Good morning, and welcome to Boston Properties' third quarter earnings call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question and answer session. At this time, I'd like to turn the conference over to Ms. Sara Buda, Vice President, Investor Relations for Boston Properties. Please go ahead.
Great. Thank you, operator, good morning, and welcome to the Boston Properties third quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the investor relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the investor relations section of our website. 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 of 1995.
Although Boston Properties 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 the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chief Executive Officer, Doug Linde, President, and Mike LaBelle, Chief Financial Officer. Also, during the question and answer portion of our call, Raymond Ritchey, Senior Executive Vice President, and our regional management teams will be available to address any questions. Now I'd like to turn the call over to Owen Thomas for his formal remarks.
Okay. Thank you, Sara, good morning, everyone. Just wanted to give everyone a heads up that we have the Red Sox victory parade coming down Boylston Street at 11 o'clock this morning. I'll do my best to keep all the Red Sox fans around the table in their seats after 11. Before I get into the details of the quarter, let me take a step back and review the macro environment we're experiencing and why it is an exciting time to be part of Boston Properties. The markets where we operate continue to display strong economic performance. Unemployment is at record lows, our tenants continue to seek high-quality, Class A properties to attract and retain their most precious asset, which is talent. The urbanization trend continues as companies and their employees seek the opportunity, community, and amenities of urban locations.
Boston Properties is in the middle of and benefiting from these macro trends. The investments we have made over the past few years in new development are positioning us for growth. With a high level of pre-leasing in new developments and a long average lease term in the existing portfolio, our growth is durable and much less sensitive to where we might be in the business cycle. Finally, our tenant base is diversified across market sectors and our assets across geographies, which insulates us in the event of a market shift within a sector or geography. Our strategy of developing and owning Class A office properties in top-tier gateway cities continues to serve us well and provides a long-term competitive advantage in creating value for shareholders.
Now, let's get into the details of the third quarter, which was another strong one for us as we made additional progress towards achieving our annual and long-term goals. Specifically, this quarter, we generated FFO per share $0.02 above the midpoint of our prior forecast and $0.01 above street consensus. On a year-over-year basis, FFO per share grew 4% in the third quarter. We also increased our full-year guidance for 2018 by $0.02. We also increased our regular quarterly cash dividend by 19% to $0.95 per share, the largest dividend increase in the history of Boston Properties. Finally, we provided a strong outlook for 2019, forecasting FFO per share growth of 7% at the midpoint of our range. We have been describing for some time our inflection point of growth based on our strong development pipeline and in-service portfolio performance.
With our FFO momentum this quarter and strong outlook for 2019, that inflection point is now evident. Moving to business highlights in the quarter, we leased 1.5 million sq ft, bringing us to 5.4 million sq ft leased in the first three quarters, well above our historical averages. We increased our in-service portfolio occupancy 70 basis points from last quarter to 91.1%. We continue to lead in sustainability performance, having been recently ranked in the top 8% of all property companies globally by GRESB, and we earned LEED Platinum certification for the Salesforce Tower in San Francisco. Overall, it was a strong quarter, and I am pleased with our ongoing financial performance and the underlying strength of the business as we approach 2019. Now, let's discuss the market environment and trends impacting the business.
Overall economic conditions remain very positive, with third quarter US GDP growth recently reported at 3.5%. Which is still quite strong, but down from 4.2% in the second quarter. 134,000 jobs were created in September, which is also healthy, but below the monthly average over the past year. The unemployment rate dropped to a 50-year low of 3.7%. Notwithstanding the strength of the U.S. economy, capital markets became volatile over the last month. The Fed increased rates 25 basis points in September, is signaling, at least for now, an additional increase before the end of the year, and multiple increases in 2019. The ten-year U.S. Treasury increased rapidly earlier this month to over 3.2% and is currently trading a little above 3.1%, up only 10 basis points since our last earnings call and about 60 basis points since the beginning of the year.
A combination of interest rate increases, both realized and forecast, slowing economic growth, concerns about trade wars, uncertainty around the upcoming midterm elections, and the extended duration of the U.S. economic recovery have led to materially increased volatility in the equity markets and for REITs. We remain constructive on the market environment, notwithstanding the volatility. The positive impacts of economic growth to our leasing results far outweigh any negatives of the modest interest rate increases we have experienced so far. Further, the current level of long-term interest rates is favorable relative to historical norms and the returns we are experiencing in our new investments. While we are disappointed with the movements of our share price relative to our dividend increase and forecast growth, it does not impact our capital strategy in that we are not funding our new investments with public equity.
Our best use of capital today is launching new pre-lease developments and making select value-added acquisitions for which the yields are higher than both stabilized property acquisitions and the inferred cap rate in repurchasing our shares, notwithstanding their material discount to NAV. Our best and cheapest source of capital is debt financing, which we can utilize without materially changing our credit profile due to the new debt capacity provided by the income from our development deliveries. We have and will continue to sell select non-core assets, which raises capital on the margin. The sale of larger core assets is a less efficient funding source given significant embedded tax gains and the resultant special dividend requirements. We can accomplish our growth plan without accessing public equity capital given the debt capacity in delivered developments and, if needed, access to plentiful private equity capital.
In the private real estate market, transaction volume growth remains healthy. Specifically, U.S. large asset transaction volume in the third quarter increased almost 3% from the second quarter and 10% over the third quarter of 2017. Office represented 36% of the transaction volume for the quarter and increased 5% from the second quarter of 2018 and 3% year-to-date over 2017. Investor appetite remains strong with multiple significant office transactions agreed once again in our core markets at sub 5% cap rates. Examples of this include in Boston, the office and parking components of 121 Seaport in the Seaport District is under agreement to sell for $1,129 per sq ft and a 4.6% cap rate. This property comprises 400,000 sq ft and is 100% leased and is being purchased by a sovereign wealth investor.
In Los Angeles, Campus at Playa Vista is selling for a 4.5% cap rate and $1,031 a sq ft to a real estate pension advisor. This property is 325,000 sq ft and is 99% leased. Lastly, moving to San Francisco, 301 Howard in the SoMa district sold to a pension fund advisor for $919 a sq ft and a cap rate in the high 4% range. This property is 319,000 sq ft and fully leased. Now moving to our capital activities. Development continues to be our primary strategy for creating value. We remain very active pursuing both new pre-lease projects and sites for future projects. Since our last earnings call, we continue to progress our development pipeline activities. We delivered into service our 280-unit Proto residential project in Kendall Square and have leased approximately 49% of the residential units on track with our initial pro forma.
We commenced active development of our 1.1 million sq ft Reston Gateway project for Fannie Mae. This two-tower office complex is adjacent to the future Reston Town Center Metro station and is the first phase of our proposed 4.2 million sq ft mixed-use expansion of Reston Town Center on land we own and have now rezoned. This project alone will provide Boston Properties significant future growth opportunities. We commenced active development of our 100 Causeway office tower development after securing a 440,000 sq ft lease with Verizon Communications to anchor the 630,000 sq ft, 31-story building. This is the last phase of our mixed-use Hub on Causeway project in Boston. We are in discussions with an existing tenant at Kendall Center in Cambridge to redevelop 325 Main Street for their expansion. We hope to announce this investment by year-end and receive community approval in early 2019.
As part of the proposed plan, we would also develop a residential tower on the same city block as our 145 Broadway office property currently under development. Our current development and redevelopment pipeline stands at 14 office and residential projects comprising 7.6 million sq ft and $4.1 billion of investment for our share. Most of the pipeline is well underway, and we have $1.9 billion remaining to fund. The commercial component of this portfolio is 85% pre-leased, and aggregate projected cash yields are estimated to continue to be approximately 7%. These figures exclude the $360 million, 2100 Pennsylvania Avenue development in Washington, D.C., which we expect to commence next year, and the 325 Main Street redevelopment discussed earlier. Lastly, on capital activities, we are having an active year selling non-core assets and will most likely exceed our $300 million disposition target this year.
