Okay, why don't we go ahead and get started? We're here for the 11 o'clock session with BXP. Let me just quickly introduce management, and then I'm gonna turn it over to them for some quick opening remarks. I'll go through a couple of questions, but certainly we can take questions from the field. If you have them, just kind of raise your hand and you know, I'll call on you, and then we'll have management kind of repeat the question so everybody can hear it. So, next to me is Owen Thomas, CEO, Doug Linde, President, Mike LaBelle, CFO, and Hilary Spann, EVP and head of the New York region.
So with that, let me turn it over to Owen to make some opening comments, and then we'll jump into Q&A.
Steve, thank you for hosting us today. Good to see all of you. Thank you for being here, and thank you for your interest in, BXP. Let me just say, our, our message for this, NAREIT meeting is, our leasing is getting better, materially. We've been talking about, as a management team, the two important drivers we think of our stock price are: one, corporate earnings, which is driving leasing, and second, interest rates, which obviously drives cost of capital. And in the first quarter of this year, S&P 500 earnings grew somewhere between 5%-6%. And we're seeing, and I'm sure Doug's gonna talk about it, some immediate impacts, very positive impacts to our overall, leasing activity. So that feels very much off the bottom.
And then on interest rates, you know, none of us really know where that's gonna go, but I think it will ultimately go down, which will also be a positive, although certainly the timing's hard to discern. So Steve, that's our, that's our opening remarks.
Wow! Short and sweet. I like it. Well, maybe jumping into leasing, and we obviously spoke this morning, and you know, it was interesting to hear just how much leasing activity had picked up in Q2 versus you know, what you did in Q1. So, you know, maybe either Doug or Hilary, you know, maybe just speak to kind of what you're seeing. Are there any particular regions where you're seeing some of that strength? And then maybe just what types of tenants, you know, are you seeing in the market today?
Sure. All right. I'll start macro and then go micro. When we had our earnings call, which was on May 1st, I described our leasing profile, and we-- I said we did about 880,000 sq ft of leasing in the first quarter, and we had a pipeline at that time of leases and negotiations, some of which had already been done, but not much of that. This was on May 1st of about 875,000 sq ft. And today, June 3rd, that number is 1.7 million sq ft of space. So we have, I think, had a rather dramatic acceleration in the clients that we were talking to and were considering leasing space from BXP, actually moving towards a lease.
To give you, just sort of a perspective, so in the third quarter of 2023, that number, again, the 8.75 or the 1.7, was about 1.2 million sq ft, and in the fourth quarter, it was about 1 million sq ft. So at the beginning of the quarter, when we had our earnings calls and said, "This is what our pipeline looks like," those were the numbers. So we are substantially higher today than we have been over the past four quarters. The overall feel of that is it's Boston first, Washington, D.C., second, Manhattan and Princeton, which is our two New York markets, third, San Francisco, fourth, Seattle, fifth, and West LA, sixth. So still a predominance of East Coast versus West Coast leasing.
More expansions in this portfolio now than contractions, and more larger expansions. So as three examples, we have a hedge fund in Manhattan that's taking 80,000 sq ft. We have a private equity firm in Boston that's looking at taking 60,000 sq ft. We have a government contractor in Reston, Virginia, that's looking at taking 45,000 sq ft. Those are sort of where the impetus for the activity is, but it's a clear acceleration. And then we have a pipeline, so deals that are not actively in a lease negotiation, but where we have a reasonably strong view that we will be able to move those into a transaction, still of about 1.2 million sq ft of space.
In May, that number was 1.6 million sq ft, so we've pushed over 800,000 sq ft into the active, and then we've backfilled another 400,000 sq ft of space. Again, consistent with Owen's comment, as the macro environment gets a little bit better, and there still, by the way, is not a lot of job growth for office-using jobs, we are seeing confidence in businesses and therefore decisions to, to do leases, and we are effectively eating a bigger piece of the pie. The pie isn't necessarily getting larger, but we are getting a, a far larger share of it, and that's sort of how we expect we will gain occupancy over the next couple of years.
Sorry, sorry.
Sorry, we've got one mic. Maybe Doug and Owen, just maybe talk about the flight to quality and sponsorship and how important kind of balance sheets are today in those leasing discussions. Maybe to Doug's point, if the pie is not growing but you're taking a bigger share of that pie, how much do you kind of view as strong capital versus some of your private peers?
