Good morning, everyone. We're going to get started. Welcome to the presentation portion of Hudson Pacific Properties 2018 Analyst and Investor Day. I hope everybody had a great time last night. I think I see some new English beat fans in our audience.
You can admit it. It's okay. As most of you know, I'm Laura Campbell. I'm Head of Investor Relations, and I'm delighted to be your host this morning. 1st and foremost, I want to thank you all for coming.
I know that many of you travel cross country or came from ICSC, and we're just thrilled that you're here joining us live for our 2nd biannual Investor Day. And as you can see from the agenda in your folders, we have a terrific line up this morning of management and guest presentations. So I'm just going to run through that high level. We're going to start with our Chairman and CEO, Victor Coleman, who'll provide a snapshot of where we are today, how we got there and give you a sense of what the future holds. Art Suazo, our EVP of Leasing, will take you through, in his words, the blocking and tackling of our portfolio wide leasing efforts.
This is the nuts and bolts of how deals get done and what we're most focused on right now. We'll hear from industry expert Spencer Levy, Head of Research for CBRE, who provide a macro and micro view of the drivers of growth in our West Coast markets and in Silicon Valley Drew Gordon, our SVP of Northern California, will dig into our competitive positioning in the Peninsula and Silicon Valley former Head of Global Workplace for our tenant, Uber, Adoni Benares, will give us some insight into how tech and other growth companies are thinking about real estate. That should be a real treat. Bill Humphrey, our SVP of Studios, will provide an update on the Tech and Media Convergence and our accomplishments and game plan for that line of the business. And finally, the grand finale always, we'll hear from Mark Lamas, our COO and CFO, who after showcasing our superior credit metrics is going to give you a throwback to 2016, our bridge to success outlining our strong NOI growth through 2019 and provide some perspective on our current valuation.
Now for some logistics. You're going to receive a lot of information today. The presentation materials are available for download on our website, and the webcast will be available for replay on our website as well. We're going to keep introductions short, but note in the folders, you have all the bios from the speakers for today and from yesterday as well. There will be one Q and A period only following Mark Lomas' presentation, and all of our speakers will be available to answer questions.
So please hold them until that time. And there will also be 1 10 minute break after Spencer Levy, and we're going to have some great snacks. So step outside and enjoy those. And we're going to do our very best to stay on track time because I know people have to get to the airport and other places after this. Finally, before we kick off the presentations, I'd like to remind everyone that this morning, we will be discussing non GAAP financial measures, which are reconciled to our GAAP financial results in the presentation's appendix and in our supplemental.
We will also be making forward looking statements based on our current expectations, which are subject to risks and uncertainties discussed in our SEC filings. Actual events could cause our current expectations to differ materially from these forward looking statements, which we undertake no duty to update. And now since you're going to hear us talk about ourselves most of the day, we thought it would be helpful for you to hear from our partners, our tenants, some of the civic leaders in our markets as to what makes Hudson Pacific a truly fantastic company.
When I started Hudson Vincent Properties, I wanted to create something very special. As Hudson has grown exponentially, we stay true to who we are. We're always looking to do what's next. We believe in the upside of $9,000,000 in California assets, but we wanted the right partner to run We've known Victor a long time. We love the company he built.
This is a company that can acquire these assets and help create a lot of value. What I appreciate about Hudson and their presence in San Jose is that they don't simply buy buildings,
they invest in the community. We had booked in this neighborhood for a period of time. We came through here and we said we love it. From the very first meeting we had with Hudson, it became clear that we had an opportunity to work with them and have a lot of the aspects that define us be a central part of our home. Our relationships have taken us from where we were a long time ago to where we are today.
I've known Victor for many years and there's no doubt that the Hudson team has an eye for spotting extraordinary opportunities. I have never worked with more of an entrepreneurial visionary leader in the marketplace, whether it's Element LA where Riot Games created a whole campus of the future or it's the ICON project where Netflix came in. In each case, Victor had that vision, had that sense.
40% of our portfolio, whether it's medium tech or just pure tech, we have to be on the cutting edge of that.
In my visits to Hudson Properties, what I see most clearly is a bent toward innovation. And that means creating workspace that creative people want to be in and around. That level of innovative thinking is really powerful. And I think it creates a lot of value for their tenants and certainly for their shareholders as well. That's a special combination.
It is a company that has the right DNA in the right place. Hudson Pacific does so much more than build and invest in real estate. They transform our communities. They house innovative companies and they help Angelino succeed and thrive. Innovation, integrity, collaboration, a focus on execution with an eye for opportunities.
There are standards and expectations that each one of us at Hudson Pacific Properties works to live by every day. Stick to
the game plan and be able to modify when need be
and that leads you to
the next level of success, which is continual and that's where we are today.
And with that, I give you our Chairman and CEO, Victor Coleman.
Good morning, everybody. Thank you.
Well, that's kind of like a puff piece, but we always like to do puff pieces.
I want to thank Laura. I want to thank the team. When you get to do a piece like that, people sort of think it's like a group effort and it's nothing but a group effort at Hudson. We have a phenomenal team, which I'm going to get into a little bit and everybody here senior management inclusive. These guys are awesome.
You guys had a good time last night? I did. So just a couple of protocol issues. We're going to take your phones and delete the videos from last night. On your way out, nobody was there.
No. We had a great time. So, we're going to jump right into this. And I really I think as Laura said before I jump into this, there's going to be a ton of information. So, you should write down some questions, because I think you're all going to have a bunch of things to ask us at the end of the day, I hope.
So with that, so we continue to invest and focus in the epicenters of innovation, tech and media. It's something we used to do for the last 12 years. It's something we've established a significant foothold in what is the most important part of our market is these two industries. As a result of that, each of these markets has a mix in factors that provide us with a lot of staying power. And perhaps the most important is the intellectual capital in our marketplace at a very, very established industry structure clusters.
The most cutting edge thinkers and doers want to be in these marketplaces. And as the capital markets grow and the inflows of major corporations, tech, groundbreaking startup companies, we are fortunate to be in the epicenter of that. Today, as Laura said, we're going to have Spencer Levy, Head of Research for CBRE to talk about this. He's going to dig into the drivers of technology impact, employment growth and what our markets are and how they're going to outpace other markets in the country. And both tech and non tech sectors are very active in the foreseeable future.
And so we're going to take a little closer look at our positioning and what our markets are and where our submarkets are and how we go from there. So in Los Angeles, it's very unique. Right now, as you all know, we're the largest independent owner of studios in the United States. We capitalize on the tech and media marketplace. I think we've had a vision in this for a long time.
We've seen it grow. In addition to our 3 studios, which Bill is going to talk about, we have an additional 2,500,000 square feet and growing immediately to almost 3,500,000 and then from there hopefully to 4,500,000 with our development, which we'll talk about. It's growing not through acquisitions, it's growing through redevelopment and development of our assets, land banking that we've had, not on our balance sheet and future growth. As Bill is going to discuss, the growth has typically been in the media side here in Los Angeles. Traditional streaming and non streaming networks and growth networks in the media business have been growing exponentially.
This market is maturing. The Silicon Beach market is flowing through to other markets, which is maturing. And the last and most important thing in Los Angeles is we have very little new supply, which we're going to get into as well today. Go up north. We talk about our institutional ownership in the Valley.
We're the largest owner of assets in the Valley both in the Peninsula and Silicon Valley. Our portfolio consists of 3 key marketplaces as you all know Foster Seating and Redwood Shores and sort of the central county Palo Alto where we are the largest landlord as well in the Stanford Research Park area and the San Jose airport, which is essentially the downtown adjacent marketplace that is now capitalized with Google and everybody else that's growing.
Drew is
going to talk about the competitive edge that we have in those markets, the tenant mix that's there. But our assets in that marketplace are 87% leased and our expirations over the next 4 quarters are about 20% mark to market. We expect to see considerable NOI growth in those marketplaces and these markets have superior talent and also unbelievable capital inflows, which we're going to talk about today a little bit on the VC capital standards. Large tech companies continue to expand. Also non tech companies are growing at a rapid pace as well.
But as we all sit here today, it's the big three, Facebook, Google and Apple. Go to the city. What do we say about San Francisco? I mean, we own 2,300,000 square feet in probably the hottest market in the country and it's been the hottest market in the country for the last 5 plus years. Iconic assets out of marketplace, sorry, mid market and the financial district.
While we have minimal mark to market in those marketplaces over the next four quarters, we've seen in place rents 32 percent below market right now and we have some unique opportunities with the Vault space in our 1455 asset. But our mark to market is well in excess after this year of 30 plus percent. Also incredible talent base growth, capital inflows and public and private tech, not to mention that the Prop M has really helped out San Francisco and all the owners in that marketplace. Smaller, but yet a very active market for us and something we're very excited about is our Seattle marketplace, our growing presence in downtown Seattle. We focused on Pioneer Square, South Lake Union and the Denny area.
Our portfolio there is 94% stabilized, not much role until 2019, but in 2019 our mark to market role is in excess of 25%. Deep talent pool there as well, central theme of capital inflows in that marketplace and a presence of blue chip companies and in migration of tech companies growing there in their second hubs. So, tech and media. Tech represents about 40% of our company, media about 15% for an aggregate of 55%. Our top tier tenants Google, Uber, Netflix, NFL.
Fire based companies balance out our tenancy. Companies like ZipRecruiter and DoorDash are considered non tech. And tech and non tech industries are increasingly intertwined in our portfolio and overlapping on a greater basis. To put a fire point on tenant quality, you can look here 84% of our tenancy, public or private companies have been in business for 10 years. Including Uber, that number jumps to 92%.
75 percent of our tech tenancy, public and private companies have a valuation of $1,000,000,000 or greater. 60% of our tenants in that same sector group have a valuation of $10,000,000,000 or greater. Stabilized force, tenancy that's more than just sticky, they're stable and growing. So if you invest with us, yes, you're getting tech exposure, but you're getting the best exposure for the outperformers. Looking to the capital allocation since inception, 40% of our portfolio has been core, core plus 45% has been value
add. Much smaller percentage
of that has been redevelopment and development in our portfolio, about 15%. Core plus and value add projects range from a minimal lease up to mark to market to minor repositionings to operational improvements to significant retaining and repositioning in assets that we've built throughout the portfolio. Our target stabilized yields are in the range of 5% to 7% for that property type. If you look to 7 plus percent is what we've been looking at and achieving well in excess of that for our redevelopment assets. We like the risk reward potential, the proposition of these types of projects.
And although we have the capabilities to invest wisely, I think we've shown our discipline across these metrics on the full spectrum by what we've owned and what we've significantly improved. If you look at the investment buckets that we've made, there's some pretty impressive ones. Rincon is an example. We captured significant mark to market rents, lease rolled over time. We put Google and Salesforce in.
It's Class A asset 4% cap rate. If you look at 1455, we took an 80% occupied basically former data center and we repositioned it for the corporate headquarters for Uber and for Square. Everybody knows the ICON story, you were there last night, but we love to tell it, a world class headquarters facility for Netflix and an entree in Southern California that was a former parking lot. So we find and execute on opportunities across the spectrum. In all instances, our stabilized yields for these projects well surpassed our hurdles.
If you look at this compared to what the market caps, as I said, a Rincon is like a 4. If you have 1455 ICON probably mid-4s. We focus on core plus value add, shorter time to market, less capital intensive. It lends ourselves to less exposure on the development side, pure development side at any point in the cycle. Today, our exposure is in line with most of our peers and we're very L.
A. Focused. Virtually all of our development today is in Los Angeles. 1 100% of the future projects in the near future are in Los Angeles area. We're capital in terms of our balance sheet, we are capital disciplined for significant growth.
We focus not just on maintaining a healthy balance sheet, which Mark and his team have provided, but proactively improving our credit, our metrics and our capital sources. Mark's going to show how that played out over time in his presentation today, but our financing outlines here that we maintain low leverage throughout the whole portfolio. Today, we're about 30%. On average, we've been about 25% levered and we've staggered our maturities and extended our term. We focus on our interest rate exposure and have a modest unencumbered tenant base right now of debt on current assets.
And most importantly, the last 3 years ago, we became investment grade. So, I started off my presentation about talking about team and that's the most part most proud I am of this entire company. We have a complete competitive advantage here. If you look at our team, the team has been together for the last 12 years. We've lost one senior person in 12 years.
There's not a company that is even remotely close to that. We're very stable. We're seasoned. We've got an unbelievable track record whether people were with me at Arden or other companies. The public company exposure and experience in real estate in all our markets have been unbelievable.
This full team has led the marketplace in all facets. They combined our relationships. And as a result of our relationships that we've incurred, this team gets the first, last and sometimes only look at acquisitions in the prospects of the markets that we're in. Our capabilities are unlike anybody else. We develop, we redevelop, we reposition, we lease and it's all in house.
It ties with what I said before, we deploy smart capital, it's proven track records, we create value in ways that others have not had the vision nor have the capacity to do so. Turning to our performance. Our portfolio has grown over 5 times and resides at over 17 1,000,000 square feet going to almost 20 with our development assets that are in play. Our market cap has increased 1100% in 8 years. Exponential growth one at a time in one of the best periods of buying real estate in this cycle or any other.
At the same time that we've been growing, we've also been prudently selling assets in our portfolio. We sold over $1,000,000,000 in our portfolio in the last several years, non strategic either in terms of the quality, the location and oftentimes both. This chart shows that we've highlight that we've highlighted our pruning over a period of time. And you can see, we've gotten out of marketplaces like Burlingame, Encino, San Diego, Orange County and grown in our core markets. If you even look at this the far right side of this between Q4 2017 and Q1 2018, even that portfolio is showing a rebalancing in our core marketplaces and it continues to do so.
On the leasing market, we've leased 10,000,000 square feet in this portfolio in the last since our IPO. We've averaged 46% cash rent spreads. I know people have come to me, talk to our team and said this is an old story. This is a really good story and we like it that it's an old good story. Nobody has had the mark to market rents in our marketplace in our sector close to what we've done in the last 8 plus years.
