leasing occupancy.
Speaker Change: Can you restate the question Q1 run rate.
Speaker Change: The Q1 run rate.
Michael E. LaBelle: So the occupancy for Q1 was down a little bit, and for Q2, it's going to be down a little bit again because of the two expirations that Doug talked about, which are the expiration of 680 Folsom and Times Square Tower. And then we don't have any significant expirations of individual size in the back half of the year.
Speaker Change: So the occupancy for Q1 was down a little bit in for Q2.
Speaker Change: It's going to be down a little bit again, because of the two explorations that Doug talked about which is the exploration of <unk> hundred 80 Fulsome in times Square Tower, and then we don't have significant exploration.
Michael E. LaBelle: And that's when many of the signed leases that we already have done, which Doug talked about, which is I think it's 815,000 square feet for the company of which over 650,000 square feet, is in 2024. Plus the LOIs that we have will start to take hold. And so that gives us confidence that the occupancy will stabilize after the second quarter and hopefully start to move northward after that. That's our expectation.
Speaker Change: Of individuals' sized in the back half of the year.
Speaker Change: And that's when many of the signed leases that we already have done which Doug talked about which is I think it's 815000 square feet for the company of which over 650000 square feet.
Speaker Change: As in 2024, plus the LOI that we have we will start to take hold and so thats what gives us confidence that the.
Speaker Change: Occupancy will stabilize after the second quarter and hopefully start to move northward after that that's our expectation.
Speaker Change: Thank you.
Omotayo Tejumade Okusanya: Thank you. And I'm sure our next question comes from the line of Omotayo Okusanya from Deutsche Bank. Please go ahead. Hi, yes, good morning, everyone. I just wanted to go back to the guidance for the year.
Speaker Change: And I show. Our next question comes from the line of almost <unk> <unk> from Deutsche Bank. Please go ahead.
Michael E. LaBelle: So if we take the first quarter, and we take the midpoint of the second quarter, you're about at 344. The midpoint of guidance is 704. We're talking about rates higher for longer, and occupancy probably picking up in the fourth quarter or so of the year. So could you just help us walk us through the acceleration of earnings in the back half, what the drivers of that will be? So, there are really three, I think, you know, impacts that are going to help us in the third and fourth quarters.
Alonso: Hi, yes.
Alonso: Good morning, everyone. Just wondering if you go back to the guidance for the year. So if we take first quarter would take the midpoint of the second quarter at $3 44 midpoint of guidance with revenue for we're.
Unknown Executive: We're talking about rate higher for longer occupancy, probably picking up in fourth quarter or so of the year. So could you just help us walk us through the acceleration of earnings in the back half what what the drivers of that will be.
Alonso: So.
Alonso: Clearly theres really three I think.
Speaker Change: Impacts that are going to help us in the third and fourth quarter.
Michael E. LaBelle: The first is that we expect NOI from the portfolio to be up, and we expect that to occur because of the occupancy improvement that we have talked about. So, I would expect that both the third and fourth quarters will show higher portfolio NOI than what we had in the first and second quarters. The other is G&A. So, G&A is seasonally high in the first and second quarter because of the timing of the vesting schedules, as well as taxes that are paid on payroll.
Speaker Change: The first is we expect NOI from the portfolio to be up and we expect that to occur because the occupancy improvement that we talked about.
Speaker Change: So I would expect the third both third and fourth quarter.
Speaker Change: We will show higher portfolio NOI than what we have in the first and second quarter.
Speaker Change: The other is G&A. So G&A is seasonally high in the first and second quarter, because just the timing of the vesting schedules.
Speaker Change: As well as taxes.
Michael E. LaBelle: So, you know, that's a pretty meaningful move between quarters. It could be, you know, between five and seven cents lower in the third quarter and the fourth quarter from where it is today. And then the last piece is we do expect to have interest income be lower than it is today as we fund our development pipeline. I mean, that is offset a little bit by capitalized interest, but I see our interest expense as being slightly lower next quarter and then stable, and our interest income will drop a little bit sequentially by quarter as we spend on our development pipeline.