We recently closed the sale of Quorum Office Park in Chelmsford, Mass to the major tenant in the park for $35 million, and as a result, have completed $185 million in dispositions year to date. 1333 New Hampshire Avenue in Washington, D.C. is under contract for sale to close before year-end for $136 million or $430 a sq ft. Recall, this asset will be vacated by Akin Gump in 2019, and an as-is releasing of the building does not fit our current operating strategy. We continue to pursue recapitalization options for the 634,000 sq ft build to suit for the TSA currently under construction in Springfield, Virginia, in order to free up capital for our growing development pipeline. This transaction could close this quarter or next.
Lastly, we are in the market to sell 2600 Tower Oaks, 179,000 sq ft office building located in Rockville, Maryland, and the last asset in our preserve at Tower Oaks Business Park. This transaction can close by year-end or early 2019. In summary, we had a strong third quarter, delivered FFO per share ahead of expectations, increased our 2018 outlook, and materially increased our dividend. Finally, our growth plan for 2019 is now sharply in focus. Looking forward, significant growth for 2020 and 2021 should continue with our new investment wins and healthy leasing activity. Let me turn it over to Doug.
Thanks, Owen. Good morning, everybody. Before I get to the markets and make some comments on our leasing progress, I want to make an observation about capital and the office business. Our customers need to engage their employees to achieve great business outcomes, access to talent remains their top priority. When you're operating in a labor market where the unemployment rate is at historical lows, particularly for college or higher degree level employees who are our customers' employee base, space plays an important role in the valuation chain of the employee as they take that job. A year ago, we had our investor conference, we reviewed in detail all the work we had done to rejuvenate our older assets. I think I went through about 20 million square feet of projects that we had completed since 2000, largely in our CBD properties.
Then we presented the new designs and the sense of place that we're bringing to our developments, which encompass 15 million square feet delivered since 2000, and the 7.6 million square feet that Owen just described that's under development. When we do this work right, we get premium rents. In Boston, go see how we have transformed 100 Federal Street. You've all been to the Prudential Center retail makeover, which has made a dramatic difference here. The public spaces at Colorado Center are going to be completed in the second quarter of next year. By the summer, when you visit our campus at 53rd and Lexington, 599, 601, and 399, you are going to see a major transformation of the public spaces. These are generational investments that we're making. The one significant capital project remaining across our portfolio is the public space at Embarcadero Center.
We've owned the property since 1998. I think it'll be 20 years next week or the week after. This is the first major architectural and place-making project we have undertaken at the property. We are reinventing the lobbies now, ongoing. It's about a $60 million three-year project. Then we're planning another $80 million common year area and place-making investments over this three and a half million square foot complex. That's about $40 a square foot. We will continue to spend $1.50 to $2 a square foot per year on traditional CapEx across the portfolio year in and year out. Our portfolio has been fundamentally reinvented or is new. Let me start in San Francisco on our market comments. With all the recent deliveries of 100% leased buildings, the market absorption is at historical highs.
One research firm calculated that the vacancy rate in CBD buildings built since 2000 is under 1%. There continues to be more than a dozen 100,000 square foot office requirements in the market searching for space. We're going to do an event at Nareit next week where we will focus on the supply challenges in the area that are the result of the Prop M and the delays in the Central SoMa plan. Even if there is a little legislative relief, no one is expecting Prop M to be overturned, it won't manifest itself into new deliveries until the end of 2021 at best or later. The large blocks of contiguous available sublet space stemming from tenants that are moving to new construction have disappeared.
While transaction costs have not decreased, rent growth is up high single digits, and more importantly, leases now include annual escalations of between 2% and 3%. If you're doing a $90, 10-year deal, your average rent's over $104, and it ends up at $120 a sq ft. I shudder to think about the roll downs people are going to be talking about in 2028 or 2029. Our availability in the city is all at Embarcadero Center. This quarter, we completed 73,000 sq ft of office leasing at EC, including a 60,000 sq ft, three-floor tenant relocating to Embarcadero Center from outside, with just a 45% roll-up in gross rent. There are currently 7 available full floors at Embarcadero Center available, and we are negotiating leases or LOIs on every one of them.
In addition, we're in negotiations on 200,000 sq ft of late 2019 and 2020 renewals, those are renewals, and we are in lease on the 165,000 sq ft block that PwC will vacate in July of 2020, where the roll-up will probably be in excess of 50%. Silicon Valley has also seen a pickup of an activity. Transit-oriented projects are the preferred alternative, and we have commenced the re-entitlement efforts on our Plaza at Almaden project, which is just under a mile from the Diridon Transit Station adjacent to the planned Google Village. We hope to deliver up to 1.5 million sq ft, and we've already had conversations with a number of Silicon Valley tech companies about the project. In Mountain View, this quarter, we recaptured 40,000 sq ft and re-leased the space at a 40% net increase in rents.
We have some expected rollover, about 260,000 sq ft at the very end of 2019 in our single-story product, and that includes 180,000 sq ft relocation from a tenant that's consolidating into a new third-party development that's going to deliver sometime in 2020. Interesting that their lease expires in 2019, and we'll see how that all plays out, well after the lease expires. Our average expiring in-place rent on this space is $36 triple net, and the market's about $54 triple net. That's about a 50% increase. The Westside L.A. market remains steady with a number of large leases on the precipice of signing. Rents continue to be in the low to mid $5s, slightly higher than our initial underwriting at the Santa Monica Business Park to the low $6s, these are obviously monthly rents, at Colorado Center, where concessions have been pretty consistent for the past few quarters.
There are limited large block options west of the 405, as everyone knows, building new and large is a real challenge. At Colorado Center, we completed a 58,000 sq ft lease with a scooter rental organization, and we are in discussions for our last remaining 14,000 sq ft that would get us to 100% leased. We're assimilating the Santa Monica Business Park into our operations and have hired a dedicated leasing director in L.A. to handle our day-to-day activities at both properties. Switching to New York City. Overall leasing activity in the market continues to be strong, and conditions in Midtown are stable, meaning availability is steady with flat concessions and flat rental growth. Buildings that have invested capital have healthy activity.
Transactions are being completed in the high-end market, i.e., over $100 a square foot, at a pace pretty consistent with last year, where about 1.5 million square feet of relocations were signed. The space is still relatively moderate. In other words, in the third quarter, there were about 290,000 square feet of deals above $100 a square foot over 16 transactions, and the third and the fourth largest were 25,000 square feet, which was at our building at 760 Seventh Avenue, and 20,000 square feet. Last quarter, I described our activity at 399 Park. The picture remains the same. We are negotiating leases for the block on seven, eight, 10, and 10, 250,000 square feet, as well as the three of the four floors on 18 through 21.
We did have a 70,000-square-foot tenant walk away at lease execution in September after our call. We are already negotiating a replacement lease for that space. In addition, we completed an early recapture of 75,000 square feet that was leased through October of 2021, and a simultaneous lease with a new tenant that runs through 2035 at an 18% increase in gross rent. As we mentioned during our last call, we have signed a lease for 100% of the office space at 1590 53rd Street, and we expect that to commence at the end of 2019. Moving on to D.C. Activity in the District of Columbia continues to be restrained.
The good news is that the shared office operators continue to lease direct space, and more importantly, fill their communities with lots of associations and startups and individuals and even some educational organizations aggregating demand that we would not otherwise serve. However, space reductions and consolidations from the GSA, the significant amount of repositioned assets, new supply, and the long lead forward leasing continue to be headwinds on the market in the city. Concessions continue to be at historically high levels while rents and annual escalations have remained steady. Once again, our activity is concentrated in Reston, where unlike the CBD, we continue to see strong, growing demand from our incumbent technology and defense industry tenants. This quarter, we completed 163,000-square-foot expansion and extension with a technology company, and we continue to have over 400,000 square feet of additional leases in negotiation.
