Nick Joseph here with Michael Griffin with Citi Research. We're pleased to have with us BXP CEO Owen Thomas. This session is for Citi clients only, and disclosures have been made available at the Corporate Access Desk. To ask a question, you can raise your hand or go to LiveQA.com and enter code GPC25 to submit any questions. Owen, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.
Well, Nick and Michael, thank you very much for having us. It's always a pleasure. I'm joined this morning to my right, President and Board Member Doug Linde, to my left, CFO Michael LaBelle, and over to the right, Head of IR Helen Han. A couple of introductory remarks and why investors should purchase BXP stock. First, we're the largest public company in the country that focuses on the premier workplace segment. The first, I think, reason that I would suggest investing in our stock is that most of the environmental factors that matter to our business are working in our company's favor at the moment. So what do I mean by that? Well, first of all, we've got a very significant trend in companies returning to the office. And this is certainly true on the East Coast, and it's increasingly true on the West Coast.
Though we think the second point I'm about to make is a more important driver of office demand, clearly if you're using your offices, you're going to lease more, and that is working in our favor. The second is our clients are not individuals, they're companies. So their health is very important to our leasing activity. Corporate earnings grew in 2024 after not growing for two straight years, and they're growing again in 2025, marked by using the S&P 500 earnings growth as a marker. So when companies are growing, they're more likely to hire people, start new businesses, and have a lot more confidence in leasing space. Then lastly, as I mentioned at the outset, we focus on the premier workplace segment of the office industry, which we define as the top 10% of buildings in all of our markets.
And that Premier workplace segment continues to materially outperform the overall office business. Direct vacancies are 5 percentage points lower, asking rents are 50% higher, et cetera, et cetera. So what's happening with us, given all of these positive environmental factors? Well, our leasing is taking off. We had a very strong fourth quarter where we leased 2.3 million sq ft. Our leasing overall in 2024 was 35% ahead of where we were in 2023. And it's getting back to pre-pandemic levels as a company. And then very importantly, when you look to the future for us, we have very limited lease rollover in 2026 and 2027. So in 2026, our rollover percentage is 3.8%, and in 2027, it's 5%. And by the way, the other very important point is when you look at who is rolling in those two years, the largest client is 140,000 sq ft.
So that means smaller tenants lease their space on a more just-in-time basis. So we have a much better shot at renewing a higher percentage of that small amount of rollover that we have because no one's really that big. So that's very important because that's going to, if we continue to lease space at our current levels faced with that amount of rollover, that's definitely going to help us increase our occupancy and our FFO per share in the coming years. And then lastly, we also are increasingly having opportunities in new investments to create external growth for the company. Most notably, and I think this is underappreciated by shareholders, our DC team created out of thin air a very creative new investment for us in downtown Washington, DC. We bought a building for about a hundred, we bought a loan on a building for $110 sq ft.
We're tearing the building down. We're building a brand new 300+ thousand sq ft property. It's directly on top of the busiest metro stop in Washington. We've leased half of it. We have a signed lease to a prestigious law firm for half the property. We're negotiating a lease with another prestigious client for the rest of the property, and the pro forma development yields are over 8%, which is very attractive to our shareholders. We think we're going to have other opportunities to do those kinds of things and possibly make acquisitions, which will accrete earnings, so Nick, those are the reasons why we think BXP is an interesting investment opportunity.
All right, thank you. I think we'll want to hit on many of those points that you just made, but maybe just one of them was talking about the limited lease rollover over the next two years. And I'm just trying to marry that with the comments you made on the broader leasing environment improving. So is it a good thing to have limited lease rollover right now, or would you actually rather have a little more just given the strength that you're seeing?
Yeah, no, we definitely want less. I mean, we this year have higher rollover. It's about 6%, and we have a couple of large known move-outs, and so we have, even though we're having strong leasing activity, which I'm sure Doug is going to talk about, I think we believe our occupied square footage is going to be roughly flat through 2025 because of that phenomenon, so that's why we're so focused on the next couple of years in terms of when the FFO can grow because we don't have those large known move-outs.
And m`aybe just starting off there on the leasing pipeline, you mentioned OT the fourth quarter really strong over two million sq ft. Seems like 2025 is off to a strong start. So maybe give us a little sense of where the pipeline is today. What are your expectations for 2025? I know you've kind of guided to around flat occupancy on a year-over-year basis, but it seems that if you've had that leasing success, it should ultimately translate to occupancy growth in 2026 and beyond.