Speaker Change: That are paid on payroll.
Speaker Change: So that's a pretty meaningful move.
Speaker Change: Between quarters, it could be between five and seven lower than the third quarter and the fourth quarter from where it is today.
Speaker Change: And then the last pieces, we do expect to have interest income to be lower than it is today as we fund our development pipeline I mean.
Speaker Change: That is offset a little bit by capitalized interest, but I see our interest expense.
Speaker Change: As being slightly lower next quarter, and then stable and our interest income will drop a little bit sequentially by quarter as we spend on our development pipeline. So those are really the three things that are driving the.
Michael E. LaBelle: So those are really the three things that are driving the improvement in our FFO in the third and fourth quarter to achieve the midpoint of the guidance range. Thank you. And I show our next question comes from the line of Michael Griffin from Citi. Please go ahead.
Speaker Change: The improvement in our <unk> in the third and fourth quarter to achieve the midpoint of the guidance range.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Michael <unk> from Citi. Please go ahead.
Michael Anderson Griffin: Great, thanks. You know, just maybe on the debt side, Owen, I'd be curious to get your thoughts. I mean, are banks willing to lend on new office development projects yet? And if so, you know, what kind of interest rate do you think they would lend at?
Michael Goldsmith: Great. Thanks.
Michael Goldsmith: Just maybe on the debt side I'd be curious to get your thoughts I mean are banks willing to lend on new office development projects yet.
Michael Goldsmith: And if so what kind of interest rate you think they would lend that and what kind of yield would you need to.
Michael Goldsmith: To justify undertaking the development.
Michael E. LaBelle: And what kind of yield would you need to have to justify undertaking the development? So this is Mike. I'll respond to this, and the rest of the team can add on. Lenders, in general, are not getting payoffs.
Michael E. LaBelle: So this is Mike.
Speaker Change: Respond to this and the rest of the team can add on.
Michael E. LaBelle: Lenders in general are not getting payoffs.
Michael E. LaBelle: So, you know, typically, they have volume requirements that are pretty significant because they're constantly getting paid off and they need to replace and hopefully grow that. You know, in this environment, you know, their borrowers are not necessarily paying them off. So they're not excited about increasing their exposure to commercial real estate and office properties right now. So I think as a whole, banks are, you know, not excited to provide lending. I think they would be more likely to lend on a stabilized piece of property at an appropriate debt yield than do a construction loan.
Speaker Change: So typically they have volume requirements that are pretty significant because they are constantly getting paid off and they need to replace and hopefully grow that.
Speaker Change: In this environment.
Speaker Change: <unk>.
Speaker Change: Their borrowers are not necessarily paying them off so theres not excited about increasing their exposure to commercial real estate and office properties right now so I think as a whole banks are.
Speaker Change: Not excited too.
Speaker Change: Two.
Speaker Change: Provide lending I think they would be more likely to lend on a stabilized piece of property at an appropriate.
Speaker Change: That yield.
Michael E. LaBelle: I think there's very little in the way of construction financing available out there, particularly anything speculative. If you went to a bank and you had a fully leased property, you know, maybe you could get that done.
Speaker Change: And then do a construction loan I think theres very little in the way of construction financing available out there particular anything speculative.
Speaker Change: He came to our banking that are fully leased property.
Michael E. LaBelle: But again, the pricing is going to be, I don't know, $300 to $400 over SOFR. So SOFR is at 5.3%. So you're talking about 8% to 9% more money. So it's really, really hard to make sense of that when that is the case.
Speaker Change: Maybe you could get that done, but again the pricing is going to be I don't know three.
Speaker Change: 300 to 400 over.
Speaker Change: Sulfur so silver's at five 3%. So you are talking about 8% to 9% money.
Speaker Change: So it's really really hard to make sense of that when that is the case. So again, Doug talked about very little in the way of new construction going on and I think the bank financing market is another limiting factor.