Rents in Reston range from the mid-40s to the mid-50s for existing product, and we expect them to remain flat for 2019. Concessions have remained stable. Owen mentioned the new entitlements in Reston. This encompasses 1.6 million square feet of office space, including the 1.1 million square feet we've commenced at Reston Gateway, as well as 1.9 million square feet of residential. And the site has a direct bridge over Sunset Hills Road to the new Metro station, which is being built on property we dedicated to the Metropolitan Washington Airports Authority. That's about as close to adjacent as you can get. Our tightest portfolio continues to be in Boston, where we're 95% leased.
There is very little available space in large blocks in the Boston CBD market, there continues to be strong demand, which has led to a tightening of concessions and an increase in rents, both in absolute terms, low teens year-over-year increases, and rents from the high 50s to in excess of $85 on a gross basis in the CBD, along with annual escalations, which is a new trend. The absorption and large leasing news this quarter is the result of deliveries of fully leased new product, with leases that were done in previous quarters. The 100 Causeway Tower is 70% leased, but we're in discussions with two tenants for the remainder, about 180,000 sq ft of this building, which would get us to 100% committed.
Other than the 440,000 sq ft Verizon lease, our largest transaction in Boston this quarter involved the early recapture, because we don't have any available space, of 58,000 sq ft at 200 Clarendon, which was expiring in 2022, and a re-lease of that space through 2035. Our largest negotiation in the region now involves another multi-floor tenant with an expiration in 2022. In Cambridge, we completed an expansion with an existing tenant for 83,000 sq ft at 90 Broadway. Cambridge office rents are now in the mid-70s triple net. Even as many tenants are attracted to the center of Boston and Cambridge, there continues to be significant demand in the Waltham-Lexington suburban market.
This quarter, we completed our second deal at 20 CityPoint, so it's now 63% leased, with a tenant in our portfolio that's relocating, but we're negotiating a lease to backfill 100% of their space with another growing tenant in the portfolio. New construction office rents in this market are about $38 triple net. Growing life science demand continues to impact the market. We have a few suburban properties in Waltham and Lexington leased to office tenants, where the current net rents are currently in the low 20s. We're now working with life science tenants to convert these buildings to lab office use with investments of about $100 a sq ft on the base building and expect to achieve rents in the high 40s on a triple net basis.
If it takes us 12 months to do the work with the downtime, we're generating around a 15%-20% incremental return on that dollar. Before I finish, I want to provide some color on the same property leasing statistics for the New York City region this quarter and our company-wide re-leasing capital costs. The pool of deals in the second-generation New York City portfolio totaled 103,000 sq ft. It includes a large piece of mezzanine space that we got back from Citibank under the original 2003 lease, where Citi leased all of the space in the building at the same rent in the mid-90s. We re-let the space, which is not accessed through the elevator lobby, at a 75% decline in net rents. Eliminating that lease results in the gross rent decline moving from 31%-13%, a really big difference.
On the transaction cost side, there are a number of spec suites that are part of the transaction cost this quarter. Since the first lease is only three to five years, the average transaction cost per lease year is artificially high. In addition, we leased a 6,000 sq ft piece of retail space on Madison Avenue at the GM Building for 16 years at a very healthy rent. We provided a large TI allowance equivalent to a year's rent, plus a commensurate commission, which obviously impacted our concession packages this quarter in our stats. To conclude, tenant demand for high-quality workspace remains strong as the fight for talent continues to be a primary focus for our customers. Leasing economics are very favorable in San Francisco and Boston.
Our activity at 399 Park Avenue is on track, improvements in our expectations of delivery timing of some of the vacant space at 399 Park Avenue in 2019 is partially driving our guidance, which Mike will discuss in his remarks. Mike?
Excellent. Thank you, Doug. We had a great quarter, a strong quarter in the third quarter. If you look at our share of total revenues, they were up nearly 5%. Our portfolio occupancy was up 70 basis points from last quarter, our cash same-property NOI improved. It was up 2.5% over the same quarter last year. Third quarter funds from operations came in at $1.64 per share. As Owen mentioned, that's $0.02 per share or about $3 million ahead of the midpoint of our guidance range. The primary driver of the improvement was stronger development in management services fee income, mostly from our joint ventures. As this joint venture portfolio grows with acquisitions like Santa Monica Business Park and new developments like The Hub on Causeway office tower, we do benefit from enhanced opportunities to drive higher fee income.
For the remainder of 2018, we project portfolio NOI growth with occupancy gains driving higher quarter-over-quarter same-property portfolio results, plus incremental income from our developments as additional square footage at Salesforce Tower is placed into service. Our run rate for fee income should moderate due to $6 million of leasing commissions we earned in the third quarter that will likely not recur. As we've mentioned before, we expect higher interest expense as we will stop capitalizing interest on our investment in Salesforce Tower on December 1st of 2018. We also expect higher usage on our line of credit. Overall, we are increasing our guidance for full year 2018 funds from operations to $6.39-$6.41 per share. We project our fourth quarter FFO to be $1.68-$1.70 per share, which is an increase of $0.05 per share at the midpoint over our Q3 performance.
We provided detailed guidance for 2019 last night in our supplemental report that's available on our website. As we look ahead to 2019, we are projecting accelerating FFO from increases in occupancy and revenue increases on our lease roll, additional income from the delivery and stabilization of our developments, partially offset by an increase of interest expense as we discontinue capitalized interest on those same developments. In the portfolio, we project gaining occupancy during 2019 and should average between 91.5%-93%, up 150 basis points from this year. We project ending 2019 just shy of 93% occupancy. We are on track to meet our commitment of 93% occupancy by 2020. Our Boston portfolio is currently 95% leased. We've already leased the majority of our available space in the CBD, though occupancy and revenue recognition will not occur until 2019.
This includes 50,000 sq ft at 111 Huntington, 50,000 sq ft at 100 Federal Street, and nearly all of the remaining space at 888 Boylston Street. We expect Cambridge, which is currently 98% leased, to be back to 100% by mid-year. Our suburban portfolio will also improve as we have 75,000 sq ft of vacancy at Reservoir Place North that will be filled with a signed lease, taking occupancy in the first quarter of 2019. In San Francisco, Doug described the level of activity that we have on our 260,000 sq ft of office vacancy at Embarcadero Center, and we expect positive absorption of roughly two-thirds of this space next year. We also have 175,000 sq ft of lease rollover next year at Embarcadero Center, where the current rents are significantly below market.
In New York City, we're making additional progress leasing 399 Park Avenue. By year-end 2019, we anticipate recognizing revenue on most of the 440,000 sq ft of currently vacant space. As Doug mentioned, we have either signed leases or leases in negotiation on all but 25,000 sq ft of this space. In Reston Town Center, we have minimal rollover next year and expect to increase occupancy from 92% to near 97%. The only place where we anticipate losing occupancy is in Washington, D.C. It's primarily at Metropolitan Square and 901 New York Avenue, each of which has a sizable law firm vacating next year. Both of these buildings are held in joint ventures. The economic impact to us is less.
With our expected occupancy gain, combined with continued roll-up in rents, primarily in Boston and San Francisco, our guidance assumes that our share of same property portfolio NOI increases by 3.5%-5.5% on a GAAP basis and by 4.5%-6.5% on a cash basis from 2018. Our cash NOI is increasing faster than GAAP, partially due to previous early renewal activity, where the rental rate increases have already been blended into our GAAP rents and the cash increase is occurring in 2019. We expect non-cash straight line and fair value rents of $75 million-$100 million in 2019. The fair value rent component of this is only $18 million. Our projected same-property growth would actually be even higher if not for three lease terminations that we are working on where we have near-term expiries that we're pulling forward into 2019 to accommodate new or expanding tenants.