... I'll take a first cut at that. Look, the flight to quality is certainly the same as it has been, as we've been talking about for a couple of years now. If anything, it's been accelerating. All the numbers continue to hold out, and those are rough justice in our 6 core markets for CBD assets. The premier assets are defined as roughly 10% of the buildings, and their vacancy tends to be 5-6 percentage points lower than the broader market. The absorption is positive versus very negative for the bottom 90%, and the asking rents are 55% higher, and those, the asking rents continue to, the gap continues to grow. So, this is incredibly important, and it's what's contributed to our stability. If you look over the last couple of years, our occupancy has been flat.
Our dividend, we have held our dividend. We haven't cut our dividend. So we've exhibited a lot of stability, and the reason is, is because our buildings... You know, when you read about San Francisco being 40% available, it's true, but it's not as relevant to us because the buildings that we compete with are not in that same situation from an occupancy standpoint. That's one factor that's helping us. The other one is, that Doug touched on, is there's a lot of distress in office real estate. You know, we lenders to office real estate on the private side are generally not making new loans, and they want their loans to be repaid.
And so if you're borrowing in the private market, and you have a mortgage coming due, it's very difficult to extend that mortgage. Fortunately, we don't have to deal with that issue significantly because the vast majority of our borrowings are in the investment-grade, unsecured market, which we have ready access to whenever we need it, so we don't face that issue. So when we're and it's particularly true in several of the markets that we're competing in, when a tenant is out in the market looking at different buildings, some of the buildings that they're looking at, that owner is not gonna be able to give them the tenant work that's required because their building is over-leveraged, and they don't know if they can extend the loan.
And also, importantly, the broker that they've retained may not get paid their commission if they go into that property. And those factors mean that the-- not only are we competing with a smaller group of buildings because of quality, but we're also competing with a smaller group of buildings because of sponsorship. You know, usually, in second-generation leasing, when you think about the factors that a client looks at, sponsorship's always been important, but I think things like location, amenities, price, all those other things were higher. But today, when we have a new client coming to us, some of the first questions are: "What's going on with this building? Who's the sponsor? What's their capital structure look like? Are you gonna hold it for a long time?" Our clients are much more attentive to the sponsorship, which really plays to our advantage.
Yeah, and I would just say that, that sponsorship is not what you think of. Sponsorship doesn't mean that it is not a high-quality owner. So in fact, many of the more distressed situations that have been in the popular press, and I'm not gonna mention names, have been with what you would, I think, view as very high-quality sponsors. However, they all have a perspective, and it's probably a fair perspective, that they have a fiduciary obligation to their equity, not to put, quote, unquote, "good money in after bad." And to the extent that the debt capital structure of these assets has not been worked out into a position where they feel comfortable that they are going to be able to recoup any incremental capital, they're just not gonna do anything. And so there are lots and lots of what we refer to as zombie buildings.
Many of them are high quality, quote, unquote, "premier assets" in our marketplaces that just are not in a position to compete for the same clients that we are talking to on a day-to-day basis.
Maybe just looking at technology, 'cause the tech companies were obviously big, you know, space users and, and you know, took up a lot of the vacancy in the new development. Those companies have, you know, largely gone on hold for the last couple of years. So I'm curious, as you look at the next two, three, four years, and you look at the recovery in your occupancy rate, you know, how important is it for big tech to come off the sidelines? And then I'm curious, you know, kind of what you're seeing in New York. Maybe Hilary can comment on, you know, some of the leasing that, you know, she's seeing down in 360 Park Avenue South and maybe speak to the Park Avenue submarket.
Hilary, you want to start, and I'll finish up with the tech?
Sure. So the tightest submarket in Manhattan is Park Avenue, north of 42nd Street, and the availability in that submarket is very, very constrained. If you are a 100,000 sq ft tenant looking for space on Park Avenue, good luck. Very hard to find at any price, much less at the price that most who are there would hope to renew at. So we are seeing pricing power in that submarket, and demand is starting to bleed outward from that submarket to the adjacent submarkets in Midtown proper. In Midtown South, that submarket has historically been more tilted to tech and media tenants, and those tenants have been softer in terms of leasing demand in recent quarters, largely because the tech industry overhired during the pandemic and started giving back jobs coming out of the pandemic...
