Good day. Thank you for standing by. Welcome to Q1 2026 BXP Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. In the interest of time, please limit yourselves to one question. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Helen Han, VP of Investor Relations. Please go ahead.
Good morning, and welcome to BXP's 1st quarter 2026 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Regulation G. If you did not receive a copy, these documents are available in the investor section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.
Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release, and from time to time in BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer, Doug Linde, President, and Michael LaBelle, Chief Financial Officer. During the Q&A portion of our call, our regional management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to one and only one question. If you have an additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.
Thank you, Helen, and good morning to all of you. BXP had a successful first quarter. Our FFO per share result exceeded our own estimate by $0.02. Our FFO per share guidance for 2026 was raised by $0.01. We made continued strong progress on our business plan articulated at last year's investor conference by completing significant leasing, closing additional asset sales, and progressing our development pipeline. Last week, we also released our annual sustainability and impact report outlining the positive outcomes achieved for shareholders and other important constituents from our industry-leading sustainability efforts. Our first business plan priority is to lease space and improve portfolio occupancy. There is no question that AI has been and continues to be enormously beneficial to BXP's leasing activity, despite the market anxiety regarding the impact of AI on job creation and resultant leasing demand.
We are experiencing direct benefits by leasing space to AI companies in San Francisco, New York, and Seattle, as well as indirect benefits from both leasing space to companies displaced by growing AI firms and to our core financial, legal, and business services clients serving the rapidly growing AI industry. The near and medium-term negative impacts of AI on jobs are more likely in support functions, which are less present in premier workplaces and in gateway markets. We had a strong first quarter, completing over 1.1 million sq ft of leasing. Our in-service portfolio occupancy rose 70 basis points to 87.4%, and the spread between our leased and occupied square footage widened 80 basis points to 3.5%, a precursor to more occupancy gains ahead. The environment for leasing premier workplaces remains healthy and very active.
Our current and prospective clients are generally experiencing increasing earnings due to the growing economy in the U.S. We are seeing more client growth than contraction in our leasing activity. In many cases, our clients are also upgrading their space and/or location to more readily effectuate their tightening in-person work policies. All of these client factors, growth, more use of space, and upgrading, have led to the consistent strength and outperformance of the premier workplace segment of the office market, where BXP is a clear market leader. Premier workplaces represent roughly the top 14% of space and 8% of buildings in the four CBD markets where BXP has a major presence.
Direct vacancy for premier workplaces in these four markets is 8.5% versus 13.8% for the broader office market, while asking rents for premier workplaces continue to command a premium of more than 60% over the non-premier buildings. Over the last three years, net absorption for premier workplaces has been a positive 11.9 million square feet versus only 420,000 square feet for the balance of the market. For the non-premier workplace segment, all markets had negative absorption except New York City. Given these positive market and client trends and BXP's strong leasing over the last year, we have started to realize our forecasted occupancy gains the last two quarters, reinforcing our confidence that our target of 4 percentage points of total occupancy improvement over 2026 and 2027 remains achievable.
Our second business plan goal is to raise capital and optimize our portfolio through asset sales. During our investor conference, we communicated an objective to sell land, residential, and non-strategic office assets for approximately $1.9 billion in net aggregate sale proceeds by 2028. We continue to make great progress in the first quarter. We have raised $360 million in total net sale proceeds so far this year and $1.2 billion since our investor conference, including land sales for $250 million, apartment sales for $460 million, and office lab retail sales for $500 million. Further, we have under contract the sale of three assets with total net proceeds of approximately $40 million and are in various stages of marketing several additional assets.
As of now, future net proceeds from dispositions projected in 2026 could aggregate up to an additional $400 million. We are consistently exploring more asset sales. We have been able to achieve attractively valued land sales by creatively positioning our office land for more valuable uses, particularly residential. Across multiple jurisdictions, we have received or are pursuing entitlements for over 3,500 residential units on land intended for office use, which is creating significant value for shareholders and will be the backbone of both our apartment development and land sales activity going forward. We have now sold three high-quality stabilized apartment buildings, which we built all at a mid 4% cap rate.
A notable office transaction we completed in the first quarter was the sale to our partner of our 50% interest in the Marriott headquarters building in Bethesda, Maryland, which we developed in 2021. The 743,000 sq ft building is fully leased to Marriott and sold for a gross price of $430 million or $589 a sq ft and a 6.8% initial cap rate. The Bethesda market is not strategic for BXP. We were able to achieve attractive exit pricing, and the development was very profitable for shareholders, generating a $35 million gain on a $47 million investment. Supporting our disposition efforts, office transaction volume in the private markets remains healthy with financing available at scale, particularly in the CMBS market.
In the first quarter, significant office sales were $14.1 billion, down from the seasonally elevated fourth quarter, but notably up 72% from the first quarter of 2025. In addition to the Marriott headquarters sale, there were a couple of other transactions with relevance to BXP's portfolio. In New York City, 575 Fifth Avenue sold for $383 million or $734 a square foot and a 5.1% cap rate for the office portion of the building. The asset comprises 525,000 square feet and is 90% leased. In San Francisco, the Transamerica Pyramid sold for an allocated price of $600 million or $1,113 a square foot.