This is moving approximately $10 million of our same-property income into the termination income bucket. This is just geography. It does not impact our earnings, but it will reduce our near-term rollover exposure, reduce downtime, and capture higher rents sooner on each space. Our guidance for 2019 assumes termination income of $10 million to $15 million versus $6 million at the midpoint in 2018. Our 2019 projected same-property NOI growth would be 70 basis points higher if we weren't proactively creating this termination income to enhance long-term value. We're projecting our income from development and management services to decline modestly in 2019 and range from $37 million to $42 million. This decline is due to leasing commissions earned during 2018. Due to higher occupancy in our unconsolidated joint venture portfolio, we don't expect these commissions to recur at the same level in 2019.
In our non-same portfolio, which is primarily our development deliveries, we project incremental NOI growth in 2019 of $80 million to $90 million. This projection also includes our share of NOI after interest expense from a full year of owning Santa Monica Business Park. I am quoting this net of interest expense because the results of Santa Monica Business Park flow into our income from joint venture lines, so they do not impact interest expense. Over half of this incremental NOI growth is from Salesforce Tower, where we expect to commence revenue on all the remaining space. All of the space is subject to signed leases now, and the property will reach 100% occupancy by the end of the third quarter of 2019.
We also are projecting growth from the lease-up of our two residential projects that we delivered earlier this year and The Hub on Causeway, Podium, and 20 CityPoint, both of which deliver in the third quarter of 2019 and are substantially leased. Our developments at 159 East 53rd Street in New York City and 145 Broadway in Cambridge deliver at the tail end of 2019, so they will have a modest impact to the year. Both properties are pre-leased, so we expect they will be at their full run rate in 2020. We are funding a portion of our development pipeline with asset sales. We expect dispositions of approximately $370 million this year. These dispositions include year-to-date sales, plus 1333 New Hampshire and a land parcel in Maryland, both of which are under contract with nonrefundable deposits.
We project an incremental NOI loss to 2019 from our disposition activity to be approximately $12 million. We have not included any additional dispositions in our projections, though we are considering the sale of additional non-core assets. We are also raising additional debt to fund our pipeline. We project our development spend through 2019 to be approximately $250 million per quarter, and it will be funded by excess cash flow, proceeds from the aforementioned asset sales, and our line of credit. We also expect to buy out the remaining 5% interest in Salesforce Tower in early 2019. As a result of these funding needs, we project our net interest expense to grow and be between $418 million and $433 million for 2019. We project our capitalized interest to be between $45 million and $55 million, approximately $15 million less than 2018, primarily from the impact of stopping capitalized interest on Salesforce Tower.
We anticipate that we will term out the projected outstandings under our line of credit sometime in mid-2019 with the long-term financing. We also have a $700 million bond issuance that carries an interest rate of 5.78% that matures in October of next year. We believe that we could replace this bond today with a 10-year new issue and reduce the interest rate by approximately 150 basis points. Based on our capital needs and our desire to lock in a lower rate for our bond refinancing, we may pull forward this $700 million refinancing into late 2018. If we elect to do this, we would incur a charge to our earnings in 2018, but would be locking in current low rates and reducing our interest expense going forward. We've not included the impact of a potential refinancing in our earnings guidance.
As I described in the last two quarters, starting in 2019, the new lease accounting rules will require us to expense internal wages for our leasing professionals and outside legal costs that were previously capitalized. This does not impact our cash flow, as we've always made these payments, but it will increase our G&A expense under GAAP. In 2019, we project that our G&A expense will total $134 million to $140 million, and that reflects an approximate 3% increase in our current G&A load, plus $10 million for the change in lease accounting. Combining all of our assumptions together results in our initial guidance range for 2019 funds from operations of $6.75 to $6.92 per share, an increase of $0.44 per share over the midpoint of our 2018 guidance.
The primary drivers are projected growth from an increase at the midpoint of $0.40 per share of NOI from our same property portfolio, $0.50 per share from acquisitions and development deliveries, and $0.03 per share from other income. These gains are projected to be partially offset by the dilution from $0.33 per share of higher interest expense, $0.09 per share of higher G&A expense, and $0.07 per share of lost NOI from asset sales, also at the midpoint. At the midpoint of our guidance range, we're projecting 2019 FFO growth of 6.8%. If you adjust for the impact of our asset sales net of reinvestment and the new lease accounting rule of approximately $0.08 a share, this growth would've been 8% on a comparable basis.
Our growth is coming from our share of higher revenues and property NOI, where we're projecting to add $140 million of incremental NOI at the midpoint in 2019. If you incorporate our 2018 projections, our NOI is projected to grow over $200 million from 2017, an increase of 14% over two years, which includes the dilution from our dispositions. While we aren't going to give 2020 guidance today, looking further ahead, we expect 2020 to benefit from a full year of stabilized income at Salesforce Tower, as well as the delivery of an additional $1.5 billion of 2019 and 2020 development deliveries that are 79% pre-leased. Beyond that, we have another $1.5 billion of developments delivering between 2021 and 2022 that are 82% pre-leased.
As you can see, we have a strong pipeline of pre-leased developments that we expect to drive earnings growth over the next several years. That completes our formal remarks. I'd appreciate if the operator could open things up for questions.
At this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Again, to ask a question, please press star, then the number 1. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Manny Korchman with Citi.
Hey, sorry about that. Good morning, guys. Just thinking about the confidence levels at 399, that's been a project where deals have fallen out seemingly last-minute to us, maybe not to you. What inspired the confidence now to sort of expect that to close the way you want it to now?
Let me just make a quick comment, and I'll let John Powers
Provide more color. The lease that we lost, we were surprised at, and we've rarely, if ever, gotten to a lease execution at 399 Park Avenue where we have had a lease disappear. I think that is the exception, not the rule. Our confidence level, from my perspective, has to do with the level of negotiations and the status of the lease that is being drafted right now. John, you should comment on your view.
Jump in.
It's Owen. I'm just going to jump in. I'm not sure where John is. I know if John were on the call, he would express what Doug did, which is a high degree of confidence in us accomplishing the leases that we're currently working on.
Just turning to the comments you made on the retail space at GM. Could you elaborate as to the timing of that lease commencing and what the income levels might be? I know you expressed a big mark-up to the line there.
Yeah. I don't feel comfortable talking about what a particular tenant's going to pay, Manny. The rent has already commenced. We've already delivered the space. They are in their build-out period right now. There's about a year plus of free rent associated with that. We expect that that tenant will actually be physically in occupancy, selling goods sometime in the third or fourth quarter of 2019. It's a very healthy rent. I would tell you that Madison Avenue rent on the lower portion of Madison and the leasing there has gotten better. It's pretty consistent where the rents would've been three or four years ago.
Great. Thanks, guys.
Hi, this is John. Can you hear me now, Owen?
Yep.
Yes, we got you, John.
Yeah, sorry. I don't know what happened. Yeah, there was a question on 399. It's really understanding the tenants that you're dealing with and the situations, where they're coming out of, and where you are in the process. I have a very high confidence level that we're going to close the deals that we spoke about.
Thanks, everyone.
Your next question comes from the line of Nicholas Yulico with Deutsche Bank.
Well, hi. Just going back to 399 Park. You mentioned that most of the 400,000 square feet of vacancies can actually commence by the end of next year. Is it possible to get what the NOI benefit for that building is going to be from that incremental leasing in 2019?