Yeah, so this is Doug Linde. So the answer to your question, Michael, is that in 2024, we leased 1.5 million sq ft of vacant space. Our expectations are we'll lease somewhere in the neighborhood of 2 million sq ft of vacant space in 2025. Right now, as we sort of roll back the clock to Q1 2025, so starting the year, we've got about 1.6 million sq ft of active leases in negotiation. Of that space, 600,000 sq ft is on vacant space, and 600,000 sq ft is on 2025 renewals.
So the bulk of our activity to date is exactly where we would have expected it to be to sort of start to pick up our overall lease square footage and ultimately our occupancy. Right now, about 400,000 sq ft of that is in the Boston market, and about 500,000 sq ft is in New York. The Washington, D.C., is 300,000 sq ft, and our West Coast is about 300,000 sq ft to sort of just give you a geographical range of where that square footage is coming from.
On the demand there within the pipeline, it would seem to reason to me that New York and Boston are still probably the two strongest markets. You've got Reston, probably seeing strong demand too, but it's those West Coast markets, I think, that are somewhat lagging. Do you really need to see vacancy leasing pick up at like a 680 Folsom, a building like that, to hit that 2 million sq ft of vacancy guidance?
So in 2025, we have a budget with our region. So it was sort of a bottom-up budget. And we had a limited amount of leasing in our what I would refer to as tech exposure on the West Coast in our sort of baseline model for 2025. Interestingly, we've got a lot of leasing to do in New York City. So we have 360 Park Avenue South with 400,000 sq ft of availability. We have 200 Fifth Avenue with 350,000 sq ft of availability. We've got 100 plus thousand sq ft of rollover at 510 Madison Avenue. We've got over 100,000 sq ft of rollover at 599 Lex. We've got about 100,000 sq ft of availability at the General Motors Building.
So interestingly, when you sort of talk about where our availability is and where I think we're feeling pretty strong about our ability to grow occupancy in later years is because it's exactly that's where much of the space is. Then we have a decent amount of space available in San Francisco, both at Embarcadero Center at 680 Folsom, as you described, and then down in Mountain View in our R&D portfolio. And I would tell you that the overall level of transactional activity there is better than it was in the third quarter and the fourth quarter of 2024. The issue on the West Coast at the moment is there's just not the same urgency for leasing space as there is on the East Coast. Why is that? Because there's a lot of availability on the West Coast. And on the East Coast, if you sleep, you lose, right?
You have an under 10% availability rate in the Park Avenue submarket. So if you screw around too long, you're not going to have the space. On the West Coast, there's more time because there's more availability. But I would tell you that we are seeing a reasonable amount of granular demand, which is a good thing. It is not going to create a situation where we are in a landlord's market anytime soon, right?
When you have a 20%-30% availability rate overall in the market and a close to 15%-20% availability rate in quote-unquote premier, it's going to take some time and it's going to take some very large ticket leasing, meaning large blocks of space being committed in order for the overall market to start to show the kinds of conditions where a landlord would be able to start to either raise rates materially and/or with lower concessions.
Maybe specific to D.C., obviously, with everything going on from a headline perspective with government efficiency initiatives and the ripple effects of contractors and other agencies there. What are you seeing in D.C. leasing? I mean, we can talk about the D.C. transaction specifically, but that was more on the law firm side. What is the overall sentiment there and where are we in terms of, is it a wait and see or are you starting to see some more momentum with the new administration?
I think the DOGE activities are net positive for BXP's portfolio in D.C. Why do I say that? Because the government, for the first time since the pandemic, has mandated everyone to go back to the office. This is something that the real estate industry has been lobbying for for a long time and has finally happened. So just to state it in an extreme, if some significant percentage of the government workers are laid off, but the rest of them go back to the office, net-net, that's positive for BXP's footprint. Why? Number one, there'll be more street traffic in D.C., more activity. It'll help all the local businesses, the retailers. Second, much of our client base in Washington are contractors to the government. And the employees in those companies will often tell their bosses, "Well, look, I'm going to work from home because my client's at home.
They don't care," but now if the client's back in the office, I do think the clients, or if their client's back in the office, the clients that we serve are more likely to come back to the office. So that's a very important point. It's counterintuitive, but we think it's true, then the second thing is, if the government reduces its real estate footprint, it doesn't have a direct impact on BXP. We only have today 70,000. We have 53 million sq ft. We have 70,000 leased to the GSA. So it's de minimis, and the buildings that the GSA occupies, the rent levels are half, maybe a third of what we are seeking for our portfolio.
A great example is Reston, Virginia. We own Reston. It represents over two-thirds of our income stream from Washington. Even before any impacts from DOGE, our properties are 5% vacant, the market is over 20% vacant, and the rents are 20%-30% higher. So it's got an ecosystem that allows it to compete for a different client base at a different economic level. So I don't think the reduction in GSA space will have a direct impact on our company.