So that remains a pocket of softness for the time being, but we do believe that long term, the tech industry will be sort of a marginal generator of demand for office space in New York. In the meantime, the tightness in the Midtown market has caused some tenants that want premier space and can't secure it in Midtown proper, to look at Midtown South as an alternative. And so we're seeing a better diversity of industries looking for space in Midtown South. If you look at the tour activity at 360 Park Avenue South, 40%+ of the tenants that are interested in that building are in finance and law. Just this week, we toured two tenants through 200 Fifth Avenue. Both of them were about 350,000 sq ft.
One of them was a law firm, one of them was a corporate. Neither of them sort of tech-oriented. So that, that submarket does seem to be diversifying in terms of the demand, but the underlying trend of tech retreating from taking space in the recent past does still present a little bit of an overhang down there.
So just broadening it out on the tech market generally, Steve touched on this. So, there's good news and bad news. The good news is, if we all had to think about what companies over the next decade are gonna drive the growth of the U.S. economy, I think many of us would put technology at the top of the list. So we have a lot of confidence that this group of users is gonna come back to the market. The bad news is in 2021 and 2022, many of them took a lot of space and hired a lot of people, and were competing with each other to do this, and it got overdone. And many of these companies over the last couple of years, they've been growing their earnings, and part of the way they've been growing it is cutting costs.
You know, in some cases it's headcount, and in many cases it's with space. But again, given AI and given the things that are going on, you know, these lines are gonna recross again, 'cause these companies are growing, they're doing well, they've given back space, and at some point, they're gonna be back. I can't tell you exactly when that is. I don't think any of us know, but we're confident it's gonna happen. And then we've got the next generation of tech companies that are taking space. So in San Francisco, Doug, we've had 2 million sq ft that have been leased already to OpenAI, Anthropic, and another AI company, and there are probably others that are smaller that are probably not as much on our radar screen. So, again, we think about the clients, like Salesforce.com.
You know, 15 years ago, I'm not sure many people knew who that company is, and they became the largest user in the city of San Francisco and the anchor tenant for Salesforce Tower. So, is this happening again? Probably. Do we know which companies it's gonna be? We don't, but we're confident in the ecosystem there and what's gonna happen.
I would just say that, so Steve, to explicitly answer your question, unless there is a major change in the attitude for the tech titans, we are not gonna see a broad recovery in the next 12-24 months in the, quote, unquote, "tech cities." That's just not gonna happen. Those organizations were taking down millions of sq ft of space each, every year for the last decade. However, as Owen said, the AI opportunity is real. It is concentrated right now in San Francisco. It is meaningful absorption, and it's picking up. And by the way, those organizations have made it very clear to their employees, being in the office with each other, five, six, or seven days a week, is the most critical component for those companies delivering each successive generation of their tech as quickly as possible.
It may very well be that there is a significant expansion of that. In addition, there are other kinds of tech companies that we are not talking about on a day-to-day basis. So as an example, Mike and I sat in front of the CEO of a tech company that is leasing 180,000 sq ft of space in Boston and is knock-knocking on the door of one of our buildings, asking if we can accommodate a 330,000 sq ft requirement over the next two years. Okay, that is a meaningful expansion. We have Meta as a building of ours in Northern Virginia. Meta is going the wrong direction. They had 75,000 sq ft. They're giving back two floors, and they're taking 28,000 sq ft on a long-term basis.
We have a small, private technology company in the building that is likely to take one or both of their existing floors. So again, these are the kinds of sort of more granular technology experiences that our client base is sort of geared towards, and that our buildings are generating on a day-to-day basis, which is allowing us to maintain and slightly grow our occupancy. But macro level, if we don't see Google and Apple and Meta and Amazon and Microsoft taking meaningfully large pieces of space, we're not gonna see this broad, macro recovery anytime soon.
Just one more sort of broad leasing question. I know it's not a big part of your business, but life science is something that, you know, BXP has kind of waded into with some other office companies. It was very fast-growing. A lot of money was thrown at that space. That's obviously cooled off. Just what are you seeing today in Boston and San Francisco on the life sciences front? And are you more optimistic about kind of tech leasing coming back first or life science leasing?