Owen David Thomas: So again, you know, Doug talked about very little in the way of new construction going on. And I think the bank financing market is another limiting factor in that picture. Just to add to that on your question on development yield. So, you know, let's divide this between, you know, office life science versus residential. So on office life science, you know, our target When rates were very low, we were in the 6 to 7% range. And I'd say those have gone up, you know, at least 200 basis points. And, as Mike described, it's very difficult to get financing.
Speaker Change: To that.
Speaker Change: Sure.
Speaker Change: Yes, just to add to that on your question on development yields so let's divide this between.
Speaker Change: Office life science versus residential so on office life science our targets.
Speaker Change: When rates were very low.
Speaker Change: We're in the 6% to 7% range and I'd say those have gone up.
Speaker Change: At least 200 basis points.
Michael E. LaBelle: And also, as I described in my remark, you know, the cost of development has gone up. And part of those costs are the inflation that Doug described, but also part of it is the yield requirements, you know, given higher rates, so that's contributing. And then on the residential, the way we've always thought about it was, you know, 100 basis points over exit cap, with no, with untrended rents. And so today, a little hard to gauge, but you know, there is some evidence of high quality residential trading, say in the mid five.
Speaker Change: <unk>.
Speaker Change: As Mike described it's very difficult to get financing and also as I described in my remarks.
Speaker Change: The cost of development has gone up and part of those costs are the inflation that Doug described but also a part of it is the yield requirements given higher rates, so that's contributing and.
Speaker Change: Then on the residential the way we've always thought about it was a 100 basis points over.
Speaker Change: Exit cap with no.
Speaker Change: With untrained and rents and so today little hard to gauge, but there is some evidence of high quality residential trading say in the mid five so I think in terms of development yield you've probably at least in the mid sixes on residential and <unk> and.
Michael E. LaBelle: So I think in terms of development yield, you've probably at least in the mid sixes on residential and I, and for us to engage in that we need a joint venture partner, as we have at Skymark, which is our development that's going on right now in Reston. I think the other, just one other trend in banks financing that's important to note, is there's an up tearing going on. And there's a analysis of profitability going on by these banks of their relationships.
Speaker Change: And for us to engage in that we need a joint venture partner as we have at Sky, Mark which is our development that's going on right now in Reston.
Michael E. LaBelle: So if you have a broad relationship, where you're providing other kinds of fee services and other things with these banks, and they can see a profitable relationship today and growing going forward, they're going to be willing to provide capital if they're not seeing that they are exiting relationships.
Speaker Change: I think the other just one other trend in bank financing that is important to note is there is an upturn going on.
Speaker Change: And there is a analysis of profitability going on by these banks have their relationships. So if you have a broad relationship.
Speaker Change: Where you are providing other kind of fee services and other things with these banks and they can see a profitable relationship today and growing going forward.
Speaker Change: They're going to be willing to provide capital where theyre not seeing that they are exiting relationships.
Michael E. LaBelle: So that again benefits us because we have a very broad set of relationships that we have, and we do these bond deals where these banks get, you know, fee income and things like this. And so the relationship profitability we have is acceptable. So we are, you know, we continue to have banks wanting to add to our, you know, our stable and our financing. And you've seen that.
Speaker Change: So that again that benefits us because we have a very broad set of.
Speaker Change: Relationships that we have when we do these bond deals where these banks get fee income and things like this.
Speaker Change: And so we the relationship profitability. We have is acceptable. So we're we continue.
Speaker Change: To have banks wanting to add to our are stable and our financing and you've seen that when last year, we added three or four new banks to our facility.
Michael E. LaBelle: I mean, last year we added three or four new banks to our facility. We continue to have banks that are interested in looking at what we're doing and are calling. Mike, additional information in the market that we are from under is that as there just goes down, their criteria for making a loan, of course, goes up, and the underwriting of the actual development firms that have a particular property has been incredibly closer. And also the criteria for pre-leasing plus credit and the capital stack of equity. And it's just not there right now. And they're passing on everything that is in any way weak.