And Nick, you asked an interesting question because I would have thought, and I think it's sort of behind your question, that given the uncertainty associated with the way the government is currently working, that the contractors would be nervous and would be pausing on the kinds of things that they do, a.k.a. procuring more real estate. And so I have been pressure testing this literally on a weekly basis with our team in DC. And to date, what I've seen and what they've told me is there's been literally no change in the sort of focus on growing. And in fact, one of our development properties is referred to as Reston Block D. We have a government contractor that last week signed a letter of intent for the entire 75,000 sq ft building.
We signed a lease with a cybersecurity contractor that also is in the DoD world that just grew by 15,000 sq ft and called us last week and said, "We're looking for another 50,000 sq ft." We were contacted by a third government contractor last week that is asking us to purchase a building in Reston for a contract that they have just won for a defense-oriented installation. So as much as there is all kinds of conversation about reductions in DoD spending, it doesn't appear that the mission-critical things that are being done by the contractors, at least the ones that we have relationships with in Reston, are being impacted in any way at the moment.
OT, maybe to follow up on kind of your optimism around DOGE bringing employees back and the benefit that that might have for D.C. in particular, do you think there is going to be a ripple effect in that the federal government is mandating more stringent return-to-office requirements? And while we've seen some areas of the private sector push it more than others, that this could be a galvanizing force to get the private sector back to the office.
Look, I think all return-to-office mandates help. My view of remote work is that what it has become is an employee benefit. It is basically like compensation. So companies do it not because they think it's more productive. They do it because they have to, because it's like compensation. You have to pay market compensation. You have to provide a market remote work policy. So the more companies that rein that in, they take away that benefit, then I think it's positive for the marketplace for office because less companies are going to provide the benefit and there'll be more office demand.
We had a question come in from LiveQA here. What sort of rental rate spreads or concessions are you expecting on new leases versus renewals?
I would tell you that, relatively speaking, there's not much in the way of a difference between a renewal transaction and a new transaction in a soft market. There's a very big difference in a very tight market. In a soft market, the representative of our client, a broker, basically goes out and tries to find the best deal. And to some degree, they use the market leverage to get the concession package that's necessary to "equate" what a renewal would be versus a relocation. Obviously, there's to some degree additional capital that would have to go into the transaction relative to the client that's moving, that it wouldn't have to go into one that's potentially renovating in place.
We have that slight advantage. But net-net, there really isn't much in the way of "differentiation" there. In a tight market, it's very different. In a tight market, we can actually, with an existing client, ask the question, "What do you need?" as opposed to, "What would you like?" And the "what you need" generally is not a lot of capital. And therefore, the concession packages in tight markets for renewals are significantly lower than what they would be to bring a new client into the portfolio.
And then we had another one come in on leasing specific to life science in the lab market. What are you seeing in terms of leasing momentum there? How much new supply are you competing with? And what has net absorption been?
So we have two primary life science markets. The first is the greater Waltham, Cambridge market in Boston, and then in South San Francisco in the Bay Area. And what I would tell you is that there is a lot more office demand than there is life science demand in those two marketplaces. Interestingly, there's actually a reasonable amount of office demand from life science companies in those marketplaces. So we are, for example, in the process of doing a lease of 40,000 sq ft with a life science company to go into a life science building and to take office space. And so they are not asking for a lab installation, interestingly. They're asking for a general office use installation. Why?
Because this particular life science company has gone out and bought intellectual capital IP from a foreign company, and they are now taking that product and trying to bring it through the FDA regulatory process. And since the compounds are created and they've already been gone through their phase one trials, there's no longer a need from that product perspective to have people in lab coats doing kinds of experiments that are necessary when you're sort of building from the ground up. So we're actually seeing, I'd say, a sort of a shift right now of those types of requirements in our portfolio, certainly in the Boston market, as opposed to having "true lab R&D." The issue from a supply perspective is that there still continues to be significant amounts of well-built sublet space available in these marketplaces.
And that means that you can get space for a significant discount to what a direct "bespoke" landlord installation would need to be. So for us to compete, for example, in South San Francisco on building out raw space and providing somebody with a 400-plus or minus allowance and charging a rent of $6 or $7 a sq ft, and they can get that same installation that's already in place for $2 a sq ft, very hard for us to compete with that. So until such time as there's a unique need for a space or that space starts to become materially in less demand, it's going to be a challenge from a life science demand perspective for direct shell space to compete.