So we are highly, highly optimistic about the nature of the changes in the life science industry's ability to improve and enhance the longevity of human life. And that the ecosystems where that is centered are the Greater Boston market, predominantly Kendall Square near Cambridge, but also in South San Francisco and to some degree, I guess, in San Diego, though that's not a market that we participate in. We believe wholeheartedly in those marketplaces. What we expect we will see is a growth trajectory similar to what was 2014-2017, as opposed to the exponential growth we saw between 2018 and 2021, where money was free, every VC firm in America was looking at life science.
The companies were grabbing dollars at ever-increasing valuations, and they were sucking up space like there was no tomorrow, and landlord after landlord was saying, "Aha! This is the key to my success. I'm going to build a life science building, or I'm going to convert a life science building." We are now dealing with the digesting of all that space and the change in the capital raising of those companies. There is money being put into the VC firms. There is a significant recovery in the XBI, so that market is recovering, but they are doing it in a very different way. And so today, if we look at the markets that we operate in, we are seeing very small, modest companies looking for a small, incremental space.
We are not seeing companies saying, "We must have huge new installations." We are looking for companies to put the burden of those improvements on the landlord. So quote-unquote, "pre-building" or building out space for those customers seems to be a prerequisite for doing a small transaction, and we have a lot of space to absorb. And so I would say that, you know, neither the technology nor the life science market is anywhere close to where it was in 2020-2022. But we are as confident in life science as we are in technology. We are in a relatively good position relative to our availability. We have two life science buildings under construction.
One of them that will come into service in South San Francisco, which we have a partner on, and the other is in Greater Boston. We have some leasing interest. I would say, I would characterize it as more shopping as opposed to buying. So it's still, relatively speaking, more of a lease exploration-driven renewal market and not an expansionary market as we sort of sit here in the second quarter of 2024.
I'm gonna open it up to the audience in a second here, but, Mike, you've been quiet, so I wanna bring you into the conversation here. You know, what are you hearing on the lending side for office, which, you know, I know has been a dirty word? Obviously, you guys have a very good portfolio, but just what are you hearing from the banks, CMBS, unsecured bond investors, you know, how, how are they looking at you, the sector? You know, where, where are borrowing costs today for, for BXP?
Thanks, Steven. I think it's okay to be quiet because we've got a great, strong balance sheet. So that's why we don't get many questions on that. Look, I think the financing markets, they're getting modestly better. The unsecured market has been open. It's been open throughout. You know, our spreads widened after the SVB crisis, but they have come back in. They've been very stable over the last four or five months at about 185 basis points over for a 10-year deal. So given today's Treasury, we could do a 10-year deal just north of 6%. And we have very active and open use of that market. We don't have a lot of expiries coming up, so we actually don't have to do a transaction in this market in the near term.
Our next expiry is not until the beginning of 2025, where we would think about that potential execution. I would say that the bank market and the life insurance company market, and the mortgage market, in general, is much weaker than the unsecured bond market. So if you're a company that doesn't have access to the broader unsecured market, I think it's more difficult for you to secure financing. Banks continue to look to reduce their exposure. Many of them are under regulatory pressure to reduce commercial real estate exposures. They're being choosy about who they're doing business with. So you're seeing them exit some relationships that aren't as profitable for them, and keeping relationships that they feel confident in, both from a credit perspective and from a relationship profitability perspective. The CMBS market has come back.
Credit, credit spreads have improved significantly in that marketplace. The single asset securitization market, where you can do large loans, had been shut down for a couple of years. We have seen two recent SASB loans done in the office sector, so I think that's showing some green shoots in that marketplace. Pricing is still high. Pricing for a 40%-50% leverage loan is probably 300 over, and it's a floating rate market today. And I would say that the life insurance companies are still pretty much out of the market.
So the mortgage business is a little bit more difficult, and as Doug was describing, for some of these buildings that are reliant upon mortgage financing, it's hard for them to have confidence that they can refinance those mortgages, and that could create opportunities for others that have access to capital in the marketplace.
Let me just... We have a few minutes. Anybody with a question from the audience? Seth.
If you want to yell, we can hear you.
Can you talk a little bit about the D.C. market? Historically, more stable through cycles, but obviously, return to office has been a challenge. And maybe where would you rank D.C. over the next five years as a market, not just your portfolio, excluding Reston Town Center, between sort of Boston, D.C., New York, and San Francisco?