Speaker Change: We continue to have banks that are interested in looking at what we're doing in our calling on us.
Speaker Change: Additional information on the market that we are lenders also is that is there.
Speaker Change: It goes down their criteria for making alone of course goes up and the underwriting of the actual development firms that have a particular property has been incredibly closer.
Speaker Change: Also the criteria for pre leasing plus credit.
Speaker Change: And the capital stack of equity and it is just not there right now and they're passing on everything that is in any way week on a development front.
Michael E. LaBelle: on a development front. Thank you. And I show our next question comes from the line of Dylan Burzinski from Green Street. Please go ahead. Hi guys.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Bill and Brzezinski from Green Street. Please go ahead.
Dylan Robert Burzinski: Thanks for taking the question. Just wanted to go back to tech leasing and some of the comments that you made in your prepared remarks, Owen, about a lot of these companies overcommitting to space during the pandemic and then being currently in a digestion process. I guess, you know, if we sort of weigh that with how much earnings have grown for a lot of these companies over the last several years versus the headcount that has grown despite some of the layoffs that have gone on, I mean, how long do you expect this digestion process to last? Is this sort of a 25 event, a 2026 event?
Unknown Attendee: Hi, guys. Thanks for taking the question just wanted to go back to tech leasing some of the comments that you made in your prepared remarks about a lot of these companies over committing to space during the pandemic and then being apparently in a digestion process I guess.
Unknown Attendee: Way that way.
Speaker Change: How much earnings have grown for a lot of these companies over the last several years versus the head count that has grown despite some of the layoffs that have gone on I mean, how long do you expect this digestion process to last is this sort of 25 event in 2026 event. Just curious how you guys are sort of thinking about that and you discussed and maybe in your discussions with a lot of these centers what they are.
Speaker Change: Telling you guys.
Owen David Thomas: Just curious how you guys are sort of thinking about that and maybe in your discussions with a lot of these tenants, what they're telling you guys, short answer. I mean, you're touching on a very key issue as it relates to the health of the. The answer is we don't really know. You know, but I agree with what you said. Our instinct is yes, there was some over commitment. There's some digestion going on. There's some shedding going on.
Speaker Change: Short answer I mean, youre touching on a very key issue as it relates to the health of the op.
Speaker Change: The answer is we don't really know.
Owen David Thomas: Several tech companies have taken charges, and put sublease space out in the market, but that seems to have slowed down recently. But our instincts and what we've seen in past cycles is that, at some point, those companies are healthy. They're in the center of all the innovation that's going on in the nation. They have a bright future. They're going to grow their earnings, and I think they will be back in the space market. But trying to figure out the exact timing of that is very challenging.
Speaker Change: But I agree with what you said our instinct is yes, there was some over commitment there's some digestion theres some shedding going on several tech companies have taken charges sublease space out in the market.
Speaker Change: That seems to have slowed down recently, but our instinct and what we've seen in past cycles is.
Speaker Change: At some point those companies are healthy they are in the center of all the innovation that's going on in the nation, they're going to they have a bright future they're going to grow their earnings and I think that will be back in the space market, but trying to figure out the exact timing of that is very challenging.
Alexander David Goldfarb: Thank you. And I show our next question comes from the line by Alexander Goldfarb from Piper Sandler. Please go ahead. Hey, good morning. Morning, Owen, or Doug, or whoever wants to take it.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.
Douglas T. Linde: So I'm going to ask a two parter question, but it's all related to the same. As you guys think about investment, you know, future investment to grow the company, a multi-part, you know, whether your land holdings in northern Virginia still have any potential for data centers, if there's any office to resi conversion, because of the new laws that may present opportunities to you, whether it's existing assets or to invest in an asset that would be convertible.
Alexander David Goldfarb: Hey, good morning.
Alexander David Goldfarb: Good morning.
Alexander David Goldfarb: And Doug or whoever wants to take it.
Alexander David Goldfarb: So I'm going to ask a two parter, but its all related to the same as you guys think about investment.