The 525,000 sq ft building is only 60% leased, so the in-place cap rate was 2.9%, but expected to be in the high 7% range in several years once the asset is leased and stabilized. The third business plan goal is to grow FFO through new development selectively with office given market conditions and more actively for multifamily with an equity partner. For office, we have and expect to allocate more capital to developments than acquisitions because we continue to find premier workplace development opportunities with pre-leasing that we believe will generate cash yields upon delivery roughly 150-250 basis points higher than cap rates for lower quality asset acquisitions with ongoing CapEx requirements. The trade-off is timing as developments obviously take several years to deliver.
For multifamily, we have 3 projects with over 1,400 units under construction, are in various stages of entitlement and or design for nearly 5,000 units, and have one project in Herndon, Virginia, which we plan to commence in 2026. We expect to continue to capitalize new development starts with financial partners owning the majority of the equity. BXP's largest development underway is 343 Madison Avenue, our market leading premier workplace tower in New York City with direct access to Grand Central Terminal. As previously reported, we have a lease commitment for 29% of the building located in the mid-rise. We are also negotiating leases with tenants for another 27% of the building, which will bring us to 56% committed with available space at both the podium and high rise of the tower.
Given strong market conditions and the lack of available competitive product, we are making multiple client presentations every week for the remaining space. We have procured 83% of the construction costs, have realized anticipated savings from our original budget, and our projections remain on track for a stabilized unleveraged cash return of 7.5%-8% upon delivery in 2029. We are in discussions with several potential equity partners for a 30%-50% leverage interest in the property, and also have an agreed letter of intent with a consortium of banks for construction financing at attractive terms. We intend to complete the recapitalization in 2026.
BXP's current development pipeline comprising six office, life science, and residential projects underway totaling 3.4 million square feet and $3.6 billion of BXP investment will deliver external growth over the longer term. In conclusion, we continue to successfully lease space and improve occupancy, creatively reposition and monetize non-core assets, and de-risk our development pipeline through leasing, construction, and capital raising successes. New construction for office has virtually halted, leading to higher occupancy and rent growth in many submarkets where BXP operates. Debt and equity capital is available for premier workplaces. BXP is building market share given our stability and consistent service to our clients and, in many markets, less competition.
BXP remains comfortably on track with our business plan, which, if successful, will lead to increasing portfolio occupancy and FFO per share, de-leveraging, external growth from development, and a more highly concentrated CBD and premier workplace in service portfolio in the years ahead. Let me turn over our report to Doug.
Thanks, Owen. Good morning, everybody. I'm gonna speak towards demand this morning for the bulk of my comments. We can debate whether technology companies today are overstaffed, whether remote work strategies have had a demonstrable impact on premier property demand, whether the massive capital investment from data center infrastructure has led to a different perspective on human capital from the large tech companies, and whether new AI models and AI agents will lead to changes in the makeup of the workforce. There are no answers, just conjectures. What we do know is that the U.S. economy has gone through many technology cycles since the invention of the personal computer 45 years ago. In this cycle today, there is dramatic incremental office demand growth from new organizations that are developing AI. This new technology demand is focused in San Francisco and more recently in New York City.
OpenAI and Anthropic are clearly the most recognizable expansions, but there are many meaningful space occupiers expanding across our markets. Databricks, Perplexity, Decagon, Harvey, Sierra, Snowflake, to name a few, with Decagon and Snowflake being new tenants in the BXP roster. It's clear that the clients that are growing are not the tech titans that expanded during the last decade, but there is meaningful office using growth in our markets. CBRE reports that there has been 3 million sq ft of positive office absorption in San Francisco over the last 7 quarters, including an extraordinary 1.4 million sq ft in the 1st quarter of 2026. This backdrop is important because it is increasingly translating into tangible leasing activity. In the 1st quarter, BXP's total leasing volume was 1.14 million sq ft.
As I discussed during our investor day, in-service vacant space leasing and covering near term lease expirations will drive our occupancy improvements and same-store revenue growth. During the first quarter, we executed leases on 700,000 square feet of vacant space and renewed or backfilled 235,000 square feet of 2026 and 2027 expirations. Post March 31st, our current pipeline of leases in negotiation consists of 1.7 million square feet and covers 500,000 square feet of existing vacancies and 500,000 square feet of 2026 and 2027 expirations. We start the second quarter with 1.44 million square feet of executed leases on vacant space that we expect to commence in 2026 in the next three quarters. The remaining calendar year of 2026 expirations are down to 770,000 square feet.
If nothing else were to change, we should pick up 670,000 sq ft or 150 basis points of occupancy and end the year at 89%. The majority of our remaining 26 expirations are known, near term upside will stem from leasing currently vacant space with immediate revenue commencement. We ended 2025 with in-service occupancy of 86.7%. Our occupancy at the end of the first quarter is 87.4%, an increase of 70 basis points, with about 57% of that gain stemming from improvements in the portfolio leasing and the balance due to changes in the portfolio, including the sales described in the press release and the suburban office buildings I highlighted last quarter that we removed from service and expect to demolish and then redevelop into higher value residential uses consistent with our portfolio optimization strategy.