So today, our stabilized and in service portfolios have a 94% and 90% leased respectively. Substantially, we've increased occupancy and rent in every market we're in. Overall, nearly a 1200 basis point increase in occupancy and a 32% increase in ABR. Art is going to get into this in major detail and I know you're going to be anxious for that, but he's going to provide our leasing front metrics and the performance. Despite the asset sales, our growth through acquisitions and development and our leasing success, it's enabled us to achieve an outside cash flow growth in this portfolio relative to our peers over the last 5 years.
As you can see here, it's well above our West Coast peers and well above the remainder as well. Prudent to our growth and our organic prospects here, this is where we sit and this is what I think, if you look at what's going in the marketplace today. As I said, significant embedded growth, a lot of opportunity for increased cash flow, which Mark's going to talk about, without doing a lot of acquisitions at all, currently today internal growth. Our lease up portfolio, which people have questioned us on, is going to go from 76% to 92% to be stabilized. And there are great assets in that portfolio that are dropping into the stabilization like our 11,601 or our 450 Alaskan Way asset are going to be in that pool.
Also, we do have some challenging assets and we do have road to hoe in some of the assets, but we're all over those. Art's going to take you through asset specific strategies and progress. About 1,200,000 square feet of expirations in 2018 2019 and we're already ahead of schedule at a mark to market of 18 plus percent on both years. We've got great momentum on the development, redevelopment pipeline. As I said, we have 1,000,000 square feet coming to marketplace over the
next 2 to 3 years.
And on top of that, we've got an additional 900,000 square feet followed behind on our Sunset Gower and Sunset Las Palmas lots that we can come to marketplace probably by 2022 or 2023. We've got world class future projects in Los Angeles, Aligned with tech and media and the convergence, which Bill is going to talk about, we're going to continue to acquire assets, but at a measured pace with the goal of driving more gradual growth. Those assets are going to be funded through the sale of non core assets and joint ventures.
We're going
to focus on the higher yield premium assets where we can create value and grow a foothold in our current core marketplaces. And some of you may have seen a press release or 2 about a potential acquisition in San Francisco. Well, I can't confirm that at this time. We're happy to hopefully make some announcements in the near future on a large acquisition and a large disposition simultaneously in our portfolio. Now as for something that I thought long and hard about talking about today.
So I put this slide up because I know there's several of you who are a little trigger happy and writing shit. So, no, we're not under contract in any new asset in any new marketplace, okay? Nothing is imminent, not at this time. But as a company, we need to be forward thinking and forward looking at other markets in our current asset classes. So, any expansion in our company will be in the 2 existing business lines, an office line and our studio line.
So in terms of office, the marketplace that we would look to today to expand into would be Vancouver. There are many demand drivers in that marketplace. They're similar to what we have in our current portfolio and they exist in the core markets And we are doing our research at this time and spending some time with our Seattle based team to look what's up there. Nearly half the population in Vancouver are between the ages of 20 44 years old and it's homegrown to many, many popular expanding tech companies. It draws from 21 different universities and colleges as well as got it produces 58% of Canada's real GDP and it's growing.
Another reason we like Vancouver is because they have studios.
It's been a sticky studio business.
This is not a marketplace that has started and stopped and started and stopped. It's been consistent. So we're going to look at the studio business there as well and see if there are opportunities for us to expand our studio portfolio. As to studios, the other market that we're going to look to and get educated on is Atlanta. Atlanta is not New Mexico, it's not Detroit, it's not part of Michigan, where it's just supported short term growth.
Atlanta now currently and Bill is going to talk about this a little bit has a tremendous amount of shows and some of our current stable media tenants have taken stages and lease stages for multi year terms. So it's a marketplace we're also going to get educated And while we look at Vancouver, Atlanta in the studio business, we're also going to look at New York, because next to Los Angeles, it's the top priority marketplace that has studios. As I said, this is a time that I think given our platform and given the cost of where these guys are and the fact that in these three markets there's not one institutional player, these are marketplaces that we will evaluate, look to see what happens and from that point on, we'll have conversations whether it's appropriate for us to dig in. So, I also think it's important for us to see what other markets are doing on the studio side to see what else we can and can't do in our portfolio. So with that, as I said, I'm super excited about our portfolio, our team, our growth and our upcoming announcements that should be very exciting.
Laura?
Let me get my coffee. Thank you.
Thanks, Victor. And just to be clear, that's Vancouver, Canada. Someone just asked me. Our next speaker is Art Suazo, our EVP or as I often say, MVP of Leasing. So Art, please come forward.
Wow. Thank you, Laura, MVP of leasing. I don't know about that, but I just want to win a title. So thank you very much, the MVP. Thank you very much.
Thank you all for being here. Welcome to our Investor Day. Welcome to you all in the room and of the tens of people listening around the world on the webcast, welcome. I was going to say it's very difficult to follow Victor because well, Victor. It's very difficult to follow Victor, but because this is the most important topic of the day, no problem, right?
You guys are going to I'm going to have your attention. But after last night's performance and rendition of I'll Take You There, I'm going to rephrase that and say, it's impossible to follow Victor. And please, please, God, listen to what I have to say. Before I start, I want to frame this properly. This is really just a look back.
This is a look back from the last time we all met, Q2 2016. So I just wanted to frame that up for you. Oops, The cat out of the bag. I wanted to frame that up for you. But no, this is truly the most important part of our business.
It's what we talk about every day amongst ourselves. It's what consumes me. It's what we talk about with all of you on an ongoing basis. And it is exciting. I live and breathe it every day.
So if I get overly excited, I apologize. That's me. And as we say in Southern California, I'm super stoked to be talking about this. So but I'm not just excited. I'm really pleased with the performance of the team, their accomplishments to date.
And I'm really proud of them setting us up for future successes in the coming quarters. And how do they do that? Well, it's by substantially growing the pipeline coverage, and they've done it consistently since 2016. It's executing the play that Victor was talking about, executing on the ground this strategy that drives activity and sets us apart truly sets us apart from our competition. And it's because of that, that we're all very, very confident about what's coming in 2018 2019.
So let's jump in because I'm super stoked. Let's jump in. Yes, we've been extremely busy. We've been extremely busy since that point in time. We've leased 4,800,000 square feet of space.
That's 2,200,000 square feet of new deals, 2,600,000 square feet of renewal deals. So this is Exhibit A that we've been extremely busy. Exhibit B is my hairline. You remember me with a pompadour, don't you? 2 years ago.
We've been extremely busy. But of these executed deals, I want to say 3,600,000 square feet of those deals, 3,600,000 were either renew or backfill deals done at a weighted average of 31% mark to market. That's an amazing number. I guarantee our competition is nowhere near that number. But we're not done yet.
Listen, we've got we realize we have accomplishments. We're executing our ground game impeccably, but we've got a lot of wood to chop. As Victor said, we've got 2,700,000 square feet of deals expiring in all of 2018 and into 2019. So nobody, especially me, is taking their foot off the gas. But I'm encouraged because we're way ahead of schedule.
The team's way ahead of schedule. We've got 65% coverage on the 2018 expirations now, and we've got 34% coverage on the 2019 expirations already. So that's great news. So let me explain to you what I mean by coverage, and then we're going to dig into the 2018 2019 expirations. What I mean by coverage is simply it's the combination of completed deals and deals in negotiation.
That is to say deals in I don't have to say trading paper, deals that are in proposals, LOIs and leases, the combination of those. Those are real deals that we're negotiating on. Of the 40% completed deals in 2018, of the 40% completed deals, they were done at a 31% mark to market. Again, very impressive. And if you look to the bar chart to the right, it simply just shows the relationship or the composition of our coverage on the renewals for 2018.
So you just get a look at the composition. Equally impressive as 2018 is 2019, where we have 34% coverage already, as I said 18% of those completed 16% in negotiation, in serious negotiation. And by the way, of the 18% completed, which we did at a 27% mark to market, again, a very, very high number. We've knocked down 2 of our biggest expirations next year, right? You often ask us who are they.
Well, in Vincennes in San Jose, for 140,000 Square Feet, right? And Capital 1 up in but we have activity on that. So we're really moving in the right direction. And once again, the bar chart just demonstrates the coverage on that activity across all of our markets. So we're not slowing down at all, right?
We're executing the ground game. We are moving, and it's because of our pipeline. You hear me talk about pipeline all the time. Let me define pipeline for you. Pipeline is, again, deals in negotiation, proposals, LOIs and leases.
These are real deals. These are real requirements. A lot of landlords, they pad their pipeline and ask them. I challenge you to ask them. They have tours in their pipeline.
That's not something we put in our pipeline. Inquiries are in the pipeline. And I swear to God, they put in unnamed tenants that are floating around the market. None of that exists in our pipeline. It's very conservative, which is why I'm so encouraged by these numbers.
And as you can see, from 2,022, 2016, we increased our pipeline by 1,100,000 Square Feet, right? So if you think about it, we've leased, on average, about 600,000 square feet of deals per quarter, right, since Q2 2016. Well, we haven't just reloaded the pipeline. That's a whole different story. You reload the pipeline.
And by the way, I had a great slide for that, but it was inappropriate. We loaded the pipeline. We've grown the pipeline, right? I had Bandeleros, the whole thing, but it was I can't we've grown it. And said a different way, we've grown the coverage from 52% on the availability to 70% on the availability.
Again, very encouraging. And this is to me, this is the most important because this is our lifeblood. When you ask me, hey, are such and such a deal going to make? What's going on? I always say you've heard me say it, this is my crystal ball.
It informs what's closing next week, and it informs what's closing next quarter and well into the next year. So again, very important, and I wanted to underscore that. And this is the composition of our pipeline across all regions, and you can see how it compares to our availability. And it is in lockstep, right? Where you think we need activity, we have it, and the team is doing a great job of executing.
So I keep saying they can do a great job of executing the game plan, right? They're filling up the pipeline. They're growing the pipeline because that's our lifeblood. Well, what does that mean? Well, they're executing a game plan that we've been running for a long time.
And I'm proud to say that not a lot of landlords do it. It's quite overlooked, right? We've been running a play out of this playbook since the beginning of Hudson. Victor and I have been running this play since, god, in past lives at different companies. For 20 years, we've been running this because it works.
It's really it's a 2 pronged approach. It's a 2 pronged approach that we run-in tandem, and we try to get to surety to close on every deal. And it sounds corny, but on whether it's a 1,000 foot deal or it's a 300,000 square foot deal, we're running this program in tandem, and our team is executing flawlessly, as you can tell by the momentum we have. But let's start with the what it is. It's the broker experience and it's the tenant experience.
And we try to enhance those experiences, as I said, in tandem. Let's talk about the broker side of the equation real Often, most not often, it's the most overlooked. Most landlords you talk to, they're going to say, the broker how many times have you heard this? Broker is a necessary evil, right? Almost a joke.
Well, that's just a bad way to look at it. We embrace that experience because brokers represent 95% of the tenants out in the market. They represent 95% of the tenants out in the market. So not only are we embracing it, but we're forging new relationships. Nobody has better and deeper relationships than we do across all the markets.
It starts with our 3rd party brokerage teams on the ground. It moves into our seasoned HPP leasing team, and it includes all the senior management at Hudson. And we forge these relationships. We foster them. And again, we're out always trying to establish better relationships.
How do we do that? Well, we do exclusive events with brokers. When I say exclusive events, I mean events like a black tie event like we have in Silicon Valley, ski trip, like we have with the top echelon brokers in Seattle, day at the races and so forth, right? We have brokers coming up to us going, hey, how can I get invited, right? You don't think it's a big deal?
How can I get invited? How can I bring you a deal to get invited? It really makes a difference. We run that in tandem with a streamlined process. What is that?
Well, simply making the deal easier. That's really what that means. We try to start the deals on 2nd base, on 3rd base, right? So, we're not reinventing the wheel. And these guys, they appreciate it because the deal is getting done faster.
So, what happens when the deal gets done faster? Yes. Yes, we appreciate that too because we get rent earlier. But for them, it will get done faster. They get paid faster.
Let's not forget that part of the equation. So we marry this up. And again, we run it in tandem with the enhanced tenant experience. So let's talk about what that is. Listen, nobody approaches building out space the way we do, especially with the experience we have with new economy tenants.
And you heard Rod Jernigan talk about it yesterday. We're out trying to create we're trying to create more active spaces. Yes, we do lobbies, corridors and restrooms, and that's great, but we activate spaces that perhaps were never used before, right? We re amenitize space for the tenants, and we increase their ability to well, we enhance their experience there for sure. But what we do is they use it as a recruiting tool, right, to recruit new tenants, to retain tenants.
It's a very competitive environment out there, and we feel like we're way ahead of the curve. And so that's what we're doing. And you're going to see examples of that coming up on some of the assets. Again, we run these 2 programs in tandem, and it works perfectly. Now the last bullet point on there that isn't just a bullet point on the slide is the Vacant Suite Prep program.
You heard us talk about it, the VSP program. I wanted to give this a little bit more attention, so I've got another slide. But again, it is part of our game plan and we run that on the ground to perfection. VSP program, vacant suite prep program. It's something we started several years ago as an attempt to lease functionally obsolete space, very difficult space, super, super challenging space.
So it was a forward spend of tenant improvement dollars to creatively enhance spaces like, oh, I don't know, subterranean spaces, spaces that were impacted by mechanical rooms and things like that. Well, it worked. It worked. We leased the space up even faster than we had imagined. And guess what?
Not only has it worked, but over the last 3 years, we've built out 800,000 square feet, 800,000 square feet of VSP space. That's 144 suites, right? And we've leased it. We leased 76% of these suites faster than we would have imagined. And there's no way we could have done this level of work in the last 3 years if it wasn't due to the teams on the ground.
Josh's team and he did it with military precision, that's a shout out to West Point, Josh. Military precision, now we've got another 200,000 square feet of space that we're building and we're trying to keep up with demand. And again, we deploy these spaces strategically across the portfolio, right, in the areas where you think we need to, Silicon Valley, the Peninsula, and we do it in a very, very smart way. Look at the pie chart to the right. 86% of the VSP suites are under 10,000 feet.