I cannot give you an explicit exact number. I can tell you that the 400,000 square feet of space has a rent of approximately $100 a square foot, slightly higher. That's $40 million. Our view is that more than 50% of it, obviously, we hope will be commencing in 2019 from a revenue recognition perspective.
Okay. That's helpful. Owen, I just wanted to go back to the commentary you gave earlier about how the balance sheet's positioned really well. You don't need to pursue much in the way of additional asset sales to fund development. I guess, appreciate all that, but at the same time, it does feel like there is this disconnect between where private market values are and where particularly office REIT stock values are. I guess I'm just wondering how you're thinking about that. Historically, you have done the right thing and sold assets, as a company, given some capital back to shareholders at times like this. How are you weighing that against what you said is already a good balance sheet, but might be the right time to prune the portfolio a bit more?
Yeah. A couple things I would say. First of all, in terms of new investments, as I mentioned, the development pipelines that we have, and the new investments that we're pursuing, we're targeting a 7% initial cash yield for those. Our stock, even at the current trading level, is more in the mid-fives on a cap rate basis. We think a better use of the capital is in development. In terms of funding them with asset sales, look, we're not selling large core assets. Mike described $370 million of non-core assets that we're selling this year. That's clearly helpful in funding our capital needs. In terms of selling some of the larger core assets, one, as Doug described, we have a lot of confidence in them. They're performing well. A lot of them have been reconditioned, have additional amenities.
We're not sure they're great sale candidates. From a financial perspective, they all have a significantly lower basis than their market value, selling them would require a material special dividend and a dilution in our FFO per share and result in growth. We don't anticipate significant core asset sales.
The other thing I would add is that given where we are in the overall economic cycle and where we are relative to the questions about volatility, I think we're taking a more defensive perspective with regards to our overall balance sheet. We want to put ourselves in a position where we're not in a situation where we've, quote-unquote, "over-leveraged ourselves." Selling assets and paying out dividends would put more pressure on where our leverage ratios are.
Okay, thanks everyone.
Your next question comes from the line of James Feldman with Bank of America.
Great. Thank you. Just focusing on the guidance for a moment. Mike, just to clarify, you had mentioned a couple potential refinancings, I think at the end you said those were not included in the guidance. Can you just clarify what is and what's not on the refinancing front?
What I talked about is that, we're looking at our bond issuances coming due, we're having conversations internally about whether we should try to do something this year with that or not. There will be a prepayment charge associated with doing that, and our interest savings next year. That is not in our guidance. We do anticipate that we're going to continue to use our line to fund our development outflows that I described. I would anticipate that our line will be getting to a point where we probably want to term it out sometime in mid-2019. That's within our guidance, based upon where we think rates are going to be.
Our rate expectations on our line for next year is that LIBOR is going to go up four times during the next four quarters, and that we will also see long-term rates continue to go up, so that, if we're doing a deal in mid-2019, it's going to be at a higher rate than a deal we could do today. We do have some kind of interest creep built up in those projections. Does that help?
Sure. You're saying the charge is not in the guidance.
Right.
What about, and then you also mentioned potentially a larger raise at the end of the year. That's not in the number?
I mentioned that we would, not a raise, that we would term out any outstandings on our line of credit likely, sometime in mid-2019. That's really just a replacement. If we're doing a 10-year financing versus what our line is, there might be a 50 to 100 basis point increase in the rate that gets put on that financing in mid-year.
Okay. All right. That's helpful. How do you think about, based on the guidance, distribution coverage for next year, or maybe what AFFO could look like?
Well, I think the dividend coverage, we anticipate certainly by mid to end of next year, should be basically where it is today, on kind of an FAD coverage ratio. I think that our cash income will continue to grow throughout the year, I expect that fourth quarter this year and first quarter next year, it'll be a little bit higher than it is today, it'll come back down, and improve. Again, part of that is the asset sale income in 2018 is not included in our FAD. It's excluded from our FAD. If you include that, our coverage would be very strong in 2018. It's just we don't include that as part of FAD.
Okay. Turning to development and where we are in the cycle. You talked about decent amount of conversations out there and certainly, with like the Reston Town Center land, just a lot of opportunities where you could keep building. Can you talk about your thoughts on being pre-leased versus, or just kind of what level of pre-leasing you'd want to see given where we are in the cycle, versus the opportunities you're seeing?
Yeah. As you know, our pre-leasing requirements have gone up and our significant development pipeline that's underway is 85% pre-leased, which we think is terrific. We don't have a specific number. It's dependent on the market and the scale of the building and those types of things. Given your comments about where we might be in the cycle, we have been elevating those pre-leasing requirements.
Okay, just final question on development. Are you looking at any Opportunity Zone development potential or potential investments?
We're studying the program and the locations of the Opportunity Zones and the specifics of the new regulations that have just come out, I would suspect that we will not conclude that will be a big opportunity for Boston Properties.
Okay. All right. Thank you.
Your next question comes from the line of Stephen Sakwa with Evercore ISI.
Thanks. Good morning. I guess, Doug, I wanted to pick up on the comment you talked about having the portfolio largely refreshed, maybe with the exception of the EC retail. As you guys sort of think about the types of building tenants want, the LEED certification issues, how do you sort of look at the overall portfolio holistically as you think about obsolescence and, how much more of the portfolio longer term do you think could be subject to sale?
Well, I would say that the conversation about obsolescence and sale don't necessarily have anything to do with each other. We don't believe that any of our CBD properties having now been repositioned and refreshed are in any type of obsolescence category at all whatsoever. If you look at the older buildings that we have and the lease commitments that we're getting, I think we feel really good about the positioning that we've done and the market's reaction to those. That includes, the Prudential Tower in Boston was built in 1967, and it's 100% leased, and we have growing tenants who are moving in from all across the city. It just sort of speaks to, if you do it right, you can keep one of these buildings going for a long, long time.
I would just comment on Embarcadero Center, that those buildings were built between 1970 and 1980. We're talking 50-plus years to 40-plus years, it's the right time to do the kind of work that we're going to be doing.
I think Owen answered the question relative to what our views are on selling assets. At the moment, we don't really have any, quote unquote, core asset sales potentially likely in the short to medium term. It doesn't mean that we won't look at that differently if the markets are changing and the valuations are different. Right now, it's not part of the conversation.
Okay. Secondly, on development, I know you've got a very active pipeline and you've also got lots of land. I'm just curious, as you sort of look out, where do you think the next sort of opportunities may surface? There's been some stories in the press about you potentially doing a large project in Cambridge, I know you won't specifically speak to the tenant at hand, but just where do you think the next few opportunities might come up on the development front?
The buildings that we are in closer conversation on, the first one obviously is in Cambridge, it's been in the public press that we're talking to an incumbent tenant about expanding a building, ripping down 100-plus thousand sq ft building and building a 435,000 sq ft building in its place. Back Bay Station is a real viable location, transit-oriented development, we've got our entitlements completed, we're working diligently on those plans. There are other pieces of land in Boston that we are looking at. We would certainly not necessarily start anything on a speculative basis, but that could be part of the conversation. I described the potential opportunity we may have in San Jose with transit-oriented development there.
There's the Fourth and Harrison site in San Francisco, which again, if everything were to go right, we may be in a position where we would have permits towards the middle to end of 2019 and be able to deliver a building in 2021 or 2022. There's sufficient tenant demand there that we feel comfortable that that's a building that has a legitimate opportunity to get started relatively soon.
Okay. Thanks very much.
Your next question comes from the line of John Guiney with Stifel.
Great. A couple of miscellaneous questions. First, looks like you're going to run 2019 without accessing the equity markets. Mike, what's that do to your net debt to EBITDA by year-end?