Entitlements are progressing quickly in Santa Monica and Waltham, Mass. Separately, we are finalizing documentation with an institutional partner to commence development at Worldgate in Herndon, Virginia, where we purchased 300,000 sq ft of office buildings and re-entitled this as residential townhomes and apartments. We anticipate closing the venture during the second quarter and immediately commencing construction. We are in active conversations with new and renewing clients across all of our markets.
Our total discussion pipeline, in addition to the $1.7 million sq ft in negotiation, is another $1.4 million sq ft, and we continue to anticipate a minimum of $4 million sq ft of leasing in 2026, consistent with what we put forth in our 2026 guidance. Post March 31st, we've executed $300,000 sq ft of leases, so the total for the year stands at $1.5 million sq ft as of today. We made a change to the way we were reporting our second generation leasing statistics this quarter.
Instead of providing statistics on leases based on the economic impact date of the lease commencement, which is backward-looking, we are showing the change in the rents for all the leases executed in the current quarter where the comparative lease expired during the prior 24 months from the date of the new lease. Since all that data is in our supplemental, I'm not going to repeat it. I do have a few comments on the transactions behind the aggregate numbers. In Boston, the data includes a 100,000 square foot lease in the Urban Edge space that was previously leased to Biogen. In New York, the bulk of the executed leases this quarter were at Times Square Tower, where we backfilled a law firm that was coming off a 20-year term with large bumps. In San Francisco, the largest portion of the leasing was at 680 Folsom.
In D.C., we extended a law firm for almost 6 years through 2038 in exchange for minimum TIs and a current rent reset. This quarter, we executed several large leases. 17 leases over 20,000 square feet, with the largest just over 100, and a second with an expanding client that took 92,000 square feet. 34% of our square footage involved renewals, extensions, or expansions, and 66% was with the new clients. Existing client expansions encompassed 150,000 square feet of activity, and we had about 50,000 square feet of contractions. I want to make a few comments on our individual markets, which speak both to the sources of demand and the success we are having leasing vacancy across the portfolio.
In the BXP portfolio, Midtown Manhattan, the Back Bay of Boston, and Reston, Virginia continue to have the tightest supply and therefore the most landlord favorable market conditions. This quarter, the most significant acceleration in activity was in the South of Mission Market in San Francisco, Santa Monica, and the CBD of Washington, D.C. In the Back Bay portfolio, where we're 98.8% leased, much of our current activity is filling in small pockets of availability. We have begun discussions with larger tenants that have expirations between 2028 and 2032, since there are no premier blocks of availability in the market.
In our Urban Edge portfolio, we completed a 100,000 sq ft lease with a national restaurant operator at The Quarry in Weston and a 43,000 sq ft lease with a life science company relocating into 15,000 sq ft of lab space and 28,000 sq ft of office space at 180 CityPoint. Our current Urban Edge activity includes expanding hard tech companies and additional life science companies that are looking exclusively for office space. In New York, the most significant change in our activity has been in Midtown South. At 360 Park Avenue South, we completed another 6 floors or 138,000 sq ft of leasing, which brings the building to 90% leased.
Last week, we came to an agreement with an existing AI client to expand to an additional floor, which will bring the building to 95% leased. Across Madison Park, we leased an additional 32,000 square feet at 200 Fifth Avenue, leaving us with only 33,000 square feet of availability, where we had 350,000 square feet vacant in 2025. At Times Square Tower, we executed over 100,000 square feet this quarter, including 85,000 square feet of currently vacant space. In San Francisco, the most significant change in our portfolio continues to be at 680 Folsom and 50 Hawthorne. During the quarter, we executed leases for 103,000 square feet, and in early April executed another 63,000 square foot lease.
Since the beginning of 2024, AI and tech leasing has steadily increased from 50% of the total leasing demand in the market to 57% to almost 80% in the first quarter of this year. As I stated earlier, there have been over 3 million sq ft of positive absorption over the last 7 quarters. In Santa Monica, we've seen a pickup in interest from clients with near-term lease expirations and the need for new and expanding space. This is a meaningful change from the last few years. The activity in D.C. this quarter was concentrated in 2 transactions. We did an early 153,000 sq ft extension with the anchor tenant at 6130 Connecticut, and we gave up our regional headquarters at 2200 Pennsylvania Avenue as part of a 58,000 sq ft lease with the Washington Commanders.
Currently, activity in the region is still concentrated at Reston Town Center, where we are 97.3% leased. This quarter, we completed 7 small leases with defense contractors and professional service firms, and we are in negotiation on over 150,000 sq ft of transactions, including 100,000 sq ft of 27 expiring leases, where in aggregate the tenants will renew and expand. John Stroman and Pete Otteni continue to field inbound requests from law firms that want us to identify sites and develop new projects similar to what we have achieved at 725 12th Street and 2100 M. We have some visibility on the third of these projects today. That wraps up my comments. Turn it over to Mike.