63% of the suites are under 5,000 square feet, right? We know this from the intel on the ground that we're getting from our 3rd party brokers. And again, it is working and it's moving the needle in a big way. The volume of these certainly is moving in a big way. So this is our bread and butter.
Peninsula, Silicon Valley, this is our bread and butter. But we are not taking our eye off the prize. We're not taking our eye off the ball because you all talk to us about the large block activity the large block availability, excuse me, and this is it. So I want to walk with you I want to walk you through what we're doing on the large blocks to make a difference. We're already seeing an increase in activity based upon the programs that we're running and the spaces that we're building out.
So let's take them 1 by 1. I hope this thing cooperates with me. Metro Center. Metro Center, 171,000 square feet of availability. As you know, it's the tower, right?
The high rise tower and it's the 2 Hillsdale buildings. Drew and his team on the ground have done an amazing job of reimagining the lobby and the entrance and creating a grand lobby, right? He's also activated spaces in the Hillsdale buildings that is really kind of in it indooroutdoor space that a lot of the tenants are using. And because of that, you see we've got 70,000 square feet of deals in serious negotiation and there's another 82,000 square feet of deals or active prospects in the market. Again, it's reactivating spaces.
It's also the use of some VSP in the tower and some large scale VSPs in the Hilldale building. And again, very, very successful. Metro Plaza in San Jose. Wow, this is a great case study for VSP, okay? 122,000 square feet available.
We had a couple of big move outs and we're making the space more attractive to the smaller tenants that are dominating that market, okay? 55,000 square foot deals in negotiation. I think it's a case study for VSP because that's like 12, 13 deals, right? That's hand to hand combat. These guys, we're churning the VSPs over and we're trying to keep up with the demand.
There's 110,000 square feet behind it. And again, it's working, right? You're going to see the needle move in a big way here because of the VSP program. You may have heard of this one, right? Cisco moved out.
We knew that was coming. We underwrote it as such. We looked at it as an opportunity to unlock entrance, right, not only the entrances and the lobbies, they created a large scale VSP on the 2nd floor that looks phenomenal. They just finished the work probably about 1.5 months ago. We had a great open house.
The market got to see this in all its grandeur. He reimagined the campus. He reimagined the campus, indooroutdoor space, activating the athletic fields. And I've got to tell you, the 2,800,000 square feet that's really looking in the Greater Silicon Valley, those are the things that they're looking for. So we do have 800,000 square feet in negotiation.
I think as I had mentioned on the call, That's 3 deals, and we're looking for some really good news in the next month or so. So stay with us. Moving to the Arts District. 220,000 Square Feet between Maxwell and 4th and Traction. We've started kind of we changed our strategy a little bit on 4th and Traction.
We've done some VSPs down to 5,000 square feet because that's the information we're getting. And we are in leases on about 20 2,000 square feet there. Have we leased it as quickly as we'd like? We have not. But because we are the Class A option in the Arts District, we feel really good about the momentum that's out there.
And again, you can see 200,000 square feet of active prospects. And Derek told me just before I walked up here, I told him not to talk to me before I walk up, but he did. He said, we have a proposal for 2 floors there. So that's more good news coming. All right.
Epic and Hollywood. I think you have the opportunity to see the igloo, right? You walk in the igloo, and it's an amazing marketing piece for us. I hope we don't upset anybody by calling it an igloo. Any Inuit Americans, I apologize.
But it's amazing. It's an amazing building. Chris Barton and his team, they took the best pieces of Element, Icon and Q, and they created the best building in L. A. I swear to you.
This thing and you saw the views, you saw what it's going to look like. This is it's got interior and exterior space, right? Those are not balconies, by the way. It's not your dad's office building. Those are activated exterior premises that tenants can create connectivity horizontally and vertically throughout the building.
It's unbelievable, and we are negotiating, as you know, on the entire building. And we've got another proposal for about 200,000 square feet. Not even it's barely out of the ground too, by the way. So we have a lot of momentum. And then the active prospects, listen, 1,500,000 square feet, there are no large blocks of space in Los Angeles and certainly nothing of this caliber.
So again, there's a lot of momentum, a lot of momentum at EPYC. And we continue no, no, go back. We continue the momentum in Hollywood to our Harlow project, right? It's a low rise very creative office campus. As you can see vaulted ceilings, it's on the lot of Sunset Las Palmas.
And though we do have 110,000 square feet of negotiations going on, those are big by the way, those are big users for that type of billing in that market. I suspect that we're going to be fighting with Bill to see who leases that space, right, because of the embedded growth that he has with content creators that he's going to talk to you about. We're going to be battling over who leases it. I mean, it's going to get leased, but rest assured that there will be a little bit of a battle going on. And oops, oh, man, please grab the Clifford from me.
Excited. I told you I'm stoked. Moving on to the Westside. You saw that amazing presentation and panel yesterday with Alex, Jeff Payon and Rob Jernigan. I mean, they said it all.
But again, this is the finest real estate in West Los Angeles. You can't amass 500,000 square feet. You certainly can't do it in a creative campus style. It's a failed mall. We've partnered with Macerich.
They've actually leveraged our expertise because they know that we can execute. Somebody said it was the epicenter. That's a bad word here in Southern California. It's not the epicenter. It's a confluence of the major transportation corridors, and it's just it's unbelievable.
So I feel fantastic about our opportunities here. We're in now I can let the cat out of the bag. We're in negotiations for the entire building, and we have 1,200,000 square feet of active prospects. And the active prospects, again, there's 2 tenants of that on that active prospect list. They're each about 200,000 square feet.
They're programming, they're space planning it on their own nickel because that's where they want to be. So I feel really bullish about what's going on here as I do about all of the billings I talked to you about and including the VSPs and how that's driving our activity in a big way. So I just want to leave you with no deal is out of reach ever. We're excited about our prospects in 2018 and beyond because of everything I just told you. And we're going to just keep working the ground game as long as we can.
So thank you very much for your time and look forward to questions later.
I don't know, Art. You're a pretty tough act to follow, too. That was great. And now it's time to hear from our industry guest speaker, Spencer Levy. As I mentioned earlier, Spencer is Head of Research for the Americas and Senior Economic Advisor at CBRE.
In that capacity, he manages hundreds of professionals focused on producing market leading insights on the latest real estate trends. He joined CBRE in 2007 and was previously Executive Managing Director in the company's Capital Markets division among other roles. He is a frequent speaker at NAOK, ULI and other well known industry organizations, and now he's here to share his insights with us. And so I'd like to welcome well, first, we're going to show a brief video, and then you'll hear from Spencer. Thank you.
Good morning, everybody. The title of today's presentation is called The History of the Future and that video sets it up because what we're going to talk about is looking at the present and the future of not only the world, the United States, but focusing specifically on these markets. But to set it up, people have been trying to predict its future since the beginning of time. And the challenge is they've all been getting it spectacularly wrong, including some of the smartest minds in the room from Adam Smith, John Maynard Keynes, Milton Friedman and Janet Yellen. And the reason I get it wrong is twofold.
Number 1, they're inconsistent. So for people who follow economics, you'll know that John Maynard Keynes is probably the line of left of center economics, always looking for fiscal stimulus when there's an issue. But what did the left wing guy say to do in the event of a downturn? He said, unleash the animal spirits of capitalists. So the left wing guy says, bring out the capitalists.
This is Milton Friedman. For anybody who follows economics, he's the right wing lion, a monetary genius. What did he say to do in the event of a downturn? He said to give out helicopter money, to give money away to the people. So the left wing guy says, unleash the capitalist.
The right wing guy says, give money away. It led Harry Truman, then President, to say I want a one armed economist. That way they couldn't say on the one hand this and the one hand that. So problem number 1 is inconsistency. Problem number 2 is which is something that everybody in this room deals with is that looking at the future is both art and it's science.
And that picture of the Mona Lisa there was painted using artificial intelligence. And why is it art and science? Because the science of forecasting is wrong the moment the model comes out of your machine and you must take into consideration the art and where is the art. And the art is called behavioral economics of taking a look at the behavior, not only of the people out there who are trying to predict what they are going to do and humans are inherently very difficult to predict, but also taking a look at the most important picture on your wall, which is the mirror because everybody in the room, myself included, has bias, which will influence your outlook towards the future. So, let's look towards the future.
Let's start here, 4 more years. This has nothing to do with our current President and the administration, but has everything to do with when is the next recession going to happen, because this is the key assumption that impacts our forecasting both on a macro basis and then market by market. So, I had a conversation 2 weeks ago with my global heads of economics around the world and what is our house view on the next recession? Well, our house view is that it's going to be about 2 years from now. And I mention that because when I spoke on a stage like this 5 years ago, you know what our house view was then?
Thank you. Audience participation. And so I said to my people, I said, well, you
can make the case for why the recession is going to
be about 2 years from now. And they said, well, inflation is going up and interest rates going up and employment is so tight, we just can't grow any faster. And I said, well, in my experience recessions don't start with a whimper, they start with a thud. And what are the thud factors that could take us down? It could be macro, it could be a China hard landing, it could be an emerging market debt crisis,
could be domestic, could be a
monetary area, raise interest rates too quickly or the number one risk factor in the world is a trade war. And don't take my word for it. McKinsey came out with a study 2 weeks ago and 55% of the world's CEOs say that is the number one risk factor in the world. And I listen to those things and I say, China's been doing better than we thought. With the exception of the last couple of weeks where we have seen some issues in Turkey and Argentina, emerging markets are doing fine.
The Fed has been walking on its shelves, which brings us back to trade war. And in my opinion, when we're listening to the words of the President, however inflammatory, offensive at times or otherwise,
I think we listen too much
and we think too little. Because if you read a very important research novel, which is the Art of the Deal from 1987, The President will tell you what he does and why he does it. He does it because he's trying to create the most important thing in the world. There's only 3 things in the world that matter: facts, logic and leverage. And leverage is what he's trying to create through his words.
So I'm not trying to defend his words, but I am trying to suggest he's not going to cut off the U. S. Nose despite its face on trade, despite what his surface rhetoric might suggest.
But let me address
the second issue, which is not only when that next recession is going to be, whether it's 2 years out or 4 years out, and I think it could be longer, is interest rates. And interest rates go hand in hand the other I word. The other I word is inflation. And in my opinion, I don't worry that much about inflation. We did see an uptick in January from the wage wages went up.
But there are 4 secular factors that are going to permanently tamp down inflation. Factor number 1, too much cheap money in the world. Factor number 2, too much cheap labor in the world. And these first two factors, there's a terrific book by a gentleman by the name of Daniel Alpert called The Age of Oversupply. Read those and you'll agree with me that these two factors are going to put a permanent cap on inflation and interest rates.
Number 3, cheap oil. Even though we've seen an uptick in the last few weeks because of Iran, cheap oil is still going to continue because of the shale oil revolution. But the number one reason why we're going to see permanently lower inflation, not no inflation, but lower inflation is innovation. Innovation lowers inflation because we use less stuff as the inputs for what we make. So if you take a look at the curves of the world use of copper, iron, steel, oil, all those curves have now bent in terms of the usage and the question is will they go negative?
And that's a key question about global trade as well. But there's another reason why I'm optimistic we're going to go a bit longer than the 2 years that our house model might suggest. The tax plan, highly stimulative, lower corporate rates, more liquidity, more incentive for CapEx. But I also think it's going to be quite good for our industry in 2 specific areas. One is multifamily because it changes the dynamic between rent versus buy making rent more attractive than buy because it raised the standard deduction among other things.
I also think it's going to be helpful to the one area that is the most put upon area in all of real estate, bricks and mortar retail. Why?
First of
all, I think the whole case about against bricks and mortar retail is overblown. But secondly, a disproportionate amount of the benefits from the tax plan help people at or below the median income level. And if you're at or below the median income level from an income tax standpoint, what are you going to do with an incremental dollar? You're going to spend it on consumables. So the tax plan is all good, right?
Maybe not. We're here in California, salt in your wounds. I don't think I got to tell anybody what that means. State and local taxes can't be deducted. So what is that going to mean?
It mean everybody's going to move from New York, California and Illinois to Florida, Nashville, Texas, South Dakota? You think that's going to happen? It's not going to happen. You are going to see some marginal movement. We have seen some movement of some industries to those places, including a recent announcement from AllianceBernstein moving from New York to Nashville.
It's not going to happen.
Why do people come here
to Los Angeles, to San Francisco, to New York? They don't go to those markets to save money. They go to those markets to make money because these markets have the deepest talent pools in the United States, if not the world. They also have a live work play environment, which are 2 of the 3 most important factors a market must have to thrive over the long term. The third is foreign capital.
We'll talk about that in a minute. But here's the deal folks. We measure not just the salaries that people are making, but the quality of the labor force using a whole host of metrics on quality of school, level of education. The best talent in the world is in San Francisco and Seattle by a lot, by every metric we have and we'll look at it in just a moment. It's also very good in Los Angeles, which is right over here somewhere.
But the bottom line is this. Yes, it costs a lot more to operate in San Francisco, Seattle, but the quality of the labor force pays for itself. So I wouldn't worry about the change in the tax plan as having negative impact on these markets. Does anybody know what this guy does for a living? Somebody shout it out folks.
He makes beer. Was it the beard? Was it the pats? Was it the beer bottles? Why am I showing this guy on the screen?
Because you've seen a lot more
of this guy recently, haven't you? You've seen microbreweries pop up everywhere. And why do you think that is? Do you think that is because people like beer more today than they did 5 years ago? No.
What this is, is a reaction to the forces of globalization and automation and people are adapting. And this is one of many examples I can give you of adaptation to those forces. And so, we've come up with an expression that local is the new global. You're seeing this in particular in retail, but it's spreading into the office space as well. But it brings up a key question because when you mention the word globalization, it's become one of these loaded political words like too many things these days.