Maybe this is a good segue to kind of switch gears and talk about external growth opportunities. Owen, you alluded to it a little bit in your opening remarks, but whether it's development opportunities or potential acquisitions, it seems like BXP is readying itself to go on offense in 2025 after a number of deals last year as well. So maybe if you could just talk about the opportunity set that you're seeing, how deep and liquid is the transaction market, the kind of buildings that you're targeting? I imagine there are a number of high-quality premier workplaces out there that might have broken capital structures that a well-capitalized landlord like BXP could benefit from.
Let me divide my comments on this into three categories. First will be office development. Surprisingly to me, this is a significant external growth category for us right now. I mentioned at my opening remarks this terrific and accretive investment that our DC team put together, 725 12th Street. Second, we have a site in New York, 343 Madison, which has got direct escalator access into the Madison Avenue concourse of the Grand Central Terminal. I think the Grand Central market in New York City is probably the strongest office market in the United States, and we have the only actionable site. By the way, it is under construction because we are building this access corridor. We are in discussions right now with five or six potential anchor clients for the property. By the way, it is 950,000 sq ft.
These anchor clients range from about 150,000 sq ft to around 400,000 sq ft, primarily financial services, a few exceptions. Our pro forma yields for this project are over 8%, and we have a capital partner that will be funding 45% of the development. Certainly hope to get that going in 2025. That's the first category. Second category would be acquisitions. I'd say the acquisition market has been slower than what we would have expected, but I think that's changing as we come into 2025. We're seeing now larger and more high-quality buildings come to market. Probably the best, most recent example would be 590 Madison in New York is being offered by Ohio State Teachers. The offering is over $1 billion in price. We'll certainly look at it. I don't want to make any predictions about what's going to happen.
But we're going to be interested in acquiring premier workplaces that we can acquire on an accretive basis to our shares, and I'm hopeful that more will come, and I think it will, because I think what you're seeing right now is there is some level of liquidity for office investment, primarily, by the way, driven by the CMBS market. There's been four or five very significant CMBS deals done on New York City office buildings, so if you take this 590 Madison transaction, you can probably get a 60% CMBS loan. I mean, it's still going to require $500 million of equity for office, which is not easy to raise, so I think you're going to have more owners that have been sitting on office inventory for five years or four years and haven't been able to sell it.
And now at least there's a price that's reasonable where they can get out. And I think you're going to see more of that activity. And then the third category is residential development. We just delivered a premier asset in Reston, Virginia called Skymark. We own 20%. We have a capital partner. It was on our site, and we brought in a capital partner for 80%. We have a project. It was a small lab/industrial building in Lexington, Mass, called 17 Hartwell Avenue, and we got it re-entitled into stick-built residential. And we are in the process of negotiating bringing in an 80% capital partner for that. And I have every expectation that we'll launch that project in 2025. And if you go through our portfolio, we've been spending a lot of time in our land and buildings out of service looking at, can we convert these to residential?
And that's going to lead to additional residential projects. Our residential development activity is different from the office in the sense of we are bringing in capital partners for at least half and maybe the majority of the equity. We don't lease and manage. We do that third party. And as a result, it's less strategic to us, so we're going to have a more merchant approach. So I would have every expectation that once these projects are delivered, over time, we'll find a way to sell them. And the opportunity for shareholders is we're a minority holder, but we also get fees for all the development activity and in some cases, carried interest. And so that's how we're conducting that activity. So those are our three external growth drivers.
Just want to say one thing about external growth, which is, it's great and it's sexy and it's the kind of thing that the teams want to do, but I just want to put it in perspective, so if we can gain 400 basis points of occupancy on a 50 million sq ft portfolio, that's 2 million sq ft of space at an $80 rent. That's $160 million of net bottom line contribution over the next couple of years. That will dwarf the external growth opportunities, and it's a lot cheaper. We pay TIs and we put some leasing commissions in, which we're creating through our operating cash flow for the portfolio, and we don't have to go raise additional capital to do that, so there's no dilution associated with it in any sense of the imagination, so that's the most critical thing that BXP can do.
Maybe just a couple of questions that came in from LiveQA. First one kind of relates to AI. Will AI drive a shift in tenant requirements for either life science or office space? Kind of in the, what are your thoughts, I guess, about the opportunity within AI and how it might impact both of those businesses?
Yeah, we spend a lot of time thinking about this. I think obviously we had a pandemic. We've had this work from home. We've had these issues that have had an impact on office. But I think what we need to all be focused on right now is what is the AI impact? So a couple of things I would mention. First, and I think most exciting for particularly the Bay Area, many of the clients that we serve today, take example like a Salesforce, they were the bridge between the digital technology and a use case for business. And think of Salesforce, I don't know if they still are, but at one point they were the largest user in San Francisco. And there are other examples of this, Uber, Airbnb, etc., taking digital technology and creating a use case.