Great. Thanks, Doug. Good morning, everybody. Today I'm gonna cover our results for 1st quarter earnings and update our full year 2026 earnings guidance. For the 1st quarter, we reported FFO of $1.59 per share, and that's $0.02 above the midpoint of our guidance range and $0.01 ahead of consensus estimates. The performance of our portfolio exceeded our expectations by $0.03 per share and was partially offset by $0.01 of higher net interest expense. Outperformance in our portfolio was comprised of $0.02 of better rental revenues and $0.01 of higher termination income. The rental revenue beat was from commencing leases more quickly in both 535 Mission and 680 Folsom, as well as from some leases in the Urban Edge properties in Boston.
We also generated more service revenue from our clients, particularly in New York City and in San Francisco, reflecting increased utilization. Termination income for the quarter totaled $12.8 million, and it primarily related to two clients. In the first case, we proactively took back 25,000 sq ft from a client in Washington, D.C., that allowed us to lease 58,000 sq ft to the Commanders at 2200 Penn. This is a great trade for us, creating incremental occupancy and extending lease maturity. The second case relates to a client that defaulted on its lease in the fourth quarter last year when we took a charge totaling $3.6 million to write off their accrued rent balance.
This quarter, we received a termination payment totaling six and a quarter million dollars, which covers both the write off from last quarter as well as nearly 12 months of potential downtime in rent. Our net interest expense for the quarter came in higher by $0.01 per share from lower than anticipated interest income and higher commercial paper rates related to the market volatility in the fixed income markets. CP rates widened by 25- 30 basis points during the first quarter. The rates have improved in the past few weeks, they're still not quite back to where they were in the fourth quarter. I'd like to turn to our updated guidance for full year 2026.
Big picture, we've increased the midpoint of our FFO guidance by $0.01 per share at the midpoint by bringing up the bottom end to $6.90 per share and maintaining the top end at $7.04 per share. We have increased our assumption for termination income in 2026 by $8 million. It relates to several credit issues we're working through that impact about 200,000 sq ft of space that we expect we will get back in 2026. More than half of this space is held in a joint venture, so the financial impact to us is less. The termination income we expect to receive is in lieu of approximately $5 million of lower rental income in 2026 from these clients.
These spaces are readily leasable in the current market, and we expect we will be successful in backfilling them quickly. Strong leasing performance across our same property portfolio is giving us increased confidence in our growth outlook. In our same property portfolio, we are increasing our assumption for our share of NOI growth from over 2025 by 15 basis points to between 1.4% and 2.4%. Keep in mind, we exclude termination income from our same property NOI assumptions. If not for the lease terminations, we would have increased our assumption for our share of same property NOI growth by an additional 25 basis points. The increase is driven by the robust leasing activity that Doug outlined, which continues to exceed our expectations and supports a stronger occupancy recovery.
Reflecting this momentum, we've increased our occupancy outlook for 2026 by 25 basis points to an average for the year of 88.25%. On a cash basis, we have reduced our assumption for year-over-year growth in our share of same property NOI by 25 basis points, that accounts for the lease termination activity as well as a couple of early renewals with free rent periods in 2026. In our development portfolio, we expect to deliver 290 Binney Street more than a month early, as we are just about complete with the Tenant Improvements. AstraZeneca already commenced cash rent payments as of April 1st, we expect to deliver the project by June 1st at the latest. We have two factors impacting our interest expense assumption for the year. First, the early delivery of 290 Binney requires that we cease Capitalized Interest early.
Second, the likelihood for Fed rate cuts later this year has diminished, and we are now assuming that SOFR rates are flat for the remainder of 2026. Including our first quarter result, we have increased our 2026 assumption for net interest expense by approximately $10 million. Overall, we're raising our guidance for 2026 FFO by $0.01 per share at the midpoint, and our new range is $6.90- $7.04 per share. The changes come from increases in our assumption for growth in our share of same property NOI of $0.02, increases in termination income of $0.04, and an increase of $0.01 from our development activity. These are partially offset by higher interest expense of $0.06. As Owen described, we continue to execute on our plan.
We have closed on asset sales generating $1.2 billion in net proceeds, including $360 million so far in 2026, in line with our guidance. We're making great progress at 343 Madison with additional leases under negotiation and active discussions for both private equity capital and construction financing. Importantly, our leasing activity has been consistent and above expectations. Signed leases that have yet to take occupancy for currently vacant space has grown to 1.6 million sq ft. Our current pipeline of 3 million sq ft of leases either under negotiation or in active discussions is higher than where it stood last quarter. We remain highly confident in our ability to grow our occupancy meaningfully, driving higher portfolio performance and value. That completes our formal remarks. Operator, can you open up the lines for questions?
Thank you, sir. As a reminder, to ask a question, you will need to press star one one on your telephone. To withdraw your question, please press star one one again. We ask that you please limit your question to no more than one, but feel free to go back into the queue, and if time permits, we'll be happy to take your follow-up questions at that time. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.