But globalization is not a one trick pony. Globalization is 4 things. It is the flow of money, information, services and goods. And some of them are objectively good, flow of information, flow of money, great. But it's the flow of services and goods where it's gotten complicated.
And because of the displacement of so many people, because of the flow of goods, people are now adapting. And by the way, the school of thought that all growth is good is now the pendulum is swinging back even among some traditional economists that you know what, maybe these transitional costs need to be taken into consideration. And so the key thing you need to think about is, is global trade actually going to slow down? And when you think about globalization, it's all going to get faster. Well, guess what?
Over the last couple of years, the rate of change has actually gone negative in the percentage of global GDP based on trade. And based upon a recent book 2 weeks ago, Ian Bremmer called Haves versus the Have Nots, the fall of globalization. This number may get significantly more negative and will have dramatic implications for our business. That's the bad news. Here's the good news.
The good news is it's going to make the proximity to talent, proximity to the consumer even more important. So high density, high wealth locations like Los Angeles, San Francisco, Seattle are only going to become more valuable in the event globalization does in fact slow down. Demographics, health care. I put a picture of my recently departed 100 year old grandma Bess on the screen for two reasons. Number 1, I like looking pictures of my Grandma Bess.
Number 2, you're going to see a lot more of these Grandma Besses over the next 20 years as the number of Americans over the age of 65 is going to double. I was watching the presentation earlier and I'm a huge fan of tech media much like everybody in this company is. The one area I didn't hear and you should be hearing more of is healthcare. Even though healthcare may seem like this sleepy old school industry, according to the Bureau of Labor Statistics, it's going to be the number one growth industry over the next 10 years. And it's not just in secondary or tertiary markets.
This is picking up the pace in New York City and San Francisco and other markets that are dynamic. So, healthcare is enormous, but demographics is the most important issue in real estate. When people ask me about retail, I say, well, retail is not getting disrupted by the Internet. It's getting disrupted by demographic shifts where people are moving out of secondary markets into denser urban markets. And who's moving into these denser urban markets?
Young, highly educated people. So when you're looking for these talent pools, the CBD areas are not only young people, but young and highly educated. The stark difference between having no college education moving into secondary markets versus those people moving into high density urban markets could not be more pronounced. The talent is in the dense urban locations. Planes, Trains and Automobiles.
I came to Los Angeles, I had to put one movie thing in there. What's Planes, Trains and Automobiles about? Not the movie, the concept. The concept's about infrastructure. And the infrastructure is probably the 4th most important factor after talent, live, work, play, money, infrastructure.
The thing about infrastructure though is that infrastructure, what's important today may be different than it was 10 years ago and it's certainly going to be different 10 years from now due to technological changes. In my opinion, the most important piece of infrastructure for a market standpoint, not for an individual project standpoint is planes. And why is planes most important? Because you need to have direct flights between your market and other markets like it. The second reason is even more important.
It has to do with the flow of goods. Last year 85% of all goods in the world moved via ship, 3% moved via airplane, 90% of the value of all goods shipped via airplane. So airplanes are extremely important. I think they're going to get more so. But when we poll our investors, they ask, well, what's the most important thing for your project?
So you go from the macro to the micro and the micro is still commuter rail. But I would suggest to you that airports are going to get more important. And the question is just how much disruption is going to happen from Uber, Lyft and then eventually self driving cars to the need to have railways. And the key question of all is parking. Anybody here that took a look at the project we talked about yesterday talked about how they got rid of the entire roof parking deck and made it into green space, which is terrific And that is at the vanguard of the trend.
You're going to see less and less parking. You're seeing less and less people building parking because of these changes in technology. Returns, agile by capital structure. If my good friend and mentor Ray Torto was up here on stage today, he would tell you that commercial real estate has earned a 9% unleveraged internal rate of return since the beginning of time. Last year, it didn't.
It got 7% overall, and the only one that really exceeded it was industrial, and everything else was below that. Here's one piece of bad news. Because of upward pressure on interest rates, the major driver of value, which is cap rate compression, is probably only going to get worse because interest rates are likely to rise, but it's not a one for 1 ratio. We think that interest rates are going to go up modestly and that it might have a 15 to 25 basis point impact on cap rates overall, but not necessarily in the high growth markets where you might see almost no change for the best assets. Here's the better news.
We're here in Los Angeles. Even though the returns overall in the United States have been trending downward, Los Angeles is doing much better than the market and this will be very similar for Seattle, San Francisco and even Vancouver, some of the markets you're looking at because they have high growth well in advance of the national averages. And why do they have this high growth? Reason number 1, foreign money. Now a lot of people that are here today say, oh, we don't want this foreign money.
It's competing with our projects. It's pricing us out. Don't look at it that way because foreign money brings with it and you take a look at the Metropolis site downtown with Chinese capital as one example, foreign money brings jobs. It also enhances the value of the other stock in the marketplace by depressing cap rates. So Los Angeles, San Francisco, 2 of your top markets are 2 of the top 10 markets in the United States for foreign money.
So we look at this number very carefully. And the percentage in San Francisco is one of the highest in the United States. And when I talk to markets about where do you want to go, you want to go to the markets where the foreign money is or is going. And I noted in Victor's opening comments, he suggested that San Diego was a market that you're not as high on. I can tell you one of the reasons why, because the percentage of foreign capital in San Diego is near 0.
Foreign money doesn't go there, it doesn't have the dynamism. You want to go to the dynamic markets that have high foreign money. Seattle is about half that also dynamic. But the other capital that we track, we don't just track foreign money, we track venture capital. And if you take a look at the amount of venture capital that has entered the San Francisco market and you take a look at the rents in San Francisco, I couldn't draw a much more closely associated chart.
As venture capital drives that market, you're going to drive rents and the good news is that venture capital has never been stronger in the tech industries, particularly in San Francisco. These are the top 12 markets in the United States according to our investor pool. This is what I might call my drop the mic moment because Los Angeles is number 1 and I did not put it up there for any reason other than that's what our investors have said for the last 2 years. 2 good reasons, one other reason, 2 good reasons, 1 highly diversified economy, the media, the content side of media has gotten increasingly important. They have tech, they have everything.
They also were a bit of a laggard. Los Angeles lagged San Francisco, Los Angeles lagged Seattle. So it has more room to run potentially than those markets. So as we talk about the recession, you can't just say the recession is in 2 years because markets that have been laggards might have the ability to go longer. Another market that has that same characteristic is Houston.
Houston took it on the chin 3 years ago when the price of oil dropped, but now they are coming out of it. And actually through a tragic event of their storm, they've actually not only been resilient to the storm, but actually helped the commercial real estate market, albeit a terrible loss in the single family residential market. Now, you'll notice there are two numbers on this screen and this is really the key point. One number is where our investors rank these markets. The second number on the screen is the single most important number in commercial real estate in my opinion, which is projected office using job growth, okay?
And that is what those other numbers are. If you have strong projected office using job growth, you're going to keep showing up on this list. That's how Tampa Bay made it to this list. I think this year is the first time I've said Tampa Bay in my life as in my career. That's why Portland makes it onto this list.
That's why Nashville makes it onto this list as well. So where were the jobs formed in the Q1? You'll see that many of those markets that were on the screen are there, but including several of your markets including San Francisco, Seattle, San Jose, some of the fastest job growth markets in the United States. That's the good news. Here's the challenge.
The challenge is that these markets are so good, they are literally running out of people and are almost entirely dependent on in migration for people for new jobs because the unemployment rate in the United States is around 3.9%. In these markets, it's closer to 2%. In the high skilled trades, it's closer to 1%. So, they have to rely on in migration, which is why when you take a look at our projected office using job growth in some of those markets, San Francisco doesn't show up on the screen, but L. A.
Does, which is a little bit of a lag of it. So this is not throwing San Francisco under the bus because San Francisco is the number one in migration market for high-tech talent. How do I know that? We studied it. And if you take a look at our chart, we rank markets based upon so called brain drain or brain gain, okay?
At one end of the spectrum is Boston. Boston is the number one brain drain market in the United States. What does that mean? It means that MIT, Harvard and the other schools produce too many tech graduates and they got to go someplace else. Where are they going?
They're going to San Francisco. They're going to Atlanta, another market that was mentioned today, Seattle. So notwithstanding the fact that these markets are super tight, they are attracting the smartest talent in the United States and smartest and also the highest quality talent in the United States, which leads me to my ranking. We rank the top 50 tech markets in the United States and San Francisco is the clear winner. They're not just the clear winner, they're a clear winner by a gap.
You can see they're ranked 1 versus 2 versus Seattle. But take a look at the scores based upon our different metrics. They are number 1 by an enormous gap, which is why San Francisco and Seattle do so well. By the way, another market that was just mentioned today, Atlanta was our number one rising market along with Toronto in this year's study. So Atlanta, I agree with what we said before, is the market that's on the rise.
Now, if you take a look at Los Angeles, Los Angeles is number 24 on this list, but Los Angeles isn't a one trick pony in the high-tech business. They have the creative industries where they are number 1. So, I would say that high-tech does not be necessarily the destiny of Los Angeles, but it's part of the story, which is good. But tech type does matter. So, if you take a look at the type of job growth across the different types of tech, high-tech is the top dark green line.
Media and entertainment, which has also grown since 2007, certainly hasn't grown as quickly nationally, but it's obviously grown very quickly here in New York, Atlanta, Vancouver, several of the markets that were mentioned earlier. Multifamily, I think it's important that we address the multifamily market because one of the key questions for growth is livability of a city. And one of the things I mentioned before is that the tax plan is now going to increase the number of renters versus buyers. And the reason for that isn't just the tax plan. This has been a massive secular shift in the number of renters versus buyers, which is not going to change.
Now, when I say not going to change, it changed slightly in the Q1. In the Q1, it changed slightly where we had a 50 basis point increase in the percentage of buyers versus renters. But you know where the homeownership rate is today? The homeownership rate today is the same rate it was 50 years ago. So, ultimately, you're not seeing much gain.
And if you take a look by age cohort, this is the millennial age cohort who are finally buying homes. This is the baby boomer age cohort, which is buying homes. But who is this little age cohort right here, the 40 to 54 year olds? Those are the Gen Xers, my generation, who had the command decision to buy their first house between 2,022,007, which was the worst time in the history of creation to buy your first house and we ain't buying it again. But the millennials, while they did uptick in the amount that they're buying, them and the generation behind them are so saddled with student loans, very difficult to buy and baby boomers are going to age out.
Now when people take a look at a chart like this, they say, wow, San Francisco, Los Angeles, how could anybody afford to live there? 125% of the cost of living and look how far up New York is, more than double what it is almost in San Francisco. How they can afford to deliver and why you're still going to see growth in these markets? Because this isn't the number that matters. You know what number matters?
This one, because this number shows the value of the rental based upon the average tech worker's salary. And you see it on that metric, they're still affordable. How do I know it's affordable? Because typically the danger zone for where you are unaffordable is 33% to 35% of your take home pay. Every one of the markets is below 30%, even the most expensive market New York, Los Angeles slightly below that, even San Francisco.
So for the types of tenants that you are going to attract in your buildings, notwithstanding how expensive it is, it's affordable for their average employee. Office. This is my office here in Glendale, California. You guys know all about the interior changes to the space. I would suggest to you that the interior changes to the space is something that you guys are expert in.
I would just suggest to you that we've seen other changes to the business dynamics in terms of how sticky are your tenants. We've seen some concerns raised recently about tenants being more mobile. And in particular, when we talk about that point, I look at old school versus new school industries, old school being law, accounting, government, new school being media, tech and things like that. The old school industries have shown more mobility recently because they all want to move into the hip cool young new space, but they also want to densify more. The new school industries, I think that the pendulum on densification may have stopped.
I'm not saying it's swinging back, it may have stopped. But in the old school industry, their stickiness has declined as has their average headcount. But what are some of the industries that are driving us? So look, this is based upon Q1 information of our people that lease the most space. Technology, number 1.
Creative Industries, which is really L. A. Is also in the top 5. But once again folks, there's one word that comes out of this, maybe it's 2 words, health care. Massive growth driver, not only in traditional health care settings, but retail and office.
In New York City, healthcare is taking more and more space as well. And then when you take a break it down by market, you could see tech is driving several of your markets, but here we are in LA, creative industries, number one driver of your space. So where are we folks? We are in what's known as a Goldilocks economy. Goldilocks meaning it's not too hot, it's not too cold.
But there are 3 bears that could take you down. One bear is the macroeconomic bear of hard landing in China, emerging market debt crisis. The second is the domestic bear, which could be something like a monetary error or the trade war, which I suggested is less likely. But the 3rd bear is the scariest of all and don't let a pretty little ribbon fool you. That's the black swan bear.
Hard to predict as we talked about this is the history of the future. I'm not sure where that's going to come. But I think the key point is this. When people talk about recession, you have to look at the individual market characteristics and the markets in which this company is concentrated are among the strongest in the United States, if not the world, and they should be more resilient in the U. S.
Overall. Thank you very much and I'll take any questions you have.
Yes, sir?
Amazon? Yes.
Do you have any view on what their preference is?
Can I tell a funny story about that? So I did a TV gig about 6 months ago with Maria Bartiromo. I said the one question you can't ask me is where is Amazon going to go because we represent them and a great company, they have lots of great choices. What's the first question I get on the air? That question.
So, look, the funny answer
that as you
take a look at our top fifty list or at least the top 30 of our top 50, every one of those cities was in it because they're looking at tech talent, they're looking at infrastructure, they're looking at live work play. It's really talent and infrastructure are the 2 ones. But if you were to ask me where I think they're going to go and again this is based upon some polling we've done of our clients, not my personal opinion, they have a lot of good choices, but there's many caveats as I can give, a lot of people think it's going to be DC. And I think a lot of people think it's going to be DC because the number one competitor for Amazon isn't Walmart, it's regulation. And so there they might have a better shot of doing it.
And D. C. Also has tremendous tech talent, tremendous infrastructure as well. Next question. Yes, sir.