So if you go to AI, a lot of the activity today is on creating the infrastructure for AI and the large language models. But what you haven't seen a lot of demand for are the use cases. And there are a very significant number of companies that are in the embryonic phases that are creating use cases for AI. And I think those companies are going to emerge. I can't tell you what their names are. I can't tell you exactly what they're going to do, but I think they're going to be successful and they're going to lease a lot of space. And I think that is going to be a big opportunity in San Francisco. And then the other thing I think that's very important in thinking about AI for the future is what's going to be the impact on jobs in general and therefore office space?
Again, we can debate this extensively, but I think the answer for certainly the near and medium term is that the top of the intellectual pyramid is going to create jobs. I just went through the case of how it's going to create jobs. I think it's creating jobs today. However, that's also going to be destructive to jobs. The jobs that it's going to be destructive for are the ones that are more process-oriented, back office, etc. By the way, a lot of those jobs are not in the United States, and a lot of those jobs are remote work jobs, but it's going to have an impact. I do think the AI story is a great example of why we're in the markets that we are.
Because if you break down the jobs that are in San Francisco, New York City, Boston, the cities where we operate, they are more at the peak of the intellectual pyramid. And I think that's where the growth is going to be. And I think cities that are cheaper, that have more back office facilities, those are the ones that are going to struggle in the AI future that we're going to all experience.
Maybe just following up on that, we had a question come in just around we've seen some VC investments by some REITs recently in prop tech companies. Is that of any interest to BXP or something that you might consider?
No. We've looked at it. We've been offered multiple things over a long period of time. Look, we're a real estate company. Our shareholders expect us to invest in real estate properties. That's our expertise. And the other reason to do this would be to get an early look at any applications that might be coming out of prop tech. And given our scale and who we are, we get those looks anyway. So there's not really a compelling reason for us to make those investments.
We had another question come in specific to what you're expecting in impact from potential tariffs. I guess it's probably on the construction side.
So what I would say is the good and the bad news is for us is that there's not a lot in the way of base building construction going on anywhere in the country in the office business. So I think it's going to be on the margin bad, but not material. We have gone through some pretty extensive what I refer to as assumption calculations based upon the amount of materials in a particular trade and where that material might be coming from and whether or not there is or isn't excess supplier availability in that particular trade.
And net-net on a large-scale project, call it $100+ million dollars or more, we think right now that the impact, assuming again the numbers that are being thrown out by the administration are actually hold, is somewhere between 1% and 3% of total cost of that $100 million. So on a $100 million project, $3 million. That's the sort of magnitude that we are seeing, and that's based upon the current sort of aluminum and steel and things that are coming from Southeast Asia, etc.
We had a question over here.
Yeah, can you just talk a little bit about the cost to build today in New York and D.C., number one? And number two, with all the efficiency stuff and talk going on in D.C., do you see a big opportunity for buildings potentially that are going to come for sale from the GSA?
You asked three very different questions there. Net-net, costs are materially higher in 2025 than they were in 2019. The hard costs are on a magnitude of 50% higher. Our development budget that we've published for the DC job is about $1,100 sq ft, Mike. And that assumes a land contribution of about $100 sq ft. So sort of give you an order of magnitude. We're assuming on the hard cost piece of that right now, about a 50% increase in what we paid for the last building that we did, which was 2100 Pennsylvania Avenue. So that's sort of what's built into our numbers. There are going to be a tremendous number of buildings in DC that are going to be available relative to having no occupants in them.
Whether they are priced to a point where the land can be viewed as sort of what the asset is, is the question. I don't believe that there are going to be many of them that they're going to have a commercial office reuse. They could have a residential reuse. The problem is that the DC market is not a frothy market relative to residential construction right now, and there are some legislation in the DC market around apartments where to the extent that a multifamily project is sold, that you have to offer each individual unit to the occupants. That makes it a less enticing market from institutional capital's perspective, so I'm not entirely sure what the review and reuse of all of those buildings are going to be, but it's going to take a long, long time to figure it out.
Now we're kind of running up on time here, so I'll just finish with the two rapid fires that we've got. First one, what is your expectation for net effective rent growth for the office sector overall in 2026?
Same-store growth?
Yeah, same-store growth, net effective rent growth.
Mike says three.
3%. All right. And will there be more, fewer, or the same number of publicly traded office REITs a year from now?
I always say fewer, and I'm right half the time.
All right. Thank you guys so much.
Thank you.