Yeah, thanks. Good morning. You know, it sounds like all of you have had very positive comments around the leasing environment. Things have certainly gotten better, and the tide seems to be turning in a number of markets like New York, certainly San Francisco and parts of Boston. I guess the question is, you know, to what extent are you able to kind of shorten the time from the time you start the discussions to getting leases signed, and then the implications that might have for kind of the TI and CapEx that you might need to be spending on these deals? I guess, can you get tenants in the space faster, and might we see CapEx start to come down?
Steve, this is Doug. What I would say is that the duration of the lease is really dependent upon the aggressiveness of the legal counsel for our tenant. In some cases, we have counsel that are very thoughtful from our perspective, and we can get leases banged out in a couple of days. In other cases, it can take six months. I don't think that the market conditions have really impacted that. I would say our ability to say yes to requests from our tenants in terms of what their counsels are saying is clearly stiffened. Maybe that's why it's taking longer to get leases done in some cases, I don't know.
From a capital expense perspective, there's no question that in the Back Bay of Boston and in Midtown Manhattan and in Northern Virginia and Reston, we are being more conservative relative to the kinds of concessions that we're offering, meaning they're lower. They're lower in the form of the amount of free rent that we're giving, and they're lower in the amount of TIs that we're offering. I would say the West Coast still has a pretty significant concession package, largely because there's still a significant amount of space available, even though the demand has accelerated materially. I'd sort of say, you know, there are places where it's better and there are places where it's still, you know, relatively speaking, consistent with what it's been over the last, you know, three or four quarters.
Thank you. I show our next question comes from the line of Anthony Paolone from JPMorgan. Please go ahead.
Thanks. Good morning. I wanted to follow up on your comment about 80% of demand, I think out in San Francisco coming from AI tenants. Wondering how to think about that as to whether it's really incremental demand above and beyond what would be normal or if it kind of goes to this idea that, you know, only 20% of the demand is coming from stuff outside of AI. Just trying to think about, like, where that goes and what that tells us, if anything, about the rest of the tenants in the market.
I'll start, and I'll let Rod comment. My sort of inference on what's going on is that there is a clear acceleration of technology defined as these new AI-oriented companies that are absorbing the majority of the incremental space absorption in the market. You know what has changed, and it's changed dramatically, is that if you went back to 2010- 2019, virtually all of the absorption was coming from the tech titans. Google, LinkedIn, Microsoft, Meta, you know, the larger companies. That has clearly shut down. None of those companies are expanding in any material way in the city of San Francisco. In fact, some of them have given back space.
I would say that the amount of space that is being absorbed is accelerating or has accelerated. I can't tell you if that's gonna hold for a consistent basis for the next 3 or 4 or 5 quarters, but you know, these companies are, relatively speaking, aggressively hiring people, and they've made a decision that in-place work is critically important to their business strategies. You know, those are all great indicators from our perspective. The professional services and the business services firms have not expanded the way they are expanding in Midtown Manhattan. We're hopeful that as the...
you know, these companies become public, and they change their capital flows and that improves the overall, wealth creation in the West Coast, that there may be some more material improvements in financial services and professional services, business and administration services. Rod, I don't know if you have any other comments.
I think you covered most of it, Doug, but I would just add that on the topic of the non-tech companies, the traditional tenants, and we have many of them, particularly at Embarcadero Center, what we're not seeing is downsizing. I mean, they've gone through that already. We've executed a handful of different renewals with those types of tenants and some new tenants coming in. I'd say they're stable. When you look to the flip side of that and you think about where the demand is growing and where it's coming from, it's what you would expect from the Bay Area, which is it's a tech-driven market, and these are tech companies that are driving the market right now.
There are 20 requirements that are over 100,000 sq ft. That's about 3.3 million sq ft. This is in San Francisco specifically. A year ago, that number was about 12 requirements. It's definitely increased. It's great. As Doug said, these are with companies that we hadn't heard of before. It's new, emerging, growing companies. It's very positive.
Thank you. I show our next question comes from the line of John Kim from BMO Capital Markets. Please go ahead. Mr. Kim, your line is open if you have your phone on mute.
Sorry about that. Okay. 343 Madison, you talked about lease negotiations for another 27% of space.
There's been some media speculation of who that is. I'm wondering if you could just discuss whether or not you believe that space represents consolidation of space, expansion, or musical chairs.
This is Doug. It's tenants, it's not a tenant, it's tenants. I think it's a yes to all of those things. It's some consolidation, and it's some growth.
Thank you. I show our next question comes from the line of Nicholas Yulico from Scotiabank. Please go ahead.
Thanks. Mike, I wanted to ask about leasing CapEx. It was, you know, it was higher this quarter, $178 million hitting the FAD calculation. I think last call you said for the year it could be like $220 million-$250 million. Maybe you could just talk about kind of what drove that and how to think about leasing CapEx for the rest of the year.
What drove the leasing cost this quarter was really a very significant amount of lease commencements, basically 2 times what we normally see. It was driven by several early renewals that we did a couple of years ago that hit this quarter. There was over 1 million sq ft of that. You know, if you looked at leasing cost per sq ft, they were $10 per sq ft per leaser, which is pretty reasonable. That's well within kind of the range we would expect. It was just these early renewals that hit that caused that FAD to be higher. I would not expect that to continue at those levels for the next few quarters.