On the residential side, what are your views on how we're going to control the year, both in top and top and then elsewhere
Here's the headline. It's the wrong solution to the right problem. It's the right problem. Affordable housing is the right problem. We should be talking about it.
We should find a solution to it. But in addition to the solution that California is putting forward, Portland just put in a requirement that you have a 20% portion of your space assigned to it. Seattle just put $2.50 a head tax on employees, but the people who did it the worst, and this is not to knock Vancouver, which I think is a terrific market, they put a tax on foreign investors into their market, right? And that to me is the worst of all solutions. So, look, there needs to be a solution to the affordable housing crisis and all of these things are not necessarily designed to make money or to create units.
I think they may be designed to create leverage over the development community, so we come up with a better answer. So, it's an impossible problem. The number one problem really isn't lack of affordability, it's the lack of ability to build due to NIMBYism. That is really the number one problem. So if you want to build in a suburban higher wealth location, because of that, it then cascades down of where you're going to build these units.
So it will retard growth of building new units, but I will say this firmly, affordable housing is a crisis we need to solve it, but these are not necessarily the solutions.
Yes, sir?
Sure. So, co working right now represents about 2.5% of the New York City end market. And It depends upon where you think that percentage of the space tops out. I've heard numbers like 5%. It's hard to say because it really all depends upon my first question, which is when the recession is.
Because during the last great boom in co working in the early 2000s, it had pretty tough impact on the space. So, let's assume for the moment that it goes between 2.5% 5% for purposes of this conversation. I think the key question there isn't its growth is what does it do to a, traditional tenant demand and number 2, what does it do to the value of the traditional office building. So, I think it's still disproportionately incubator space, but it's increasingly becoming a strategic option for traditional tenants. Now, I don't think the traditional lease, the long term stability of space is ever going away.
I think it will only be incremental demand, maybe moving into a new market or basically temporary space. But, I do think it could be 2.5% to 5%. I think it could be accretive, A, from a tenant standpoint, if you put them in that space, maybe you move them into your other space. But here's the key question. Let's assume I'm wrong.
Let's assume the number goes to something much higher than that. And you are a lender, and we have some lenders here in the room today. The person who's going to make the decision on what the right percentage is isn't us, it's the banks. Will they accept a shorter term lease license, less credit and give you the same value for your property? So we did an ad hoc study in my company on this.
We tried to determine where is the breakpoint in your building where you can have this co working space and maintain the same value. And we came up with about 20%, 25 percent, which is a much higher number than I expected. So, we think that in today's market, that's the number. But in the future market, it might be different. So, I'll give you one other example on this.
So you probably noticed that WeWork bought the Lord and Taylor building in New York and they bought similar buildings to that in London. Why did they buy it, right? They bought it because they not only wanted to show their model is great, but I think it's a capital markets decision because I think what they're really going to do is fill it up and try to securitize the debt on the building and get a credit rating that people can't believe great pricing and move forward because if that happens, that actually helps the marketplace bring more of their space into other buildings. But until that happens, every person in this room is going to be reluctant to have more than that, call it 20% of the space because they're afraid their banks are going to ding them on their valuation. After any more questions?
Well, thank you very much everybody.
All right. So we're going to take a quick break now for about 10 minutes. So we'll meet back here at about 10:05. So welcome back. We're going to get started again.
And next up, we have Drew Gordon, our Senior Vice President of Northern California. Here comes Drew.
Thank you, Laura, and good morning. Brendan from Wells Fargo. There he is. If you guys haven't met Brendan, you should. He's one of the rising stars.
And this goes under the story of your old when. So I'm standing next to Brendan watching the band last night, and I look over to him like, what do you think? He's like, oh, this is really cool. I said, Do you recognize any of these songs? And he looks at me being very polite and goes, Well, maybe like on Spotify once or and I was like, yes, no, I get that.
But he goes, but I texted my dad, and my dad knew every single song. Oh my god damn. So I go, we should FaceTime him right now. And Brendan's looking at me like, I
can't believe this guy knows what FaceTime is.
What I should have said is Snapchat. I should have SnapChated your dad. Anyway, good morning. Again, welcome to Investor Day as we call it around here, Hudson finals week. My name is Drew Gordon.
I oversee our Northern California portfolio, and I have the distinct pleasure of once again reminding you all just how well our markets are doing in Silicon Valley and the Peninsula. But before I get started, though, I ask you to enjoy the following short video that depicts examples of the reimagining of our Bay Area portfolio. Okay. Today, I'll be focused on 3 areas of importance with respect to our Bay Area portfolio. 1st, I'll be discussing the strong real estate fundamentals I see today Peninsula and Silicon Valley markets, markets that remain healthy and continue to exhibit signs of expansion.
I've also called out several examples of growing barriers to entry, barriers that bode well for our portfolio of existing properties. 2nd, I will be discussing where we see the sweet spot of tenant demand today, that is tenant requirements of 10,000 square feet or less in size. And equally as important is that this demand aligns perfectly with the majority of our current availabilities in our portfolio. And lastly, I'll be highlighting the return of large tenant requirements to the Peninsula and the Valley and why I believe Campus Center is well positioned to be a direct beneficiary of this surge in demand. So let's kick us off and discuss the strong real estate fundamentals that I'm seeing in the Valley and the Peninsula today.
Let me first refresh you on how we define these 2 submarkets. The peninsula is bordered by South San Francisco to the north, Palo Alto to the south and the Valley is Mountain View to the north and San Jose to
the south.
Since the start of this current business cycle in 2011, we've seen strong net absorption of 4,200,000 square feet in the Peninsula and a staggering 19,200,000 square feet in the Valley. Additionally, we're experiencing very healthy single digit vacancy rates in both markets that have declined 5 30 bps and 6 60 bps, respectively, since 2011. It's worth highlighting that though there has been a slight uptick in vacancy in the Valley, a bulk of this increase is a result of both new supply and additional Selby space, two factors that we do not see as material risks to our portfolio, and I'll explain this later in my presentation. Finally, the last two quarters in the Valley have been exceptionally strong in terms of net absorption, totaling 1,700,000 square feet in Q4 of 2017 and 2,000,000 square feet in Q1 of 2018. Now you can't speak to the health of the Peninsula or the Valley without addressing the impressive growth of both venture capital and corporate R and D spending, something that Spencer spent some time on in his presentation.
Not only has overall VC spending continued to increase domestically with an impressive year over year jump to nearly $1,400,000,000,000 in 2017, but the Bay Area saw an even more impressive increase that year of $150,000,000,000 with Bay Area firms being the recipients of approximately 43% of all VC spending, an incredible 3.2 times the next closest region. We are also seeing a continued upward trend in R and D spending in the Bay Area approaching $100,000,000,000 in 2017. And as many of you know, R and D spending has historically been the engine for growth and innovation for technology firms in the Bay Area, and we see no signs of this weakening. There's been some mention of a coming tech rec in the Bay Area, though I don't think those concerns were raised by anyone in this room, maybe those who no show today. I can tell you though, from where I sit, I simply have not seen any indications of this occurring.
Rather, technology and other related industries continue to expand within the Bay Area. Google and Apple's footprint alone stands at 28,100,000 Square Feet, and their planned expansions in San Jose equal an impressive 10,800,000 square feet of new growth. Facebook, which is the new story in the Bay Area, who currently has 1,300,000 square feet of expansion underway, recently announced plans to hire an additional 20,000 employees in the Bay Area around its Menlo Park headquarters, more than doubling their existing headcount. These are truly staggering numbers and cannot be ignored. Now here's where it gets a little more interesting and at least for me.
Many of these same growth companies I just mentioned are now focused on purchasing existing properties to feed their thirst for growth, as evidenced by our sale to Google at Bay Hill Office Center in San Bruno 2 years ago, along with many other recent examples. The purchase of these buildings has resulted in the displacement of numerous companies forced into the market to find alternative locations, several of which have landed in our portfolio. Two examples come to mind. First, Experian recently leased space at our Concourse project in San Jose after LinkedIn purchased a building in Sunnyvale. And second, a financial services firm is now in leases at our Tech Mart project in Santa Clara as a result of Google purchasing another property in Sunnyvale.
All the focus in our market seems to be around large tenant requirements. And even though these requirements are back in a big way, the real action and the opportunity that we see is with tenant demand below 10,000 square feet, our sweet spot. Roughly 90% of the deals completed in the Peninsula and the Valley are less than 10,000 square feet, 90%. This is a statistic that we focused on early in our ownership of this portfolio, and this focus has served us very, very well. Now the good news.
Pulling Campus Center out of this equation, more than 85% of all current availabilities that we have are also less than 10,000 square feet with an average suite size of 6,000 square feet. This is no coincidence as we have been systematically rightsizing many of our availabilities through our vacant space prep program that Art has already alluded to in his presentation. This rightsizing matches up very, very well with the strength of the small tenant demand that we are seeing. So how do we feel about our focus on small tenants? Well, we feel really, really good.
And why? 1st, these small tenants provide us with exceptional diversification across all major industries, 66% are non tech related companies. 2nd, with 27% of these companies public and additional 49% that have been in business for over 10 years, we're getting solid credit companies across the board. And lastly, our Peninsula and Valley portfolio includes a total of 520 tenants, 410 of which are under 10,000 square feet. That's 79%.
So we clearly have a small tenant portfolio. These small tenants in aggregate represent only 27% of our total ABR, which is our annualized base rent for this portfolio. However, taken individually, each of these smaller tenants represents no more than 0.1% of our total ABR, providing solid diversification. People love to talk about what's happening with sublease space, and so do I, and it's often considered a canary in the coal mine of sorts. 2 years ago, there was growing concerns over the impact of sublease space in San Francisco.
As we all know, that concern has now vanished. For sublease space, though, we see in the Peninsula and the Valley today, we simply do not view it as competitive to our requirements. Why is that? Because over 80% of the sublease availability in both the peninsula and the valley is in blocks greater than 10,000 square feet. In addition, the sublease availabilities have offered little to no TIs to prospective tenants.
And this environment of rising construction costs, providing no TIs simply kills deals. And lastly, the average sublease terms available today are relatively short, 4 to 5 years, terms that are not desirable for large tenants who are trying to manage their future growth needs. Here's the real takeaway you should take from this. Of all the recent large tenant deals that have occurred in the Valley over the last 9 months, none went to properties offering sublease space, 0. Now let's discuss what's happening with the delivery of new supply in the market and the corresponding amount of pre leasing occurring at these projects.
Both the Peninsula and the Valley have seen a tremendous amount of pre leasing for both completed and under construction projects. Of projects under construction in the Peninsula that are being delivered this year, 71% have been pre leased, which equates to 643,000 square feet of positive absorption. Though only 13% of completed projects in the Valley have been pre leased, just 800,000 square feet of this new supply is truly competitive to us. And of that amount, 50% has already been pre leased. Lastly, and most important to our leasing efforts at Campus Center, the average asking rents for competitive new projects is $3.55 triple net and rising, nearly a 30% premium to our current asking rents at campus, providing us a real competitive advantage.
Not to mention that this newly repositioned project now boasts many of the same amenities being offered to all these new projects, amenities such as outdoor seating, recreational areas, large contiguous floor plates, everything that today's growing companies expect and demand. So the return of large tenant requirements to both the Peninsula and the Valley matches up very well with Campus Center. With a significant asking rent spread advantage over both new and existing competitive properties and unparalleled expansion optionality over the competition, campus is well positioned to perform favorably in the near term, as you've heard. The larger deals are taking longer to close and Art mentioned this earlier too. We are currently seeing over 2,800,000 square feet of active requirements that fit with our campus center availability and an additional 800,000 square feet of actual deals and negotiations.
This strong activity bodes very well for campus center once again. HPP Peninsula and Silicon Valley assets outperform the market in both in terms of both occupancy and rent growth. Look, it's not just the title to my slide, but it's much more than that. It's something that Art and I and our entire incredibly proud about. From mid-twenty 15 to now, Hudson's asset performance has clearly distinguished itself from its competitors.
In our Foster City Roadwood Shores portfolio, both occupancy and ABR growth are 500 bps higher than the market. In the Palo Alto Research Park, in the Palo Alto Research Park, our ABR growth is 1200 bps higher than the market. And finally, the San Jose airport market, we are 1,000 bps higher in occupancy and 1300 bps higher in ABR growth, impressive numbers for sure, something, like I said,
we are so proud about.
Now significant barriers to entry remain and in fact are increasing in the Bay Area as an ever expanding labor force and strong economic conditions in the Bay Area are spurring many municipalities to try and reign and grow through restrictive land use measures. These efforts will continue to benefit existing landlords like ourselves, who specialize in the repositioning of our properties that compete alongside both existing new assets. A current example of this is the city of Palo Alto recently enacting a restriction on new office development to the tune of just 50,000 square feet annually and rumors of an attempt by the same city to broaden this restriction to include the Stanford Research Park as well. Now I've highlighted on this slide the 2 municipalities that we have our properties in, namely San Jose and Palo Alto, but all these growing restrictions will have the effect of tightening the overall supply for all markets in the Peninsula and the Valley, which once again we think we're going to benefit from. So in conclusion, all of our
markets in the Peninsula and
the Valley remain strong and robust with impressive growth of both VC and R and D spending. Large tech company expansion continues for leasing and owning assets. Increasing barriers to entry will continue to enhance the performance of our assets. Our focus on smaller tenant demand, less than 10,000 square feet, will continue to drive our occupancy and rent gains. And the return of large tenant requirements, non competitive sublease and significant pre leasing activity for new supply in the Valley bodes well, not just for Campus Center, but for our entire Northern California portfolio.
Thank you very much. So one last thing. When Victor led off and he talked about how important relationships to us are to us, it's absolutely true, our relationships with you and with our tenants. And we are very happy to introduce Adoni, who we have worked with very closely over many years, who has been running real estate for Uber, and we value that relationship. We've been working with him very, very closely.
And I like you to welcome up to stage Adonio Baneras with Uber.
Hey. How are you? Good. You guys can hear us both?
