BXP, Inc. — 2024 Q1

Yes. Thanks, Steve. So of the activity that we have in our pipeline, and I'm going to give you 2 different sort of pipeline numbers. So the 875,000 square feet of stuff that we have going on, about 20,000 square feet of that is development and the rest of it, the other 865,000 square feet -- 855,000 square feet are all existing portfolio deals and the majority of it is on available existing space.

Sure. Thanks, Doug. Steve, 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 and the common areas and the amenities that we've put in place. And so we are starting to see a pickup in our activity there.

Yes. 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. 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.

Yes. Thanks, Doug. So yes, last year, of course, was a big year for AI in San Francisco. There was 2 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. 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 this is -- let me start. This is Doug, and I'll let [indiscernible] make a comment as well. We are committed to the geographic locations that we currently have occupancy and vacancy. 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 some of our Waltham suburban assets in our Lexington suburban assets.

Sure. Thanks, Doug. As Doug said, we've seen an incredible pickup in leasing activity in the Princeton market in the first and second quarters 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.

This is Bryan Koop for Waltham. 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.

So when you use the word lease rate, you're talking about occupancy rate, right, 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 2023 at the end of 2024 and then we'll continue to make additional progress.

Well, let's let Mike answer the commercial paper question, and then I want to answer the question on our return expectations for multifam.

So we decided to enter in this commercial paper program because 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.

Yes. It's Owen, let me address the 121 Broadway development. 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.

So the answer to your first question is it's pretty what I would refer to as granular. 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. It's in the greater Metropolitan Washington, D.C. market, primarily in Western Virginia, where we have a significant pipeline of active smaller deals that are going to occur in 2024.

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, 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, call it, 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.

Yes. Just 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 3 deals in there, 3, 4 floor deals, and those tenants are in various stages of moving in.

Yes. Let me -- that was a lot to unpack there, but let me take a stab at it. So first of all, Castle 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 in an urban area over a period of time.

And Rich, just from a sort of macro thesis perspective, I think what is a 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 such stuff under construction, but you're not going to be seeing new buildings delivered in any of these metropolitan areas for the next 5-plus years, right? That's how long it takes to build the building.

Yes. I would just maybe second what Doug just noted 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.

Sure, Cait. 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. It's truly a flash Zillow, their fact consolidation which occurred earlier and that's where the majority of the availability is. And Rod, you can describe sort of leasing prospects there and how things are looking in our portfolio in South market?

Yes. So that's right. The space that you're referring to is in the low rise of that building and it's the former Zillow/Trulia space. We've had some activity on it. We've had better activity on a couple of floors up top. In fact, we just completed the 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.

So on the interest rate expectations, 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.

So Omotayo, there's really 3, I think, impacts that are going to help us in the third and fourth quarter. The first is we expect NOI from the portfolio to be up, and we expect that to occur because the occupancy improvement that we have talked about. So I would expect that both third and fourth quarter will show higher portfolio NOI than what we have in the first and second quarter.

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. So 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.

Yes. Just to add to that, on your question on development yields. So let's divide this between office, life science versus residential. So on office, life science, our targets when rates were very low, we're in the 6% to 7% range. And I'd say those have gone up at least 200 basis points.

The other -- just one other trend in bank financing, it's important to note is there's an upturning going on and there's an analysis of profitability going on by these banks of their relationships. So if you have a broad relationship where you're providing other kind 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 where they're not seeing that, they are exiting relationships.

Mike, the additional information market that we've wondered also is that as that 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 on the development front.

Short answer. I mean, you're touching on a very key issue as it relates to the health of the [indiscernible] the answer is we don't really know. But I agree with what you said, our instinct is, yes, there was some over commitment. There's some digestion. There's some shedding going on, several tech companies have taken charges sub lease space out in the market. That seems to have slowed down recently.

Well, there's a lot there. You violated Helen's rule of one question. That's okay, Alex. We'll still answer them all. So 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 and is fully leased or very close to it and 599 is well on its way. So and 399 -- I mean on Park Avenue, but it's back end is on the lag, right, at the same location and those buildings are performing extremely well.

Yes. And just to put a little bit of meat 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 30,000 square foot office building that we will demolish and that we are getting entitlements to build 350 plus or minus residential units.

Why don't I let -- 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.

Yes. Just real quick on 680. 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 and it's got high ceilings and it's excellent space.

On 7 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 7 Times Square for 27,000 square feet. So we're continuing to chip away at the pending vacancy.

[indiscernible] are looking for ways to manage the 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 to your operating margins. But do you get a sense that these potential tax increases could change a tenant's view on whether they take a lease in the market versus going somewhere else? And does this make investing in Boston less attractive, adding upward pressure to cap rates?

So let me take a stab at that, and I'll let Bryan provide his perspective as well. We don't think passing expenses on to 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 change the things that we're doing, so that we do not have to have dramatic increases.

Really no further clarification, Doug, other than we have made it quite clear to political leadership our position.

Yes, no further comments. Thank you all for your attention and interest in BXP.