I do expect that, you know, for the year, our lease transaction costs will be higher, given the start that we have at $175 million for the quarter. I would anticipate that, you know, our leasing costs will be, you know, closer to in excess of $400 million based upon the occupancy growth that we anticipate. You know, there's a couple of other early renewals that are gonna be coming in the second and fourth quarter.
Thank you. I show our next question comes from the line of Blaine Heck from Wells Fargo. Please go ahead.
Great. Thanks. Good morning. I was hoping you could talk about the trends you're seeing in the life science segment of the portfolio. You know, you've disposed of your West Coast exposure, and you've had some success in leasing up the greater Boston portfolio. Is that potentially a source of funds if the transaction market is supportive, or do you still kind of see the overall Boston life science portfolio as a longer term hold for BXP?
The BXP life science portfolio is in 2 sub-markets. It's in, you know, Kendall Square in Cambridge, where we're building our new building for AstraZeneca, and we have buildings with Biogen, and we have buildings with the Broad. Then it's our life science buildings in Waltham, Massachusetts, at 180 CityPoint and at 880 and at 200 West Street, and then, you know, at 103 when we get that building leased. I don't think that we are looking at exiting any of those markets or any of those buildings. We are clearly seeing a change relative to the demand that's currently in the market towards more office and less lab intensitivity.
Quite frankly, we're taking advantage of that in our traditional office buildings with life science companies. In fact, the as part of the 1.7 million square feet of leases under negotiation, we signed a letter of intent last night for a 49,000 square foot life science company that's gonna take 49,000 square feet of office space at one of our buildings. I think that's gonna we're gonna see continuation of that. I would tell you that there's no question that the life science market has already bottomed out and things on the margin are getting better in the greater Boston ecosystem. I think you will find if you look at the companies that are quote-unquote incubator-like, there's more activity and more interest in those incubators.
Hopefully that will, you know, over time, roll its way into larger companies. There's clearly consolidation in terms of big pharma purchasing life science companies that are, you know, that were born and bred in the Boston ecosystem, again, which I think is a good thing for the ecosystem here. I would say on the margin, things are better. We're strategically, you know, going to continue to maintain our portfolio, and we believe in the long-term viability of the life science business in Greater Boston.
Thank you. I show our next question comes from the line of Jana Galan from Bank of America Securities. Please go ahead.
Thank you. Good morning, and congrats on the great leasing. Given the focus on occupancy and speed to occupancy, can you talk about any initiatives like spec suites, you know, to kind of attract tech and AI tenants quicker? Do AI tenants have different power or architectural requirements than kind of the more traditional tenant groups?
I'm gonna let our regional management team sort of answer that question. I'd like let Brian talk about sort of turnkey builds, where we're doing a significant amount of what I would refer to as we're gonna do sort of the design and the build-out for medium-sized companies. John Stroman can talk about our pre-built suite program in Northern Virginia. Rod, you can talk about what we did and how we were successful at leasing 680 Folsom. Brian, why don't you get going first?
Yeah. Urban Edge is the area where we're seeing this type of activity because our portfolio is effectively leased in Boston and Cambridge. On the Urban Edge, we are seeing.
This turnkey ability with these new emerging companies and several of them in life science. Like Doug said, we're encouraged, and we feel it's bottomed out. The activity, I wouldn't say, is like overwhelmingly significant, but it is definitely ticked up. The companies that we're talking to, one of the things that I think is really interesting about these companies, along with doing the turnkeys, relates to Steve's earlier question about time to effectively put a lease together. One of the things that we haven't seen in a long time is that these clients are doing their best to gather what their growth will be, and that's been a little bit of a stall in that we'll be working on a 30,000-foot deal, and all of a sudden they'll say, "We got good news. It could be 40." That's new.
The turnkeys are really working out really well. We haven't done any call it. We've only done very small spec builds in that area. Turnkey, fast, and quick occupancy.
Nick.
Sure. In Reston Town Center, we've delivered over 50 spec suites in. There's two buildings in Reston that are we sort of have coined our incubator buildings. These are buildings that, you know, these groups that are 4,000 to 5,000 to 6,000 sq ft want to be adjacent to the likes of a lot of the corporate headquarters that exist in Reston Town Center. We've been very successful with those pre-built suites. Oftentimes, when we've gone forward to build five to six of them, prior to having lines done on paper and drawings and permits in hand, we've already leased those suites. There's been an insatiable demand for that space. In terms of, you know, I think your question was about power requirements and anything different.
Nothing really different relative to those spec suites. Oftentimes, we're doing those on a short form lease. We're oftentimes seeing term greater than five years and very competitive rental rates.
Rod.
At 680 Folsom, it was a key part of our strategy in leasing that building up was doing the spec suites. We did a full floor. In fact, we did a 34,000-foot full floor spec suite. We did that last year, and it was extremely well received. We were able to show prospective clients what it would look like. Once we had that built, our activity spooled up quickly. The activity that we've recorded is largely based on that strategy. This is nothing new for us, by the way. We've been doing this for many years, and we continue to do it across all of our properties here in the Bay Area. It's a great strategy.