Right now, our net debt to EBITDA is about 6.7 times. Obviously, we've got EBITDA coming in from developments, where the money is already spent, and we've got money going out for developments that we've announced or have underway. My expectation is that our net debt to EBITDA over the next year or so is going to remain in kind of that high sixes kind of area, maybe around seven. Then, as we deliver this stuff, it's going to come down. Pro forma for the delivery of the developments, it would be down substantially from where it is today. We feel, again, our tolerance level on a kind of steady-state basis is somewhere in the low sevens. We still have comfort and room as we look at pro forma for our developments being well below that. We feel very good.
Looking at your development management service revenue, let's say it's $40 million next year, is that a gross number or a net number? Said another way, should we look at that as an offset to G&A?
No. It's not an offset to G&A.
Is it a gross number, though?
Yeah.
Yeah, it's a gross number.
It's a gross number, and we use our G&A to fund it.
Yeah. The people are in our G&A already that are doing that work.
Okay. All right. Two real estate questions. What's going on at Annapolis Junction? That building's been sitting there vacant for a couple of years now. The second is, I looked at your Reston development deals, 1750 President looks like it's coming in at about 518 a square foot, which isn't surprising. Reston Gateway looks like it's coming in at about 670 a foot, which seems a bit high.
Peter, do you want to answer the questions on the developments, and then you or Ray can talk about Annapolis Junction?
Sure. Part of that differential, John, has to do with the fact that the Gateway site abuts, as Doug indicated, the Silver Line rail, and there are a number of proffers and costs associated with that. The other thing, as you know, in the town center, the footprint of the site associated with the 1750 deal is just basically to the curb line because it's a very urban development, whereby if you think about all of the infrastructure and streetscape that the town center has and what we'll be replicating down there, that's a much bigger just footprint that has to accommodate and allocate those costs over it. That's the bulk of the differential. Plus, we're buying the building probably 15 months less, so you'd normally factor in 3%-5% escalation in those costs anyway. I hope that answered your question.
As far as Annapolis Junction, Building 8, I think, is the one you're referring to, which we did build with our partners speculatively based on what we hope were contracts coming out. Hasn't obviously leased, and we actually are touring people through that, multiple firms that are all competing for the same contract, which is pretty typical for that marketplace. We're hopeful that we're going to be able to strike a deal with somebody in the near future.
The other thing on that project, John, is, again, that's a 50/50 with the Goulds.
I think that the total cost to date is $24 million, something along those lines. Our total exposure there is $12 million.
Well, it's actually less, Ray, because none of the TI dollars have been invested either. It's just a shell.
Got you. A wonderful job. Thank you.
Thank you.
Your next question comes from the line of Blaine Heck with Wells Fargo.
Thanks. Good morning. Wanted to touch on acquisitions in L.A., in particular. It seems like this year has been slower from a transaction volume standpoint in general out there, but there seem to be more deals coming to the market recently. Owen, you mentioned campus at Playa, but I'm just wondering if you guys can talk about your comfort with your current footprint out there, whether you're pursuing anything out there at this point, and whether there are any sub-markets outside of Santa Monica that you guys would target in particular.
Yeah, I'll start. Then turn it over to Ray and John, who's also on the phone. The volumes in L.A. have gone down because basically Blackstone worked through their EOP portfolio, and they were a big driver of the volumes. I think Santa Monica Business Park is one of their last deals. I think that's the driver. That being said, there's still plenty of things to look at, and we're looking at them. We've had a big year so far, obviously, with the Santa Monica purchase. We're thrilled with our footprint. It's very material in Santa Monica, and we've had good financial performance, particularly with Colorado Center, which we've owned for several years. I think the nature of the deals are also different and, in some ways, more interesting.
There's clearly the broadly offered types of deals that we will look at from time to time, there are also off-market transactions with owners that are also interesting. With that, why don't I turn it over to Ray or John for additional color?
Go ahead, John, that's you.
Yeah, I would reiterate what Owen said there, that we continue to pursue both the marketed opportunities and the off-market opportunities. I think everybody knows that the West Coast has been particularly attractive, both for domestic capital and international capital. We're very cognizant of the competition here, but we remain hungry to find the right deals. With that, we're looking in different sub-markets outside of Santa Monica, across West L.A., and across the L.A. MSA.
Realizing we've only been in the market for two years, we're now the largest landlord in Santa Monica, and we are, through John's effort, reaching out aggressively to off-market deals. Again, we're trying to employ the same formula in L.A. we have done in our other four markets, which is creating value through the development process, which is incredibly difficult in L.A., but we're trying hard.
Very helpful. Then maybe sticking with Ray or Doug, we noticed a pretty substantial increase in the office expirations next year in D.C. Looks like another 300,000-350,000 square feet added to 19 expirations with a higher rent per square foot. Just wanted to see if we can get any color on whether that was a short-term lease or maybe one of the leases you mentioned you pulled forward to 2019. Any detail there would be helpful.
Yeah. Those are in our JV properties. There's two law firms that are expiring in 901 New York Avenue and Metropolitan Square. Those are leases that we've known were going to be vacating for the better part of two-plus years. One of them is an 80% JV, where we're the 20% owner. That's the Met Square, and then we're a 50/50 partner in 901. Relatively speaking, they don't have much of an economic impact.
That also includes Akin Gump.
No, that's what I was going to say, Ray. Go ahead.
Yeah, it also includes Akin Gump, which is a building we have under contract to sell. We've already mitigated that issue.
Got it. That's helpful. Doug, thanks for the color on the drivers of the higher CapEx during the quarter, but that's somewhat backwards looking as it's on commenced leases, not what's executed. Hoping we could get a little bit more color on general trends on the ground with respect to TIs at free rent, whether there are any markets you expect further increases or even tight markets that you could see concessions decrease.
Yeah. I tried to sort of sprinkle that through my prepared remarks. I'll just refresh that. In the Boston marketplace, we actually think transaction costs are going to start to moderate, meaning the TI concessions that were provided a year ago are going to be less in 2019. The free rent's de minimis. In San Francisco, I would say that we're pretty comfortable that the transaction costs are going to remain flat, largely because the cost of installations there, and this is across the board, are going up at such high rates that the tenants are being forced to spend a lot more money. To get a tenant to agree to move is not an easy decision in and itself. The rental rates that we're getting in these marketplaces are escalating at such high numbers that we're comfortable with the overall economic package.
In New York City, things are very flat. The big TI concessions and the big free rent concessions that were part of the market in 2016 and early 2017 are long gone. I would say your concessions are static at, call it, $100-$120 a square foot on a 15-year lease and about a month of free rent, with a cap of probably 12-13 months. In the Washington, D.C. market, I think that's the weakest market from a concession perspective. I don't think things are going up dramatically, but there's some desperation out there with regards to getting some of these larger blocks of space filled. People are providing $104-$150 a square foot tenant improvement allowances and in excess of a year plus of free rent. That's, again, the weaker the market. In the suburban markets, the concessions are significantly lower.
In a market like Reston, we're talking about $5-$7 a year, and probably half a month a year of free rent. In the Boston market, we're talking about concessions of probably closer to $5 a square foot in TIs, and very little in the way of free rent. In the quote-unquote, Silicon Valley, the concession packages are de minimis. That for a project like Mountain View, which is single story, we're talking about providing market-ready improvements, which are $20-$25 a square foot.
Great. Thanks, guys. Enjoy the parade.
Your next question comes from the line of Alexander Goldfarb with Sandler O'Neill.
Good morning. Just a few questions from me. First, Mike, just going back to the guidance and Jamie's question earlier. If you guys do early bond refinancing at the end of 2018, you said that that interest savings is not in your 2019 guidance. You also mentioned the potential for dispositions next year, which I assume would be similar to this year. Nothing large scale, but maybe some smaller ones. Is it your view that any interest rate savings would be offset by NOI lost by dispositions, or could that disposition lost NOI be a bigger number?