Alexander David Goldfarb: Future investment to grow the company a multipart.
Alexander David Goldfarb: Whether your land holdings in Northern Virginia still have any potential for data centers, if theres any office to resi conversion because of the new laws that may present opportunities, whether it's existing assets or to invest in an asset that would be convertible and three what do you think it takes for Lexington Ad <unk>.
Douglas T. Linde: And three, what do you think it takes for Lexington Ave next to Grand Central to finally benefit from what's going on west of Grand Central to come east of Grand Central? Well, there's a lot there. You violated Helen's rule of one question, but that's okay, Alex, we'll still answer them all.
Alexander David Goldfarb: Grand Central to finally benefit from whats going on west of Grand Central to come East of Grand Central.
Alexander David Goldfarb: Well.
Speaker Change: There is a lot there you violated helens rule of one question. If that's okay, Alex we'll still answer them all so.
Douglas T. Linde: Anyway, I'll just start. Lexington Avenue is doing well. I mean, where we are at 53rd Street, it's right where the subway station is, and 601 is fully leased, or very close to it, and 599 is well on its way. So, and 399, I mean, it's on Park Avenue, but its back end is on Lex, right at the same location, and those buildings are performing extremely well. I think that location on Lexington Avenue is also unique because of the access to the subway.
Alexander David Goldfarb: Anyway, I'll just start Lexington Avenue is doing well and where we are at 50 <unk> Street is right where the subway station is in 601 and is fully leased or very close to it and $5 99 is well on its way so and 399.
Alexander David Goldfarb: Park Avenue, but.
Alexander David Goldfarb: Backend is on lax right at those same location and those buildings are performing extremely well I think that location on Lexington Avenue is also unique because of the access to the subway so.
Douglas T. Linde: So, on residential, so. I don't think there's any asset, I don't want to say any assets, but I don't think there's going to be a significant opportunity in our portfolio of existing assets to convert them to residential. I mean, frankly, the only ones that are empty are ones that we've emptied out for life science conversion and some, they all have some level of leasing and I'm not sure they have the physical characteristics for it.
Alexander David Goldfarb: On residential so.
Alexander David Goldfarb: Don't think theres any assay I don't want to say any assets, but I don't think theres going to be a significant opportunity in our portfolio of existing assets to convert them to residential I mean frankly.
Alexander David Goldfarb: The only ones that are empty are ones that we've emptied out for.
Alexander David Goldfarb: Life Science conversion and they all have some level of leasing and I'm not sure. They have the physical characteristics for it that all being said.
Douglas T. Linde: That being said, we do have land parcels that you see in our Supplement, and in several cases, we are working with local communities to rezone that land from commercial to residential. And given some of the regulatory overlay that's going on in many of our communities and states, that process is a little less challenging than it used to be.
Alexander David Goldfarb: We do have land parcels that you see in our supplemental and in several cases, we are working with local communities to re zone that land from commercial to residential and given some of the.
Douglas T. Linde: So, I think that's where we will benefit. And then I do think there may be opportunities, and we're certainly looking at them for our residential team to get involved in office building conversions of buildings that we don't currently own. You know, we've always felt that this is going to be an important commercial real estate. It's certainly one that's going to unfold slowly, but you're seeing it unfold right now.
Alexander David Goldfarb: Regulatory overlay that's going on in many of our communities and states that process is a little less challenging than it used to be so I think thats, where we will benefit and then I do think there may be opportunities and we're certainly looking at them for our residential team to get involved in office building conversions of buildings that we don't currently own.
Alexander David Goldfarb: We've we've always felt that this is going to be an important.
Douglas T. Linde: And there's an increasing number of projects in many of our markets. Yeah, and just to put a little bit of meat on the sort of carcass of that on the residential conversion side for us. So at 17 Hartwell Avenue, in Lexington, we have a 30,000 square foot office building that we will demolish, and we are getting entitlements to build 350 plus or minus residential units. In Shady Grove, which is a piece of land that we bought, hopefully, to think about doing some life science.