I mean, most tech companies, it's, you know, they need the space quickly. When it's built and ready to go, we can deliver it quickly. I'll just comment quickly on the power question that you asked. It's not happening in anything in San Francisco, the office using AI companies that we're dealing with are not necessarily looking for more power. We are seeing that in some of our R&D portfolio properties down in Mountain View in particular. Those might be different type of robotics companies or different technology companies, power is definitely something that they will seek out.
Thank you. Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey, good morning. Good morning down there. Question on the development program. I think you guys talked about, you know, a new pipeline of deals, just curious, 2 parts. 1, the split between residential, where you're monetizing land or buildings, to ultimately sell versus office. As you contemplate office, just given again where the stock is trading an implied 8, how you weigh, you know, starting a potential office deal, you know, future versus, you know, where the stock is trading right now.
Morning, Alex. On the pipeline, as I mentioned, it's, you know, $3.5 billion or so. It's about to shrink because we're gonna deliver 290 Binney Street. We do have a portfolio of new developments coming. We've talked about a couple that we're doing in Washington, D.C., I think that will build back up. I think on residential, you may have a situation where we have more projects, but it will be lower capital. The 17 Hartwell deal we did, we were 20% of the equity. Skymark, we were 20% of the equity. Those are the kind of models that you're gonna see going forward. I think, in the future, the amount of capital invested will be greater in office than it will be in residential.
On your last question, as it relates to the development yield versus, you know, the capital allocation decision of starting a new office development at an 8 yield versus repurchasing shares, we think an 8 yield is higher than the underlying yield in the stock. You know, the look-through cap rates are probably somewhere in the 7s for the stock. At 8, we think it's an accretive activity for shareholders, and it's certainly, you know, more attractive than some of the acquisitions that I described in my remarks.
The only other thing I would add, Owen, on the residential is we're gonna generate more fee income.
Yeah.
Because we're gonna only own, you know, a minority interest in those, and we're gonna generate development fees and other fees like that as we do that. As those start to ramp up, we should see it in our fee income.
The only last thing I would say on development, Alex, is, you know, the company over a long period of time has generally had somewhere between 3- 4, maybe somewhere in the $4 billion of development underway. I think in the future that could continue, but I think there'll be less projects because, simply stated, you know, the cost of these projects is much higher. I think it'll be concentrated in fewer individual projects.
Thank you. I show our next question comes from the line of Seth Berge from Citi. Please go ahead.
Hi, good morning. Thanks for taking my question. you know, you mentioned the $400 million of kind of dispositions. What's kind of the target mix between non-strategic office, residential, JV interest land? you know, just given some of the interest rate movements that you kind of drove the change in that guidance piece, you know, how have pricing and conversations with potential buyers changed around that pool of assets?
Yeah, I'm not sure that pricing has really changed all that much. You know, I do think slowly more and more capital is coming back into the office sector. I provided the sales data to you earlier. In the first quarter of this year, you know, office sales were up 72% seasonally over the first quarter of last year. I think that's kind of a marker that, you know, more deals or more capital's coming into the market. On your question about mix for the rest of the year, you know, the residential is not fully complete, but largely complete. I think you're gonna see for the rest of the year, more non-strategic office and some land.
Thank you. I show our next question comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead.
Hi, good morning. I was just wondering, maybe back to 343 Madison, JV, if you could give any incremental color on the conversations you've been having recently, timing expectations for an announcement, and if you're pursuing just to have one partner with you in the project.
Well, as I said in my remarks, timing is this year. Our goal is to complete this re-recapitalization in 2026. In terms of how the partnership will be structured, that is to be determined. Our guess at this point or our forecast at this point is that we will probably have multiple partners instead of 1.
Thank you. I show our next question comes from the line of Brendan Lynch from Barclays. Please go ahead.
Great. Good morning. Thanks for taking my question. Doug, I wanted to follow up on your commentary about the U.S. economy growing through a lot of tech cycles. Certainly appreciate the commentary there. It's important to put the current moment in context. I guess the pushback would be historically, office hasn't necessarily grown in conjunction with tech or even with in conjunction with the broader economic growth in the country. Certainly, there's been a lot of lumps over the past couple of years with GFC and then excess supply in the teens and then COVID. I guess high level question, how can we get confidence that this cycle in the next 5-10 years are gonna be better than the last 20 or so?
I can't give you confidence that the next five years will be better than the last 20 years. What I can tell you is that, much of the discourse and the pontificating about the impacts of this very rapid utilization of artificial intelligence, you know, kinds of tools, is not equivalent to what is actually going on in our markets. In our markets, we are seeing additional absorption of office space growth from our clients in premier buildings.
Particularly in markets like San Francisco and Midtown South, we're seeing significant growth of new organizations, many of whom names and ideas didn't exist five years ago, that are likely to be the next vehicles of growth from technology compared to what was a tech titan explosion between 2010 and 2019. I think it's very clear that we did in fact see significant office demand growth during that period of time. We had this COVID thing happen, which, you know, dramatically changed the, the economics of our business because of the amount of supply that suddenly was brought back onto the market through subleases and tenant defaults.