I can't tell. Obviously, they offset each other if we engage in both activities. I don't think that the savings in interest expense would likely not be Well, actually, I don't think it will be quite as high if the disposition activity is the same as it is this year. If we had similar disposition activity next year as this year, I think there'll be a little bit more dilution from the sales than there is the gain from the interest expense. Although both items, you're not talking about $0.10-$0.20. You're talking about $0.05-$0.08 type of number, I would say.
Okay. That's helpful. The second question is on WeWork. It's certainly a recurring topic. Recently, they hired Wendy Silverstein, they seem to be bulking up on owning property directly. There have been articles about some landlords doing participation rents. How do you guys view WeWork as far as your exposure to them and other co-working tenants? Are you thinking about launching, I don't know if you have your own co-working platform or not, but how do you view the growth in this space, or do you view that more of the WeWork type co-working space is going to be more in B and C office rather than in A office?
Alex, we view WeWork as an important customer. They're our 16th largest tenant, and they currently represent about 0.8% of our income stream. We would, in places that make sense, we would be open to expanding the relationship further. The facts are, our portfolio, as you've been hearing us describe on this call, it's getting pretty full. I think there are fewer and fewer opportunities to work with WeWork and other co-working operators. We are also selectively opening our own types of spaces in a handful of situations. I might turn it over to Brian just to talk about that.
We opened up Flex by BXP, and the distinction versus co-working is that this product is specifically targeted towards the enterprise user. Let me explain two enterprise users that provide greater clarification because this whole zone is getting misuse of terms. An enterprise user for us in our Flex by BXP that we've already obtained in terms of clients is, one, the corporate user who has a specific project length for a project. The other would be, a startup company that's several, call it, series into their investments, and there still is a risk on the length of the term that they'd like to have. Those two customers have already proven out to be great customers for us in Flex by BXP at the Prudential Center. We announced last week that we're going to kick off another 40,000 feet in the CBD at 100 Federal.
We also think that this product is really good for our larger towers, where you can place this between some of our larger users, and as Doug's referred to it in the past, almost like a shock absorber for us for growth for those clients. The length of term can be month to month, but what we're finding is that the user in the enterprise zone has been a year to two years. The evidence of the size of the enterprise user is already there. As an example, within our 14-million-square-foot portfolio in Boston, we have roughly 101 subleases. Of those subleases, it's really interesting, 33 of them are less than two years in length.
This customer's already been out there, and we think there's still a significant opportunity for us to satisfy the needs of those customers and then have it blend really well with our long and strong leases that are such a big and important part of our portfolio.
Alex, just to summarize it all. WeWork is an important customer, as I mentioned. We have other co-working operators in several of our buildings, and we're, as Brian described, experimenting with it ourselves in a couple of installations. When you add it all up, it's about 1% of our revenue.
Okay. Thank you, Owen. Thank you, Brian.
Your next question comes from the line of Vikram Malhotra with Morgan Stanley.
Thanks for taking the questions. Just a couple of quick ones. Any update on the lease with Under Armour, given sort of the recent restructuring plans? Timing-wise, any updates on the lease?
No updates on the lease. As you probably are aware, if you've been to New York City recently, we're getting really close to delivering the dramatically changed plaza at 767 Fifth Avenue, the General Motors building, with the new Apple cube and the extraordinary store that Apple is doing. In the meantime, they have been using the Under Armour space as their temporary store, without much in the way of a drop of sales, interestingly, yet they're going to double the size of the Apple store when the Apple store opens.
We expect that in early 2020, we will be delivering the space to Under Armour, we'll start to be able to recognize revenue, they will be in a position to open their store, based upon whatever their current construction timeframes are.
Okay. Some of your peers have opined that rent growth in Midtown, while it's been under pressure this year, effective rents have been down now for a year and a half, maybe more. They view sort of rents inflecting upwards over the next six to nine months. I'm wondering if you share that view, or if there are any nuances or other thoughts you may have on rent growth into next year for Midtown.
I provided my perspective in my comments, which were, I think things are going to be flat. I'll let John Powers provide you his view, because it may be slightly different.
No, it's not very different, Doug. We think the market's pretty flat. We certainly have a lot of velocity here, and that's really good. Manhattan overall is going to have a strong year on the velocity side. The availability rate hasn't dropped because we have new supply coming on. When you balance those two things, it's a flat marketplace. It's a good marketplace, but it's a flat marketplace.
Flat rents into 2019. Just last question. On your life science portfolio, a larger healthcare REIT just transacted a large billion-dollar campus. I'm estimating a low 3 cap. Just sort of wondering, any thoughts on where pricing is for your portfolio in the Cambridge area?
Our Cambridge portfolio, for the most part, is actually office space, not lab space. We only have one dedicated lab building in Cambridge, and it's only 60,000 sq ft. I will tell you that we've seen some extraordinary sales of life science buildings. There's a new building that was just purchased in Watertown, Massachusetts, which is close to Cambridge, but it is not a transit-oriented facility anywhere close to it other than bus depot stops. It traded for over $900 a sq ft. There are a couple of buildings in the suburban market in Waltham with a significant amount of vacancy that traded or are trading in excess of $700 a sq ft. There is a very strong life science demand. Because of that demand, there's an expectation for significant rental rate growth, and there's a lot of investor demand for it.
Great. Thanks, guys.
Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.
Hey, guys. Doug, maybe going back to one of your comments in the prepared remarks. Sounded a little sarcastic about the shudder to think about rent rolldowns in San Francisco, given the increase in bumps. I just wanted to get your thoughts on that market longer term, and the ability to push rents in with, or get positive mark-to-markets at the end of some of these leases of big escalators if the split-roll goes through, and what you think that could do to rent growth in the market.
I think it's a really interesting question, Craig, because the split-roll has an economic impact, which we can define based upon the contractual leases that we have, i.e., if you have a triple net lease, it doesn't matter. If you have a gross lease, it sort of matters, and it rolls in over time, right? I think you asked the right question, which is at what point does the pricing get so expensive that these tenants start to change their habits in terms of their real estate, which is a fair question. Relative to other parts of the world, the rents in San Francisco still look very cheap, including, by the way, the new construction in Midtown Manhattan. The profitability of the companies that are leasing a lot of that space are extraordinary.
I'm pretty bullish on the vibrancy of the tenant demand that we are seeing in a market like San Francisco and the strength of those companies and their ability to absorb those types of increases. It will sort of become part of the marketplace. I think the real question is some of the sort of quote, unquote, "service providers" and the other companies that are not quite as profitable as a salesforce.com or an amazon.com or a Microsoft, LinkedIn, or a Google, or potentially Airbnb and Uber. I mean, you have different types of companies. I do think that there will be a set of companies that will have a different perspective on that. We're hopeful that, first of all, this is not going to play out until, I think, 2020 to 2021.
There's going to be a lot of conversation, a lot of politicking, a lot of lobbying that goes on, and we'll have to sort of see where it all shakes out.
No, that's helpful. Then just on the reclassification of the 120,000 square feet at 399 Park, could you just give a little bit of color about what that was, and is that going to have any effect on kind of rents in the building, what you guys are trying to lease up?
I'll answer that. We do not typically include what we call storage space in our portfolio square footages. This space, which is at 399 Park, was always part of the big Citibank lease that we acquired with the building in 2002. They used that space for kind of back office, cafeteria, payroll, and stuff like that. When we got that space back and started looking at what we could lease it for, we determined that we can't lease it for anything other than storage space. We determined the right thing for us to do would be to reclassify it like all of the other storage space that we have in the portfolio, which is not in the portfolio square footage.
If we get any rent off of it, which we do get rent off our storage space, obviously at a discounted rent, it goes into kind of other rental income. We may be able to lease some of it over time.