Alexander David Goldfarb: In commercial real estate, it's certainly one that's going to unfold slowly, but youre seeing it unfold right now and there is increasing number of projects in many of our markets and just just to put a little bit of meat on on the sort of carcass of that on the residential conversion side for us. So it's 17 Hartwell Avenue in Lexington, we have a 30.
Alexander David Goldfarb: <unk> square foot office building that we will demolish and the we're getting entitlements to build 350, plus or minus residential units.
Alexander David Goldfarb: Shading growth, which is the piece of land that we bought hopefully to have thought about doing some life science. We've said, we're going to pivot and we're going to do hopefully some life science at some point, but we're going to be residential and so we are we're selling a piece of parcel to a tangible townhome developer and we're also working on our residential portion of that development and then.
Douglas T. Linde: We said we'd pivot, and we're going to do, hopefully, some life science at some point, but we're going to do residential. And so we are, we're selling a piece of property to a townhome developer, and we're also working on a residential portion of that development. And then third, we bought some older, relatively inexpensive office buildings with an existing parking structure.
Alexander David Goldfarb: Third we bought some older.
Alexander David Goldfarb: Relatively inexpensive office buildings within existing parking structure.
Douglas T. Linde: In Herndon, Virginia, we just received approval to convert that site to multifamily, both townhomes and multifamily apartments, and we are likely to sell the townhomes and potentially either sell or develop the residential. So we are actively doing that and then jumping to the other side of the country, our assets at North First, which we've owned for quite some time, which we had hoped to build some kind of office on. We are now working with the City of San Jose on converting a portion of that site to a residential entitlement, and we would build some housing and potentially provide a parcel for affordable housing to somebody else who would build that.
Alexander David Goldfarb: Herndon, Virginia, and we just received approval to convert that site to multifamily both townhome and.
Alexander David Goldfarb: Multifamily.
Alexander David Goldfarb: <unk> and we are likely to sell the townhomes and potentially either sell or develop the residential. So we are actively doing that and then jumping to the other side of the country.
Alexander David Goldfarb: Our assets at North first which we've owned for quite some time, which we had hoped to build.
Alexander David Goldfarb: Some kind of office on we are now working with the city of San Jose on converting a portion of that site to a residential.
Alexander David Goldfarb: <unk> and we would build some residential and potentially provide a parcel for affordable housing.
Douglas T. Linde: And then, obviously, down in Santa Monica, there's a real question about what Santa Monica Business Park will become over the next, call it, you know, decade or two. But it would not be unlikely to see not just office development there but also other uses, including some kind of residential on that site. So this is sort of something that we are actively working on as we speak. It's not about converting an office building in Times Square to residential, or an office building in the CBD of Washington, D.C., to residential, or an office building in Back Bay or in the San Anselmo District of Boston to residential.
Alexander David Goldfarb: Somebody else, we build that and then obviously down in Santa Monica.
Alexander David Goldfarb: A real question about what Santa Monica business Park will become over the next call. It Deca.
Alexander David Goldfarb: Decade or two.
Alexander David Goldfarb: But it would not be unlikely to see not just the office development there, but to also see other uses including some kind of residential on that site. So this is sort of something that we are working actively on as we speak it's not about converting a office building in times.
Alexander David Goldfarb: Square to residential or an office building in the CBD of Washington D. C. The residential or an office building in back Bay or in the financial district of Boston to residents our buildings do not.
Douglas T. Linde: Our buildings do not line up with the kinds of assets that likely would be potentially convertible if the economics actually worked, which they don't right now, over the next, call it, four to five years. Thank you. And I show our next question comes from the line of Upal Rana from Key Bank Capital Markets. Please go ahead.
Alexander David Goldfarb: The lineup with the kinds of assets that likely would be potentially convertible if the economics actually work, which they don't right now.
Alexander David Goldfarb: Over the next call it four.
Alexander David Goldfarb: Four to five years.
Alexander David Goldfarb: Yes.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of power of runoff from Keybanc capital markets. Please go ahead.