I think that this time is not that different than other cycles that we have been through, but the source of the demand is a very different source. Owen, you know, started his remarks by saying there may be, and there likely will be some kinds of job disruptions from these types of technologies, but it certainly doesn't feel like, and we have not seen any evidence that it's occurring in premier office assets in our markets across the U.S.
If I could add a little data point to that, Doug. This is Hilary from New York. In Midtown South, the first quarter of 2026 captured as much AI demand in leasing as the first half of 2025 did. The demand from AI users in Midtown South is actually accelerating in New York year-over-year.
Thank you. I show our next question comes from the line of Upal Rana from KeyBanc Capital Markets. Please go ahead.
Great. Thank you. In terms of capital allocation, you know, the stock has come down a bit this year. I was wondering if share buybacks are potentially on the table or not, or if that's something you're considering.
Well, we think our stock is a very attractive investment, given that the look-through cap rate is in the 7s, and all the comp sales that I provide every quarter are in the 5s and 6s. We think the stock is a very attractive investment. That all being said, as we've described on this call, we are allocating capital to new developments which are generating 8%+ yields to the company, which are accretive. One of our goals, our leverage is about 8 times net debt to EBITDA, and our goal is to lower that over time. That's why we're not repurchasing shares.
Thank you. I show our next question comes from the line of Floris van Dijkum from Ladenburg Thalmann. Please go ahead.
Hey, morning guys. You talked a little bit about the CapEx requirements. I'm just curious, I don't think you quantify your signed, not open pipeline. You have 350 basis points of delta between your leased and occupied space. Not all space is created equal. Obviously, your Urban Edge portfolio has much lower rents. You know, the occupancy there is much less valuable than in your urban portfolio. Maybe if you could quantify what the $350 million of incremental rents would be and what kind of impact that would have on your NOI and FFO potentially.
I'm just gonna go back to what I said during our investor day. I can't answer your questions explicitly without having a whole bunch of computer screens open. Big picture, our average rent's about $75 a square foot on our unoccupied vacant space. If you take $75 a square foot, it all drops to the bottom line, other than maybe a little bit of cleaning expense. You multiply that by the 350,000 square feet, and you sort of get what the overall contribution would be if that was all flowing through at one time.
One thing I can say is, there's 800,000 sq ft in Midtown Manhattan. Again, our lease versus occupied is that there's a significant difference in Midtown based upon all the leasing that we've done in Midtown over the last kinda 6-12 months. That's a meaningful component of it at a very high rent. Yeah, those that rent's, you know, in somewhere around $100-$105 sq ft.
Thank you. I show our next question comes from the line of Dylan Burzinski from Green Street. Please go ahead.
Hi. Good morning, guys. Thanks for taking the question. Just wanted to touch on 343 Madison. You know, obviously leasing continues to be very strong in New York. You guys talked about, you know, having leases in negotiation that would bring that project to high 50% pre-let. Seems like dispositions are trending very well, and you guys continue to monetize that. I guess, just sort of curious why have this big desire to wanna re-recap the equity in 2026 when it seems like maybe you can wait some time, get that project closer to stabilization and get stronger pricing. Just curious, you know, the thought process there.
We did delay raising this capital and doing this recapitalization for a year to accomplish all of the things that we have accomplished and to de-risk the asset in all the ways that you described. You know, we've now or are about to lease more than 50% of it. We've bought most of the materials at savings. We are close to completing a construction loan, et cetera, et cetera. We think the terms under which we will bring in capital into this transaction will be attractive to shareholders. It'll be accretive to BXP, and it will allow us to free up capital to make additional investments and also to deleverage, which is one of the goals I described earlier.
Thank you. I show our last question in the queue comes from the line from Ronald Kamdem from Morgan Stanley. Please go ahead.
Hey, great. Hey, just had a quick one on same-store NOI. Just thinking about sort of the breadcrumbs as you're going through this year and into next year. Clearly this year, I think you talked about sort of flat. There are some buildings taken out of service. Can you just sort of walk through, as you sort of roll into sort of the next year, how we should be thinking about, like, the occupancy ramp, any other buildings that could potentially come out of service? Is it sort of pretty clear acceleration into 2027 and beyond? Thanks.
At the moment, the only thing that we can say definitively is that we are going to sell assets. As we sell assets, they are going to impact our portfolio size. They're gonna be on the margin. We are highly confident that we will end the year at 89%, hopefully a little bit higher, and that we will end 2027 at 91%, hopefully a little bit higher. The majority, if not all of the occupancy that we are working on today, will be in place on 12/31/2026. You'll have a 100% run rate on all the improvement in occupancy that we're achieving right now.
My guess is that we will, you know, get some more of that as we early on in 2027 as we continue to do leasing in this environment on both renewals and vacant space that will likely start during that year. We are still pretty comfortable about the ramp-up in our same store portfolio on a going-forward basis.
Thank you. That concludes our Q&A session. At this time, I'd like to turn the call back over to Owen Thomas, Chairman and Chief Executive Officer, for closing remarks.
We have no further comments. Thank you all for your attention and interest in BXP.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.