Good. Thanks.
You are more than welcome. So before we get into the formalities of it, what was I don't recall, what was the first size of the first lease we did with you guys? Do you recall what the size was?
It was preemie. Travis had negotiated for the 4th floor at 1455, about 90,000 square feet. And then since then, we've done deals and we're up around 320,000 or 330,000
at $14.55 And your favorite landlord is?
It's right on the head here.
So Adoni, talk a little bit about your roles both at Uber and Lincoln first LinkedIn and sort of what your responsibilities have been and were sort of broadly aspects of people getting sort of
a feel forward. Absolutely. We own the entire built environment from putting together the strategic plan and the budget for real estate and facilities related costs, managing the transactions across the world, construction and project management and then daily operations on an ongoing basis. I did that at Uber and I did that previously at LinkedIn with the last 4 months of LinkedIn being more of a focus on daily operations as the company stabilized its growth.
And how did the real estate portfolios transform over that period of time in those companies?
Sure. From a couple of high-tech, high growth companies, right, successful companies is at LinkedIn, we went from about a dozen sites a dozen sites to about 400 people to about 6,000 people and about 30 sites. At Uber, we went from 15 sites in about 350 people to about 14,000 people in about 750 different sites.
Over what period of time?
Over and about same period about 4.5 years.
That's amazing, isn't it? Yes.
So, talk about the role of
real estate in a company like Uber since it's global and its ability to sort of stay competitive for growth in employees and the likes of that place.
And I'll break it into 2 parts. 1 is for employees. And what we do is for theirs, we put the strategic plan and the budgets together. We bring insights to the business on where we should put office space based on demographics, where we should put office space based on market conditions. Then what we do is we build and maintain spaces that people like to work at and people want to work at and are successful working at.
And then ultimately, the other part is delivering on the business plan, right? It's everything you do in terms of the planning, everything you do in terms of the construction. If you don't do it on time, on budget and people don't like working there, you kind of
the boat. And that sort
of premise of running your business, since you're intimately involved from the tech side, does that differ from the size of companies, do you think, today in the tech world? Or is that same model, small, big, they still look at the same thing?
It's the same around the tech world. Now different scales, different scope. And even at Uber and LinkedIn, when we're small, you think about things a little different, more transaction management. Priorities for
real
estate? Is it a location? Is it a priorities for real estate? Is it location? Is it what you talked about sort of dealing with the urban amenities that your employees like, talent?
I mean, what are you sort of looking at? And sort of give us
a feel for sort of an
A to Z menu on that? Yes.
The biggest thing, and I'll keep coming back to this, it will sound a little bit like a trope. It really is about acquiring and maintaining your people. It's having a place where people want to come to work and they don't show up just to work at a certain facility, right? Because it's the excitement of building something new, it's excitement about changing the world, it's excitement about enhancing their careers. But we have a part of it to make sure that it's a place that they want to come into every day and that they can be successful there.
And when they want to collaborate with people, they can collaborate. When they want to have heads downtime, they can have heads downtime. It's the right live, work, play environment for people. And then ultimately, is the other things that are important to us is total cost of ownership. And if I have a building that OpEx is lower than competitive buildings and I'm paying a little bit more on rent, that's okay.
If it's the other way, that's okay too. So I think about cost per square foot, I think about cost per employee. And then the final thing is flexibility of space. We talked about your first deal at Uber, you guys made a bet with us, right? It's 90,000 square feet.
And as a start up, you don't want to overburden your real estate if growth isn't what you think it will be and then worrying about what do I do with all the empty space. But on the other hand, you don't want to keep moving every year to 2 years because you don't have a landlord who's flexible enough to be able to adjust to your growth needs.
Got it. Well, that sort of goes into the next aspect, which is planning. How far ahead to I think we all like to figure out with all big tech today, how far ahead are they planning? How far ahead did you plan? I mean, you're 14,000 people.
How far ahead did you plan to grow in
the space in markets like San Francisco,
other markets around the world?
Yes. And I can talk about that
a little bit in kind of what
I call the band I'm in, not like our search engine friends or our iPad friends who have 20, 25 year plans, right, for what they're doing. For us, what we look at is it's based on the scale and the scope and where our cores are. So for our headquarters basis is in 2015, we put a 10 year plan together with a 5 year execution horizon saying, hey, look, this is where we're going to want to be in 2025 and this is how we're going to get there and let's start working towards 2020. As we look at our dozen to 15 hub offices in the world is we'll tend to focus on a 5 to 7 year plan on there. And then for smaller offices, 2 to 3 year plan.
And then every year, as the new business plan comes out, adjust and kind of adjust course a little bit. And at the end of the day, when you look back, you're successful if you're sort of where you thought you'd be 5 years later.
So this is something I think everybody wants to know like do you care and
do you if an Uber
or even generally do they do tech companies care about new, old, renovated construction? I mean, is
that does that hit the radar?
And if it does, tell us a little bit about that.
It's more about where the space is rather than its new roles because we'll all go in and remodel the interiors. And employees show up and we show up and everybody here shows up. And you kind of know the age of your building. But on Market Street right now, we're on in buildings that were built between 1906 61985. So it's like it's about the interiors more than the exterior as long as you have the basic amenities, right?
Efficient floor plates, light coming in are the 2 biggest things from a facilities and employee point of view. Access to transit is high on that list. And the whole lived work play dynamic that is not just urban these days, but also suburban that when employees are done working, they're where they want to be for the evening or that they come up on the weekend.
Got it. All right. So we just heard a little earlier because and everybody's seen in the paper with WeWork's buying assets. So, talk a little bit about that lease versus buy. You guys were both obviously leaned down more to the lease side, but you have ownership interests too obviously going forward.
Give us your thoughts around that.
And this is for me and the companies I've worked for, right? Again, different based on the scale and leadership's approach to real estate. But for us, it really matters because we don't buy assets to make money on it. We're not investing in assets. We're buy versus lease.
Do we have extra capital we can use? Can we make that capital be more effective than sitting in the bank? Is that what our long term vision is and then what our long term growth plans are and the flexibility of space. We look at that for anything. We used to look at that for every project, but we started looking at that only for spaces of more than 50,000 square feet because it's a weak spot for us.
And we've decided to date that that only made sense in our headquarter locations in San Francisco as well as our headquarter locations in Pittsburgh for our advanced technology group. Got it.
All right. So, a little bit of a plug for Hudson, but just maybe not because I didn't ask you the question yet. But, 1455, tell us what drew you to 455 and continually draws because you're almost 400,000 feet there and the space is pretty cool. How did that sort of thought process run through because it was by a very, very close competitor Pier. I shouldn't say Pier, but I'll say competitor, but I'm trying to be nice.
It was the ugliest building in San Francisco at one point. And we said, we'll take it all day long. So, what do you think? With
the most orange carpet you could imagine. If you think of the most orange carpet you can imagine, you're not orange enough. It was phenomenal, right? Is that I can talk a little bit about conversation I had with Travis because Travis did the first deal first. And then I came on right after we closed on the 4th floor.
It was size of floor plates. It was growth potential. It was honestly the landlord relationship, right, punching windows in, right?
Yes, we did that. How many windows are we punching, Drew? 12. 112 windows, wow. Okay.
Right? It's turning dark space into bright space. It was flexibility and lease term to start with, right? It's also a small tech company with 300 people worldwide, while it's got a nice name in San Francisco in 2013 as Uber, not quite the monster and the great company it's become, kind of the willing shop on, hey, we'll grow with you. And then when I came on board, evaluated everything, right?
As when I come on board, I like looking at portfolios and saying, hey, is this the right place? Is this the right market? Looking at the growth of mid market and the transformation with Twitter, Square, everybody else in mid market, it just makes sense to expand in there. Some of the back and forth we've had in terms of interconnecting staircases that we've worked on together, elevator access, making a building work for new use case isn't the easiest thing in the world to do. And you run into things where you're like, oh, data connectivity, okay, let's figure that out.
Right. Oh, we have a lot more employees coming in and out than the footprint of data center would be and just kind of penciling out ideas.
Perfect. All right. So, let's just talk a little bit more generally and you could use to your example of Uber, but because you're so tied into the tech world. We've been talking a lot in the last couple of years specifically about the obviously the migration up to San Francisco for big tech, right, expanding up to San Francisco. Give us your feel for San Francisco versus Silicon Valley, Silicon Valley versus San Francisco survivability of both, none, 0, just sort of general thoughts around that and we can drill down a little bit if you want to.
Yes. I don't think about it as migration, but expansion, where it was 15 years ago, right? There was 1 or 2 companies who were based in San Francisco. San Francisco was, in my world, known as the startup and the incubator. And then when you got big, you moved down to Silicon Valley.
Is that's changed now? And instead of, oh, you're thinking about Silicon Valley, you're thinking about San Francisco, you're thinking about the Bay Area. You look at where the people are living with the East Bay with Francisco, you saw the slides earlier in terms of demographics is most tech companies or I should say all of the big tech companies are both in the South Bay and San Francisco. Expansion in the East Bay is happening. So it really is about access to talent and the balance between making people's commute good, it's this tricky balance between work life balance, but when we want to meet is as great as video conferencing is.
It works out better if you can get in a room for whiteboard, figuring out flexible work schedules and figuring out the key for us for being able to expand in multiple locations is the benefit that technology brings us, right? Is it being able to work almost anywhere in any style I want to work on, whether it's my laptop or whether it's a video conference meeting or whether it's my cell phone?
And are people going back and forth, employees?
The people start off by going back and forth, and they quickly learn that it is easier just to jump on a call for the most part. We learned that on Market Street is our strategy was expand as much as we can at 1455, but there's other steps as well, right? Yes. Is that and then we picked a strategy of expanding on Market Street where we could use the subway and get from door to door in 20 minutes, right, from any of our 3 buildings back and forth. And what we saw for the 1st 6 months is where people were spending their days kind of going back and forth between buildings meeting to meeting, meeting.
Then we saw them interestingly start scheduling multiple meetings in the same building and spending a day. And now we see people staying in their buildings and getting together less frequently in person with
using Technology Bridge. So, Bay Area, your general feelings. Obviously, it's the centric tech hub of the world, right? Your feelings about the Bay Area and the future of the Bay Area versus other markets that people are responding and talking about like Austin or like Boston or other places even outside of the United States? What's your thoughts around that, Seattle, etcetera?
I think it's we you talked about migration before. Again, I don't think it's migration, but expansion is both you and Spencer mentioned a couple of things. You talked about yesterday that if you're going to be in content, you're going to be in L. A, right? And there's great content providers across the world, but if you're not in L.
A, you're kind of not paying attention. It's the same thing for tech. If you're doing high-tech and you're not in San Francisco Bay Area, you're kind of not paying attention to what the market is. It is additive to have engineers in Amsterdam. It's additive to have engineers in New York.
It's additive to have engineers in Bangalore. But this really is or the Bay Area really is the tech center and we and everybody else are going to continue to grow there. And it's about access to talent and keeping people in your company. You saw on Spencer's chart, right, the top 10 workers top tech workers around the world based in San Francisco. That's not going to change for the foreseeable future.
So, I mean, for years, I've been defensive about this different tech cycle. This is not tech rec clearly talking our own book, because that's what I get paid to do and support the real estate we bought. But from the flip side, somebody who's a user, somebody who's a part of one of the largest companies in the Bay Area and in tech growing also around the world, what's your thought about this whole negative trend of tech rec? It's coming. We're all going to get wiped out with it in the next recession, etcetera.
Just give us your thoughts on that as a Bay Area guide to
you.
Pick the reason for your next recession. And as Spencer said, right, predicting the future is hard. And when we look at the 2,001 setback, we look at 2,008 setback, not a lot of, oh, yes, this is going to happen on this day, is that tech is certainly not what it was in the dotcom days that I went through, right? It's that it is stable, financial, well funded public companies that are actually delivering projects, delivering products and making money in terms of that. Where we see setbacks is you'll always see setbacks in any economy, in any country around the world, but there's underlying strength and technology is one of the major drivers of the future, right?
As that Spencer talked about health care, His biggest driver around healthcare is how technology can enhance healthcare, right? It's not a trend that's going away. It's not, oh, I can get my coffee cheaper, right? If I can get my coffee delivered to me, although that's kind of a nice thing, right? It's really about the fundamentals of business, and I'll put a plug in for the rideshare guys, right?
It's getting around with Uber, getting around with Lyft, getting around with jump bikes. It's changing our lives for the better. It's changing the world's lives for the better. That's not disappearing.
Got it. All right. So, I got a couple of just drill downs and then we'll open it up to some questions. Sure. First of all, Travis is living in L.
A. Now. I don't know if you knew that. He started a real estate company. He's a direct competitor.
I think he bought like a 28,000 square foot office building right in Culver City. So, I know Art's a little nervous that he's going to compete with him, but it's okay. So, offshoots of Uber for us for an example. So, we have here in L. A.
And it's become very popular in San Francisco is Bird, right, which is the minimal version of Uber and the likes of
that, but you get to
do everything yourself. Where do you see something like the Birds going to on the next level? Is there something that you guys have kicked around internally that you said, okay, we're going to see Uber expanding to Uber Air or Uber something else. And just give us a little flavor of sort of the progression of the business on that basis. Well, and I'm
going to talk as Adonia facility guy as opposed to any spokesman for Uber or whatever, right? So it's kind of like a high-tech junky, right? It's interesting on what kind of used to be called the gig economy, but the delivery only restaurants, I find fascinating on, pick your Uber Eats or your other delivery thing. There's restaurants that I get food delivered from that I can't actually go to. Yes.
It's what I tend to call kind of the invisible service providers like the bikes, like like the sorry, scooters, scooters, bikes, all those where I just go to do something and there's no one there to help me. There's which I think is a direct offshoot from what we started seeing in terms of service providers like the travel companies, where you used to call a travel agent, you used to book travel, you used to call the airlines. And now it's this cool invisible helper that just makes your life mostly easier. It's just an offshoot of that. And you talked about earlier rent versus buy is that rehabilitation of old assets is fascinating future, whether it's for restaurants, whether it's for self driving car recharging, whether it's for converting things to housing, whether it's helping low income, it's kind of redistribution of assets, the stuff you guys are doing that is a great feature on reuse as opposed to replace.