Upal Dhananjay Rana: Great, thanks for taking my question. Just real quick, you know, Doug, thanks for your color on the existing pipeline and the update on the Carnegie Center. I wanted to see if you could give us an update on the ongoing backfill at 680 Folsom and 7 Times Square. Why don't I let you? I mean, I think Rod, you mentioned 680 Folsom before, but you can reiterate that, and then Hilary, you can talk about 7 Times Square. Yeah, just real quick on 680.
Speaker Change: Great. Thanks for taking my question.
Speaker Change: Real quick Doug Thanks for your color on existing pipeline and the update on the Carnegie Center I wanted to see if you can give us an update on the ongoing backfill at 680, Folsom and seven times square.
Speaker Change: Why don't I, let.
Speaker Change: I mean, I think Rod you mentioned security fulsome before but you can reiterate that in an Hilary you can talk about seven times square.
Rodney C. Diehl: Yes, we have 200,000 feet on the low-rise portion of that building. And it's excellent space. It's some of the best space in the market. It's a nice floor plate size. It's 34,000 feet.
Speaker Change: Yes, just real quick on 680, yes, we have 200000 feet on the low rise portion of that building and excellent.
Speaker Change: Excellent space to some of the best space in the market. It's a nice floor plate size, its 34000 feet and its got high ceilings and it's excellent space. So we've been marketing it and we've had proposals that we've been pursuing and so we're going to continue to do that on that space, but it's it's Greg it's very high quality.
Speaker Change: And our portfolio.
Hilary J. Spann: And it's got high ceilings and it's excellent space. So we've been marketing it, and we've had proposals that we've been pursuing, and so we're going to continue to do that in that space. But it's, it's very, it's very high-quality space in our, On Seven Times Square, I think the team here in New York has done a fantastic job of converting some of the space that was sublet by the major law firm tenant in that building to direct tenancies. And in the first quarter, we signed a direct lease at Seven Times Square for 27,000 square feet.
Speaker Change: Seven times square.
Speaker Change: Thank the team here in New York has done a fantastic job of converting some of the space that was sublet by the major law firm tenant in that building to direct tenancies and in the first quarter. We signed a directly you said seven times square for 27000 square feet. So we're continuing to chip away at that.
Speaker Change: Pending vacancy I will say that the times square submarket unique more or less among markets in Midtown is exhibiting reasonable sort of weakness.
Speaker Change: In terms of demand.
Speaker Change: <unk>, a little bit with the <unk>.
Speaker Change: Streetscape and some of the other things that are going on there, which we are working very hard with the city.
Speaker Change: And other folks in the neighborhood to address but.
Hilary J. Spann: So we're continuing to chip away at the pending vacancy. But I think we are encouraged by our ability to convert sublease tenants to direct tenants. We are pursuing every tenant that's in that sub-market that makes sense for the building. And we're just going to continue to chip away at it.
Speaker Change: But I think we are encouraged by our ability to convert.
Speaker Change: Sublease tenant to direct tenants, we are pursuing every tenant that's in that sub market that makes sense for the building.
Hilary J. Spann: But at the moment, I wouldn't describe it as a sub-market that's got lots of large tenant demand sort of breaking down the doors, just chipping away at it lease by lease. Thank you. And I show our last question in the queue comes from. Camille Bonnell from Bank of America.
Speaker Change: And we're just going to continue to chip away at it but at the moment.
Speaker Change: I wouldn't describe it as a sub market thats got lots of large tenant demand sort of breaking down the doors, just chipping away at it lease by lease.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: And I show on last question in the queue comes from.
Speaker Change: <unk> been now from Bank of America. Please go ahead.
Jing Xian Tan Bonnel: Municipalities are looking for ways to manage their revenue streams, and recently, the mayor of Boston has been talking about raising commercial property taxes. I understand you can pass a lot of these costs through to tenants, so not much of an impact on your operating margins, but do you get a sense that these potential tax increases could change a tenant's view of whether they take a lease in the market versus going somewhere else?