A couple of quick comments on D.C. So for BXP, D.C. is actually a tertiary market. Our portfolio is predominantly in Northern Virginia, in Reston. And so we're really, D.C. is sort of, you know, secondary from a cash flow perspective. It's an important market in terms of our business, but it's really not an important market relative to market share. I would tell you that the D.C. market has not seen a growing customer for quite some time, and in general, the GSA has reduced space. The GSA is not coming to work, and Owen can comment on all the conversations he's had with politicians about that problem. And the legal practices, which are really the dominant user, have all shrunk or are shrinking.
And so I would say that the D.C. market is a challenged market relative to demand. Interesting for us, the D.C. market is probably the most distressed market relative to capital structure. There are more zombie buildings in D.C. than anywhere, and as you know, the nature of the D.C. building is that it's a, quote, unquote, "short, squat building," and every law firm has a desire to be in the top of the short, squat building, also referred to as the muffin top, for those of you who eat a lot of pastry. Interestingly, there are virtually no good blocks of space available.
So we have been actually in conversations with a law firm that is looking for 160,000 sq ft and can't find anyone to build them a new building, where they would take the top of that building at any price, regardless of... And they'll pay what they have to pay, because no one wants to take the speculative risk on the other portions of the building. So what I would say is that for—D.C. has traditionally been a merchant building market, in the sense that most tenants, after their initial lease, look for the next shiny car. And now, with capital strains from an availability perspective, limiting the ability to get new construction going, I think over time, D.C. is going to see a lot less of that.
So I would predict that, you know, five or six years from now, there will actually be a tighter market in D.C. But for... At the moment, without demand growth, it's just a very sort of static market. And interestingly, the best assets are getting far more market share because there are so few of us who actually have capital that are prepared to put in those assets. We announced a 15-year extension on a lease, that's now gonna mature in the, in the 2040s, on a building called 901 New York Avenue. We actually bought our partner out, and Owen can talk about that. As soon as we announced that we did that, then, that we were doing a major repositioning, the activity level picked up dramatically because it, it was clear we were gonna invest in that building.
So ranking, I would tell you that my view is that our New York, Park Avenue and our Back Bay of Boston are sort of one and one. Those are by far the most dominant markets that we have. And then our Cambridge market, where we don't have much in the way of availability, so we can't make a lot of hay there, other than through development, would be a close second. And then, sort of things sort of fall off from there. And then I would jump to Reston, Virginia, our SF Salesforce Tower, sort of, you know, mission-related assets in San Francisco, and then everything else is sort of, you know, tertiary to that.
DC last.
D.C., D.C. is just, yeah, is sort of in that other bucket in terms of growth.
David?
Hi, apologies if you've already touched upon this, but could you talk about whether TI packages are typically stabilizing? Are you able to get annual bumps on any of your new leases? And also, are we looking at tenants looking at... What about duration? Are people looking for shorter leases as opposed to being happy to sign for longer?
All right, I'm gonna include my colleagues here. So big picture, rents have bumps. TIs are stabilizing. Depends on where they are, you know, 2%, 3%, sometimes it's $5 or $7 after five years. And I'll let Hilary talk about TIs in New York, and I'll let Mike talk about our average lease length.
So tenant improvements in New York saw a run-up, call it, five to seven years ago, because construction costs were increasing quite a lot. They went up about 50% over a five-year period. They've since stabilized, and they've been stable for the last three years. So we've not seen increases in in tenant improvement concession packages, and we have not seen increases in free rent and concession packages. So in the submarkets where rents are going up, like Park Avenue, net effective rents are also going up. I think that once sort of the occupancy metrics in the adjacent submarkets improve and free rent starts to go down, you'll see a real acceleration in net effective rents going up. But for now, I'd say there are modest increases in net effective rents in the best submarkets in New York.
On lease term, you know, our lease terms have been very consistent, so we announce it every quarter, the average lease term in our leases, and they're always, you know, somewhere between 8.5 and 10 years. New leases, where you're doing new installation, where a new tenant is coming into a building, still mostly 10- to 15-year terms. Renewals, you know, you get a lot more three- to seven -year terms on renewals, and you have less of a TI investment in those, right? So we're not in a situation in our buildings where we're seeing a lot of, "We're not sure what we wanna do.
Let's just do a one-year extension or a two-year extension and kind of kick the can, and we'll decide later." Most of the clients in our buildings have decided what they want to do, and they're willing to sign long-term leases, and they're investing in the space.