We may be able to figure out a way to reutilize it and use it for something totally different, some kind of amenity or something like that. I know the team in New York is thinking about those ideas. That was the driver behind pulling it out of the portfolio and putting it into storage space, which is the same way we handle all of the storage space of the company.
Okay. It's separate from the 400,000 you guys have left to lease?
Oh, yeah.
Okay. Just last one, Mike, on the mid-year kind of size of that bond offerings, should we think kind of in the $700 million range?
No, I think that's fair. We have a $1.5 billion line. I don't think we want to get it to the point where it's over $1 billion outstanding. Because as you start to get to that level, it just kind of limits your ability to do other things, potentially, that might happen quickly. My expectation is, once it kind of gets approaching that level, that we would think it's the right time to term it out. As I mentioned, our expectation is that we will have $250 million of development outflows every quarter. As you kind of think about that, when you get kind of into the mid to third quarter of the year, that outstanding is going to start to get up there. That's our thought process.
Great. Thanks, guys.
Yep.
Your next question comes from the line of Daniel Ismail with Green Street Advisors.
Hey, guys. Just a few quick ones for me. Can you provide an update on where in-place rents sit relative to market for the entire portfolio now?
We have a schedule. Ask your next question and we'll come back to you.
Sure. It sounds like core asset pricing remains pretty stable for office properties. For the non-core dispositions, have you guys found a similar trend in bidding trends or asset pricing?
I'm sorry, could you mention the preamble again? There was some papers rustling, I didn't hear it.
Sure. No problem. I was asking about in-place rents relative to market.
The first question, we have our answer. Right now, on a pure market-to-market basis, for the whole portfolio, it's about $6 a square foot or 9%. Positive.
Great. Thanks. For the non-core sales you guys have been doing this year, have you found pricing coming in at your original underwriting, and how's the appetite for the market for those types of assets?
Yeah, absolutely. We've been getting the pricing that we expected to get when we made the decision to put the asset in the market. That being said, we are selling non-core assets, which generally means they're in suburban locations, so the cap rates are higher than what our core assets would sell for. We're generally getting multiple bids and having active processes.
The largest one that we closed was 500 E, and I think we were slightly above where we expected to be there. 1333 New Hampshire Avenue, we exceeded our initial price expectation by a modest amount. Less than 5%, but pretty consistent with where we thought we would be.
Okay. Last one from me. It looks like costs increased a little bit on Dock 72. Can you explain maybe some of the reasons why, and if that impacts the economics of that development at all?
Yeah. It's really simple. It's a draw out of the lease-up schedule due to just sort of challenges of the labor at Dock 72 from a construction perspective and the timing associated with getting the building completed. We've extended out our lease-up.
Great. Thanks, guys.
All carry.
Your next question comes from the line. It is from Manny Korchman with Citi.
Yeah, it's Michael Bilerman. Just two quick ones. Just one on New York. Can you just give an update on prospecting at Hudson Boulevard? Also sort of the prospecting at Dock72, especially given the increased cost and the timing delays that you're talking about from a leasing perspective?
John, you want to cover that?
Sure. We've had a couple of meetings on 3 Hudson Boulevard. I think the redesigned building has been well-received. These are long-term discussions for tenants with lease expirations farther in the future. We have another one this week, later this week. We'll go forward with that process while we're still redesigning the building, getting our pricing in, et cetera. On Dock72, Doug mentioned that the construction process has been delayed. Also, WeWork's construction process, for other reasons, has been delayed, so we expect to open late in the first quarter next year, 2019. We have had a couple of tours. We have an important one this week. We are trading no paper at this time.
How do you feel, John, about timing on Hudson Boulevard? Do you feel more confident of that potentially landing someone?
Well, I said to a group of analysts that we would start tenant work, I think, between 2022 and 2052.
That's great. I hope I'm still doing that at that point.
I'm comfortable with that range. Look, we have to find the right tenant, or potentially two tenants, to start this in this environment. It's a great site. We like the site. It's a full acre, avenues on three sides, transportation, et cetera. There's other competition right in the neighborhood, as you know, with 66 and 50, and also Brookfield Properties' building, Manhattan West. Everyone's kicking the tires, and now we're in for the meetings.
Good. Doug, just on Embarcadero retail and the $80 million that your plan spend, how should we think about the timing of that 80, whether there's any sort of drag from an income perspective, like there's been at some of these other large repositionings that you've done? Then when does the potential upside come as that space gets redelivered?
I would describe the work that I'm describing as follows. It's not about the retail from a retail income perspective. It's about the space on the ground level and on the plaza level, at Embarcadero Center to enhance the overall office environment. We are achieving historical rents right now in Embarcadero Center. In the short term, I could tell you that there's absolutely no revenue correlation with what we're doing. I will tell you that, we are in a time of plenty, and there probably will be times when things will be more challenging, and we should do this because it's the right thing for the property. On a net basis, we will be able to have higher retention and achieve higher rents in a down market, because of the work that we're doing.
I don't personally believe it's going to impact this market in sort of the next, call it 12 months, because it is so strong and it is so hot, and rents have moved up so fast, and there's so little space. Tenants will almost take any space they can. I mean, it's that tight in San Francisco.
Great. Sorry for taking the call longer, but I'm pretty sure I heard Yankees suck a few times, in the background.
Yeah.
Your next question comes from the line of John Kim with BMO Capital Markets.
Thank you. Apple entered your top 20 list as far as tenants. Does this represent the new lease that they're taking space out of the GM Building, or is that the temporary space? Can you also remind us when that impacts your cash same-store results?
It represents some increases that we have gotten in the existing lease. We expect them to vacate that premises sometime first quarter, second quarter, early second quarter, next year and move into the new premises. The total contribution that they will provide will actually go down slightly, when they do that. So that may change their position in the top 20 at that point. Because the project has taken a little bit longer, we had provisions in the lease where we got increases in rents as the redevelopment of the existing store took longer. We are now obtaining those and their cash rents that we're getting today.
Okay. Mike, can you just explain once again the termination income increase for next year? It sounds like it's just an allocation of rent, rather than the tenant termination fee.
Yeah, we don't include termination income in our same store. We've never done that because it's lumpy, and it has impact the next year and the same year. We pull it out. In these situations, and we've got three relatively large ones that we're working on in the portfolio, where we want to move a tenant out that doesn't want all of the space necessarily, but we have another client that wants it. We are in a good position where we can negotiate a termination payment that is attractive to us, covers all of our kind of downtime and costs, and bring the new tenant in. It has an impact on our same property, and it basically just moves that income from the same property pool to the termination income pool.
I wanted to describe it because as you look at our overall guidance increase, you have to have the same store pool plus the termination income in there.
One last one.
Yep.
Yep. One last one, if I may. The 19% dividend increase, was that purely based on your taxable income growth, or was it partially influenced by the movement in ten-year?
We talked about this, I guess when we did the dividend increase. For 2018, the gains on asset sales, the tax gains on the asset sales are driving our taxable income higher. As we look at 2019, our taxable income is increasing because of operating cash flow going up. We felt it appropriate, rather than doing a special dividend to cover the tax gains on the asset sales, that we would do a regular dividend in the third quarter of 2018 and feel confident that our cash flow and our taxable operating income, which is growing, is going to be there in 2019. We kind of would've done it anyway, in effect, is the way we kind of looked at it.
Yeah. Dividend increase is driven by internal factors, net income, not external factors like interest rate.
Yep. It's all about our taxable income and how much we have to pay out.
That makes sense. Thank you.
Yep.
There are no further questions at this time.
Okay, terrific. That concludes all the questions. Thank you for your interest in Boston Properties. We'll see many of you at Nareit next week, and we're going to go hit the parade. Thank you.
This concludes today's conference call. You may now.