Speaker Change: Thanks for taking the question municipalities are looking for ways to manage their revenue streams and recently the Bayer Boston has been talking about raising commercial property taxes.
Speaker Change: I understand you can pass a lot of these costs through to tenant so not much of an impact to your operating margins, but do you get a sense that these potential tax increases could change at tenants feel on whether they take a lease in the market versus going somewhere else.
Jing Xian Tan Bonnel: And does this make investing in Boston less attractive, adding upward pressure to cap rates? So let me let me take a stab at that. And I'll let Brian, you know, provide his perspective as well. We don't think passing expenses onto tenants is a good way to treat our clients. And we do everything we possibly can to reduce our operating expense escalations every single year. And we spend hours and hours finding ways to, you know, change the things that we're doing so that we do not have to have dramatic increases.
Speaker Change: Does this make investing in Boston less attractive, adding upward pressure to cap rates.
Speaker Change: So let me, let me take a stab at that and I'll, let Brian provide his perspective as well.
Speaker Change: We don't think passing expenses onto tenants is a good way to treat are our clients.
Speaker Change: And we are we do everything we possibly can to reduce our operating expense Escalations every single year, and we spend hours and hours finding ways to change the things that we're doing so that we do not have to have dramatic increases.
Douglas T. Linde: The commercial property sector currently bears a disproportionate portion of the benefit or the burden of taxes in the city of Boston. As assessments change and residential assessments go up and commercial assessments go down, obviously, we all understand what's going on with regard to overall environmental issues associated with interest rates, valuations, occupancy, and capital costs. It's very hard for us to think it would be a good thing for the commercial office property sector to bear a higher proportion of those expenses than it currently does.
Speaker Change: The commercial <unk>.
Speaker Change: Property sector.
Speaker Change: Currently bears a disproportionate.
Speaker Change: Portion of the benefit or the burden of taxes and the city of Boston.
Speaker Change: As assessments change in residential assessments go up and commercial assessments go down obviously, we all know understand what's going on with regards to overall.
Speaker Change: Environmental issues associated with interest rates valuations occupancy capital costs.
Speaker Change: Hard for us to think it would be a good thing for the commercial office property sector to bear a higher proportion of those expenses than they are currently are bearing.
Douglas T. Linde: We don't think that these types of policies are good for our business or good for the companies that occupy our buildings. We're hopeful that, you know, these types of, ideas will not, you know, do the day and that there will be pushback from the constituents in the various communities that will sort of see that it probably isn't the right time to be asking the commercial sector to pay to have a larger proportion of the burden on any kind of regulation, given the challenges associated with our business, right?
Speaker Change: And so where we don't think that those at these types of.
Speaker Change: Policies are good for our business or good for the companies that occupy our buildings.
Speaker Change: We're hopeful that these types of.
Speaker Change: Okay.
Speaker Change: We will not.
Speaker Change: Through the day and that there will be pushed back from the constituents in the various communities that will sort of see that it probably isn't the right time to be asking the commercial sector.
Speaker Change: To have a larger proportion of the burden on any kind of regulation given the challenges associated with our business.
Douglas T. Linde: Really, no further clarification, Doug, other than we have made it quite clear to political leadership, our position. Thank you. This concludes our Q&A session at this time. I'll turn the call back over to Owen Thomas for closing remarks. Yeah, no further comments.
Speaker Change: Ryan.
Speaker Change: Really no further clarification, Doug other than we have made it quite clear to political leadership our position.
Owen David Thomas: Thank you all for your attention and interest in VXP. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you for watching!
Speaker Change: Thank you.
Speaker Change: This concludes our Q&A session at this time I'll turn the call back over to Owen Thomas for closing remarks.
Owen David Thomas: No further comments. Thank you all for your attention and interest in DXP.
Owen David Thomas: Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Owen David Thomas: Okay.
Owen David Thomas: Okay.
Owen David Thomas: [music].
Owen David Thomas: Okay.
Owen David Thomas: [music].
Owen David Thomas: Okay.