And obviously, the concern about employment, right? You're taking that sort of that risk expense factor and not necessarily negating it, but minimizing it a little bit and give it a little bit of safety. Absolutely. Right? Of course.
All right. The craziest thing you guys ever thought that you didn't execute on for space, something in your space, I mean that you sort of said, oh, somebody came and say, we need a swimming pool in the middle of the lobby. Something like is there anything like that that's come your way? You're like you guys like laughed at each other at the end of the day that was the stupidest idea
or the craziest idea? Absolutely. And it was yes, it's kind of jobs ago, neither LinkedIn or Uber. And we had a great idea on kind of flex space for a year and just don't do anything with it and people will be okay with it for a year, just squeeze them in into old data center space and the old warehousing space, it'll be a great thing. That was disastrous, right?
If people if you have like all of us, if you have a light at the end of the tunnel, it's a great thing and you'll say, hey, we'll squeeze in for 6 months because we've got a new office space going. We're working on our Mission Bay campus to kind of expand. So, we're trying to squeeze in an Uber, so we don't have to take significant amount more space before we kind of expand in the Mission Bay. But you have to make sure that light at the end of this tunnel is explainable and visible to your entire organization. And it's not this mythical lighter, it's just like you just say, hey, 4 years from now, it's going to be great, because 2.5 years from now, 30% of the people aren't going to
be working there. Great.
How about some questions? Anybody got any questions they like?
Yes. You just mentioned Mission Bay campus. How does your state that 14 55 and 1515 fit into that and then eventual growth over time where Uber would want to be located? Great question. And we're modeling that.
As I talked about, we had our 10 year plan with kind of 5 year execution. So we're currently working on what that second 5 years is and whether Mission Bay that is 7,000 assigned people, how that fits into our bigger portfolio. Do we need 12,000 seats San Francisco? Is it 15,000 seats in I shouldn't say San Francisco, 12,000 seats in the Bay Area, 15,000 seats in the Bay Area. And we're just going to keep working on that.
We've got great leases for all of our properties going into the mid-2020s. So kind of adjust. It will be Mission Date will certainly be our headquarters, but not our only office space in the Bay Area. Yes. Can you help
us think about the way that whether it be a LinkedIn or an Uber, when they expand, they say we're going to hire 5,000 people or 10,000 people before you need that for us. And how much of that is assigned to specific use or a function
and then that function is already It is and I tend to be on the more conservative side of facility guys is I tend to keep the portfolio at kind of 85% to 95% occupied with space coming on about 2 quarters before I need it, causes a few problems as we talked about, there was light at the end of the tunnel. So it's when we see headcount growth, we take that as people coming in, not necessarily 2,000 front end designers and 1,000 engineers. So, we tend to design space to be flexible for whatever group and we colloquially talk about it seventythirty where regardless of who you are, you'll use space about the same 70% of the time and 30% of it is unique to your group. So recruiters need more phone booths to make phone calls in, is that finance guys need more space for transaction based work, engineers need more one to 1 desking than phone sales guys do. So, we stay ahead of the growth by about 6 months and then have the space about 70% standard and then adjust for each team as they grow into it.
That answer your question? Thank you.
Yes. Years ago, when we did
Off the top, I'll say, and not just for those companies, but for most companies, it tends to be where you first start up your headquarters is I'm trying to think if there's anybody besides Adobe who did their big shift from San Francisco to San Jose. I'm not sure there's been another big tech company that once they got to a few 100 people didn't stay centered where they were. And I know from my LinkedIn days was we evaluated San Francisco. We evaluate or I should say, we evaluated the entire Bay Area and said, yes, you know what, staying close to the center of where our growth started and where the majority of our employees live is the right answer. When we were working with Travis on what we do for our headquarters for Uber, it was the same process we went through.
We looked at every potential headquarters space in the Bay Area, heavily north of the San Mateo Bridge in terms of that And then came to the realization both objectively and subjectively that kind of staying near where you were born is a good thing.
Anyone else? I can't see over there. Yes.
It's total cost of ownership for me because the nice thing is when you're a funded company, whether you're a public company or a private company, when you're well funded, you can look at it from a total cost of ownership. And that I look at it and I say, hey, if you're giving me $100 TI, but my rent's a little higher, you give me $50 TI, rents are a little low, if I've got access to capital, it doesn't impact me that much as long as my cost per square foot and cost per employee stays low. When I'm starting off and we're 300 people and we're trying to grow to 1,000 people is getting CapEx to help pay for your rent, getting free rent even though you're gapping it, getting free rent, very important, right? Because I can always spend start up money somewhere better than my space, even though I need space and they need space for people to be effective, is I'd rather have money go toward driver incentives. I'd rather have money go toward more technology and more engineers than spending today's cash.
I'd rather spend tomorrow's cash. Great. Yes. As the company matures, right? Now I look at it and I go, hey, you know what, my TI, I can pay for my own CapEx if it helps me get a better overall cost of cost per square foot.
But we always come back to cost per square foot and cost per seat and cost per active employee. Those are the 3 big drivers in the world of facilities and real estate is how do I burden the P and L and the business plan with the cost of doing business. So, you mentioned a lot of the workforce is starting to live in P and C today and you guys have had a changing strategy with respect to fulfillment. Can you just talk about sort of pros and cons of the area and how you guys think about O'Connor? Yes.
We still think or I should say again myself, not the Uber guy, right? But myself, East Bay is still a growing opportunity in there. We as Uber looked on it, as I said, our business plans have changed what our growth is, what our efficiency per employee is. So we looked at it and decided that at this time Oakland wasn't the right place for us and instead we'll focus in our Mission Bay, but still personally high on the East Bay with commutability for people and being able to tap the immense talent of workers that are living in the East Bay. So, still high on it, but we feel comfortable with the that's a better fit for us now.
Great. Anybody else? No, we're good. All right. Perfect timing.
Look,
how cool we are. Exactly. Thanks, Adoni. Really appreciate it. Thank you.
And the relationship.
Thank you, Victor and Doheny. That was great. We're now going to switch and talk a lot about tech. So we're now going to switch to the entertainment side of our business, studio side of the business. And there's no better person to talk about that than our SVP of Sunset Studios, Bill Humphrey.
Thanks, Laura. Okay. So first of all, we're going to run a little video here to give you sort of a visual perspective, sort of an aerial view of the studios we manage. And I think if you really look at it carefully, you sort of see that integration point between our real estate side of the business and our media entertainment side and you see how they really integrate well. So let's roll the video.
Okay. So we're going to talk today about the Studio of the Future, what's next for Sunset Studios. Let me start 2 years ago, I talked to you about the increasing demand for studio space, Class A office space, production office space. And I'll tell you again, it's even the demand is even greater now. The level of demand for our stages and production is the best time to be in the business.
I've been around the block a couple of times. Even though I'm a millennial, that's great early, I still have a great perspective on it. But I want you to really get focused on this because you got to view me as the lead in here for I'm sort of the small lead in band like Payment Powell waiting for the main act Mark to come on board here, who's sort of like Radiohead, it will be coming out. So I just I'm going to get you guys revved up here a bit, okay? So I'm going to make 3 so the only thing I want to say is that the entertainment space is super exciting today.
I was just reading over somebody's shoulder that Comcast is now going to try to make a bid for Fox, trying to outbid Disney by trying to buy Sky. So there's a lot of different movements going on in the industry as the content guys, the technology guys all try to merge together to create global scale. Even Barack Obama and his wife just announced yesterday that they're going to go into the TV business and they just cut a deal with Netflix to shoot a bunch of television shows. I'm going to make 3 key points. 1, demand is continuing to increase in Los Angeles with Los Angeles benefiting the most from this.
And at the same time, the supply side isn't going to grow for stages and for productive services. Secondly, Hudson Pacific, our combination of real estate expertise and our combination of media expertise gives us scale, technology and to basically make this market really grow, take advantage of all this demand. And third, as Victor talked about in his presentation, we're going to keep an eye on opportunities outside of our Censa Studio Los Angeles Hollywood portfolio. Right now, Los Angeles continues to be the epicenter for oh, I use that word, sorry, epicenter, I'm sorry, continues to be a place where entertainment, media is happening. There's 5,000,000 square feet of production space.
There's over 300 certified stages, and we're right in the middle of it. So our primary services consist of 3 areas in terms of how we drive our revenue. 1 is stage and production office rentals. So you have to basically run stages and there's areas around it. You need green rooms.
You need places for wardrobe, you need storage areas. And also, we have a lot of office space. Office space is required if anytime you have a show, it's somewhere between 15,000, 20000 square feet of office space required to house producers and directors and all the people that make TV. And we also house people that don't do TV shows on our lots. So for example, Starz, Fox, Empire Show, they love being on our lots, but they don't shoot on lots because they shoot on locations.
So as you can see in the
picture on the bottom here, we can see that we have 35 stages, so it makes us we have the largest independent operator stages in the United States and gives us a lot of cloud. And our client base is really diverse. First of all, we do a lot of traditional media companies. So ABC and CBS are very large clients of ours. We have a lot of clients in the branded area, HBO, Comedy Central, MTV, VH1.
And then on the streaming side, we've really grown tremendously in this area, and that's why the demand is up. We have a very long a 10 year deal with Netflix in place. We are doing work with Hulu right now, with Silverman, and we also do work with Amazon. So take a look at this slide. This is an incredible piece of information here.
There's always $60,000,000,000 of media production going on and most of it's happening in Los Angeles, a lot of it's happening in Los Angeles. It's a 40% increase from 2015. In the blue, you can sort of see all the different traditional media companies and trying to figure out how to grow here.
But the most interesting part of
it is the orange bars, Netflix, Hulu, Amazon, Apple. And what's really interesting about it, Hulu and Apple haven't even ramped up yet. They're just starting to ramp up. Amazon just basically just procured one of the top executives in NBC. Yesterday was in the LA Times.
So they're getting ramped up for TV. Apple is just entering the market and a ton of money and they bought the talent they basically stole the talent from Sony Pictures. So you're going to see more and more demand for programming. And this demand, I'm going to explain to you, is going to also create tremendous demand for office space in Los Angeles. Digital consumer spending dramatically increased while traditional spend remains constant as you can see in this chart on the left.
Netflix just announced, for example, their quarterly earnings, of which they have a $7,000,000 increase in subscribers in 1 quarter. It's astounding. The NPA 2017 theme report stated digital entertainment spend increased 20% domestically and 41% internationally. Global streaming subscriptions up 33%. So 2 years ago, I stated that traditional studios would be disrupted by this tech media conversion and it's absolutely happening right now and it's actually happening right before our eyes and it's also growing tremendously.
The tech media conversion can be best summed up by a recent quote from Bob Iger, Chairman of Disney. While media firms still debate whether content or distribution is king, technology completely altered the behavior, expectations and the power of consumers, making them the ultimate authority as to who will bend the knee. So the historic studios, as you can see here on the right, are scrambling. There are certain people that have digital expertise, global brand recognition and software expertise. And then there's other guys that have content, so they're trying to put the 2 together.
AT and T's purchase potential purchase of Time Warner is a great example of a gigantic content company that has all the Turner Broadcasting, TNT, CNN, all those pieces and HBO with, I guess, a nationally recognized and a globally recognized brand. Disney Fox
is a
little bit of a Trojan horse here because this acquisition gives Disney a majority hold of Hulu. And as you may have not known, but Disney has tried 2 times to build their own software platforms and have failed because they're not a software company. So again, what I'm saying is Los Angeles is a place where these technology companies, including an Amazon out of Seattle, an Apple out of Silicon Valley, come down to L. A. And grab that talent.
Spencer talked about it, all that talent on the creative side is here. So we're going to see that kind of explosion. The point is that LA drives creative products supported by an expanding software infrastructure that continues to grow. Okay. This slide this we're going to talk about Los Angeles for a minute.
Why is Los Angeles the center of all this activity? 51% of all scripted television shows are produced in Los Angeles, basically outnumbering all the other all these other outlying markets. Why? Producers, directors, editors, cinematographers, agents, PR people, they all live in Los Angeles. They all want to stay here.
They don't really want to go out of state, and that's what really drives this gigantic economy here around this. So increasing content production continues to drive demand for studio and creative office space. 1,500,000 square feet of additional spaces come on the market since I was up here 2 years ago talking to you. As Victor pointed out, most of our developments occurring in Los Angeles. This is one of the reasons why.
And Jeff Hain talked about this yesterday is that these companies are starting to grow. And you see them in these big office buildings, wow, how can they keep growing? But if you look at a studio lot, like a Fox or a Sony, they're just what's happening, these companies are very efficient around how they manage their vertical infrastructure. And I think that Hudson Pacific, we're very well positioned to basically help them build this vertical creative infrastructure and then integrate it into sort of, I'll call it, the horizontal production factory. So let me talk about the supply side for a minute.
Not changing. Land building is just too high in Los Angeles to build these gigantic stages that have that take up a lot of room. There's a shortage of residential housing here. There's a great demand for commercial real estate, for office use. So that's where the money is going to go.
It's people are not going to go out and start building stages here. As you also see on the right, what's happening is that L. A. Spinal Valley is already booked. Our Sunset Brands is 100% booked right now, 100% occupied, and our other ones are in the 90s.
So back in the business, back not that long ago, everything was in about the 70%, 75% range for occupancy. Now it's in the 90%. In fact, right now, it's about 90 all the stages in L. A, I mentioned 300 stages, we're at like 96% occupancy. It's a staggering number.
And on top of that, what's happening is those companies like Netflix and like Amazon that don't really want to own the means of production, they don't want to own these big 45 acre lots. Their focus is on brand identification on a global basis. Their focus is on making great content. Their focus is on distribution, making it really efficient. So they don't need all this ownership.
That's why we can partner with companies like this. And what they're doing is because they don't own studios, they're basically warehousing stages. So Netflix, for example, they deal with us. They're making deals here. They're making deals in Atlanta.
They're making deals in Malaysia to basically lock down stages. What's happening, all the other players are backing up saying, what's going on here? I need stages too because nobody's building new stages in Los Angeles. So we're seeing this sort of dilemma and this push and pull and really competitive nature happening in the industry for companies that do not own large production facilities. And I'll include ABC in that because they're owned by Disney, and Disney Lot was originally an animation lot, it's quite small.
Sensus Studios is poised to capture this increased demand and create significant value. So I'm going to talk about 3 key factors in terms of the studio of the future. 1 is the business model itself. The traditional model was anybody's old enough in the room, you watch traditional TV, it was all time sequenced. Then they had ratings, there's Nielsen, these Nielsen ratings.
And then you went to the upfronts, which just happened in New York, and you basically get your CPMs and you figure out your advertising dollars. Streaming companies don't do that. They don't have those metrics like that. They have they don't use Nielsen. They have tons of private data that they They know exactly what their shows are doing the minute they're aired because of streaming.
They don't shoot on a network schedule. They shoot all the time. Why? Because they have to keep producing new content. If you're going to spend even HBO, if you're going to spend $16.99 for HBO and your cable box, if you're going to spend $11.99 for Netflix, if you're going to spend $39.99 for Hulu, you better make sure that you've got a product out there that people want.
And you need to create products that have a global appeal. So you see these large dramas, which are done on stages and are not on stages, very high production values, very high costs. That's really good for us because we take those dollars in. American economy, for example, does not translate well in most foreign countries. So that's why this big trend of Game of Thrones, Westworld, all these kind of programming are really proliferating, and they eat up a lot of space to make these shows because these shows, at the end of the day, are really movies.
They're just really long movies. 2nd point, technology is really, really important here. We are just announced we haven't formally announced it, but we are doing the first 4 ks show. You know what 4 ks is? It's 4x the resolution of high definition television.
And Netflix is doing a show called The Fix with us, and it's going to start shooting in 2 weeks in 4 ks. Why 4 ks? Because compression algorithms. It's not about the TV set. It's about Spencer talked about demographics, I didn't think of that.
Demographics, young people do not watch TV. They watch stuff on laptops whenever they want to watch it and they basically binge watch programming, right? So my daughter is there. She's watching some show. She's 23 years old.
She's watched it a couple of years ago. She's watching a show on her bed. And she's like, Dad, this is a show you got to see. It's called Friends. It's unbelievable.
So that's so that it's all about the compression hours around watching TV on a small screen. That's what 4 ks is going to take off of. And the third point is that we're really well positioned because we have premier Class A office space. We have and we can basically connect people to our office space and to our production environment. That's exactly what Netflix wanted from us.
So I'll give you a brief history. Nobody is better positioned than we are right now, but nobody wanted to hear from us, right? So, 2008, I'll just quote, others have speculated that outsized studio lots and densifying urban location will eventually go the way of the used car lots. I'll go on and quote, and Gilmore Field just south of Hollywood where midget auto racers circled the oval track back in 1930s that was a block in 2,008 when Victor bought Tribune Studios, which is now Sunset Bronze Studios in 2010 years ago. And here's a quote from Victor here, or from we see a prime opportunity in creating a production network platform comprised of state of the art facilities.
He didn't say that 2 weeks ago. He said that 10 years ago. So I think that we got it right. We have taken advantage of our location and our ability to expand the studio lots. ICON, Q, Carlo, all part of our vision that Victor had 10 years ago.
I want to turn quickly to the 3 studio lots we own. First, Sunset Bronson Studios, our physical plant. We've just built 418,000 square feet of Class A office space fully occupied by Netflix. At the same time, we're upgrading our facades, signage because when you build new space like that, all the everything else starts looking really old. So we have a whole programming on there to improve that.
On our cash flow improvement, we've leased the entirety of those buildings. I said we have long term leases with Netflix KTLA, which is owned by Tribune to be sold shortly to Sinclair and CBS, which means at the end of the day since our IPO, our studio NOI is up 100%. And our estimated value creation on profit cycle offers $152,000,000 Not bad, right? Sunset Gower Studios, We've developed back in 2008 the headquarters for Technicolor. They're a North American headquarters.
We completed a parking garage extension. And the big thing is right now is, as you can see in this picture, we are we've already submitted to the city a plan to build 423,000 square feet of space. Chris Barton, I know you're here. You're going to be a very busy person for a long time, just to let you know. But what's exciting about this is look at this diagram.
Here we are with these 4 or 5 story creative office buildings for productions. We have this tower going up, which would be for a creative office building, maybe Apple will take
it, I don't know.
And then but it's all integrated into the lot with trucks and people and stuff going on. And you know what? Creative people love this. They love to walk outside and see the industry working. That's why Ted Sarandos is headquartered in our building at ICON because you can walk outside and go talk to talent and meet people, and they love that interaction.
It's really fantastic. Since the IPO on this lot, we're up 100 36%, not bad either. Okay. We bought Las Palmas Studios, Hollywood Center for a private transaction back in May 2017. We fully integrated it into our portfolio in terms of our organization, our operations, our financials very quickly, basically using our scale and our model.
We're now upgrading all of our technology platforms and IT there, which it was pretty really needed some work. So on an NOI basis, we're up 11 months in, we're up 57%. Why? Because we've been really, really efficient around managing our expenses. We've signed a 5 year deal with Disney Channel, which, again, as I talked earlier about really needed stages and really want to lock them down.
We've done our 1st big drama deal. We have Shonda Rhimes' new show called Station 19. It's the highly anticipated spin off show from Grey's Anatomy. And all of our office space is full. And right now, we're in the process of just ground up the building, Harlow, which is this building over here.
In the picture, it's a beautifully designed 5 story creative office building or it could be a production office building. So we're really excited about owning this property. We feel so far that this formula we created, we're proving it's being successful. Victor talked a bit about these three markets. And again, we're mindful of these markets because as L.
A. Basically gets boxed in, there's no place else to go. We need to understand what all the other players are doing in the marketplace. And a lot of these players, as Victor said, aren't they're not big time investment companies. They're entrepreneurs.
They're real estate people. So in a way, got to keep an eye on them to see what they're doing. Atlanta is important. They have 150 stages there. All the feature film businesses move there.
So it's funny, if you look at old photographs of the lots that we have in our buildings, you'll see these studios that we own surrounded by farmland from the 1920s.
You go to Atlanta, I went down to Atlanta,
I go, oh, hello, I got these giant studios building surrounded by farmland. It's the same concept all over again with Atlanta. New York has always been a very strong place for talent lives, and there's a lot of creativity there. So those stages will continue to thrive. And Vancouver is the number 3 market in North America.
So these three markets are interesting for us to take a look at and to see if there's any kind of take in our model and we can use it there. So I'm now going to sort of sum this up and do my little classwork here for you. So back in 2016, I said media companies will continue to spend significantly on programming. 12 companies are now spending over $1,000,000,000 $61,000,000,000 spend. Not bad.
I think I was right on that one. 2, streaming companies are going to create additional demand for Class A office, dollars 1,500,000 of additional incremental space in the marketplace in the last 2 years alone, with record high occupancy on the stages of 96%. Los Angeles will remain the preferred content production market, supplementary markets will emerge. L. A.
Continues to be the large market, 51% of scripted shows I showed you on that slide, with Atlanta, Vancouver remaining steady secondary markets. Supply is fixed in Los Angeles. The net increase in stages is 0 right now. Yes, Universal has announced they're going to build some stages, but they're tearing some stages down. Yes, Culver Studios is going to tear some stages down to make room for their office building, to do room for Amazon, but they're also at the same time going to build some new stages, but it's going to be a net number.
So I'm going to go on a limb here for 2020 when you all come back and talk about what's going to happen next. Spend will increase at least for the next 2 years because Apple and Amazon haven't ramped up yet. Disney, Hulu, if that transition transaction happens, there'll be more ramp up there. And I haven't talked about Verizon, another company that as you might have read in the Wall Street Journal, was sort of behind the scenes with Les Moonves trying to buy CBS and then got sort of this when this whole problem happened there. So that's what my prediction is.
That's continued growth. And that continued growth then means continued growth on the office side as well as the Class A office space. Class A Auto space continue to grow as these streaming companies grow as I showed you in that bar chart. Los Angeles continue to drive production with modest growth in Atlanta and New York and Vancouver will maintain their current market shares. And then lastly, minimal or no net increase in Los Angeles supply.
So in conclusion, I think that we're going to be it's going to be a real wild ride here. It's going to be very I'm really, really excited about the barber market. So everybody just hold on to your horses and we'll see what happens, okay? Thank you for your time. Really appreciate
All right. Now what you've all been waiting for, we're going to have Mark Lamas, our COO and CFO. And just a quick note after he finishes, let me take a quick minute, reorganize the stage so that we can bring everybody back up and then we'll do our Q and A. So without further ado, Mark?
Thank you, Laura.
If I can move this sucker. I suppose I should start with an apology for not having a glossy video that kick start my presentation. I suggested to Laura that we do a montage of photographs of my 1985 South Padre Island spring break adventure, but she just could not see the relevance. So I'll just dive right in.
This morning, I'm going to
walk you through 3 aspects of our company we believe should put Hudson Pacific on top of your stock pick list for 2018 and beyond. There are very favorable and continually improving credit metrics, our strong and potential NOI growth through 2019, the bulk of which is contractual and our significant discount to NAV despite our proven track record of delivering outsized FFO growth. We've provided all the detail you'll need around our assumptions in these slides, but in addition, much of the underlying information can be found in our supplemental reports. So let's get started. The purchase of our Peninsula and Silicon Valley assets in April of 2015 doubled the size of our company and, therefore, provides an important milestone in terms of understanding how our credit metrics have trended.
Starting with year end 2014, total debt as a percent of market cap has never exceeded mid-thirty percent even with indebtedness associated with the major acquisition. Our leverage has continued to trend lower since then and now is approaching 2014 pre acquisition levels. Our secured indebtedness has also trended lower. Today, only 16% of our indebtedness is secured, down from over 70% at year end 2014. We now have a large diversified unencumbered pool of properties, which enabled us to complete a $400,000,000 inaugural bond offering last October as well as the recent recast of our revolving and term loan facilities.
We similarly dramatically decreased the percent of our floating rate indebtedness. Today, it's at an all time low of 4%, down from 46% at the end of 2014. We've chosen to very proactively address the growing uncertainty around interest rates while simultaneously extending our debt maturities. And finally, you can see our adjusted EBITDA to fixed charge multiple is trending higher even in the face of recent asset sales. We've successfully matched underlying EBITDA trends and with meaningful debt reduction.
This next slide demonstrates the fruits of our labors. Today, our credit metrics stack up well against both our California office peers as well as other highly regarded investment grade CBD office REITs. Our metrics are stronger on nearly every measurement, and I think our track record is clear. We've successfully grown our company around a commitment to a fundamentally sound and sustainable capital strategy. Now let's turn to what you've no doubt been waiting for, our Bridge to Success 2.0, so to speak.
Yes, we've brought it back, and it's even stronger this time around on one very important front, our contractual NOI growth. We'll talk about each component of our growth. As you all know, I like to get into details, but this first slide cuts to the chase, capturing all components of projected NOI growth through 2019 and ultimately beyond. Big picture, we're projecting NOI growth beginning from Q1 2018 annualized through 2019 of 18% or a 10% compounded annual growth rate with nearly 70% of that contractual. 2 years ago, if you recall, contractual sources of NOI accounted for about 54% of projected
growth, meaning nearly half of
the NOI projection was based on speculative sources. Today, 1 third of the NOI projection is speculative, which of course significantly improves the predictability of our NOI growth. This next slide, we provided a breakout of $61,000,000 of embedded NOI growth from a combination of 3 contractual sources: the burn off of upfront rent abatements, signed uncommunced and backfill leases and contractual rent bumps under existing leases. Approximately $27,000,000 or nearly half of the embedded NOI growth stems from the burn off of non recurring upfront rent abatements detailed in the supplemental. Incremental tenant recoveries and parking and other revenue of 20% 5%, respectively, of base rents are included in this component of NOI, though tenant recoveries have been reduced by onethree to account for base year resets on gross leases.
Another approximately $16,000,000 of embedded NOI growth results from executed uncommunced and backfilled leases over the next 7 quarters, also as identified in our supplemental. Rents from uncommenced leases are grossed up for tenant recoveries and parking and other revenue, subject to an NOI margin of 70% and a onethree reduction on tenant recoveries. Only the mark to market impact on the backfill leases is included, together with a 5% increase for parking and other revenue, then reduced by onethree of the tenant recoveries associated with the expiring leases being backfilled. The remaining almost $18,000,000 of NOI growth stems from the 3% average contractual rent increases on our existing leases adjusted for scheduled expirations. Last Investor Day, contractual sources of NOI growth accounted for less than 12% growth over Q1 2016 annualized NOI.
By comparison, the current projection includes embedded sources of NOI growth accounting for more than 15% growth over our Q1 2018 annualized NOI. I think we can all agree that, that's a strong improvement over last bridge. This next slide summarizes the $30,000,000 of speculative NOI growth from 3 sources: mark to market spreads on expiring leases lease up of existing vacancy at our in service office and redevelopment properties and incremental NOI associated with our studios. I'll begin with $3,000,000 of NOI growth from our studios. This is projected incremental NOI assuming we achieved 6% annual NOI growth over our trailing 12 month NOI for our same store studio assets and annualized trailing 6 month NOI for our Sunset Las Palmas studios
as of
the end of Q1 2018. We are projecting another $6,000,000 of NOI growth before downtime from the mark to market on the re leasing of expiring leases not yet backfilled. We've assumed 18% rent spreads, and rents are grossed up for parking and other revenue subject to the same reduction on tenant recoveries associated with expiring leases. As with the backfill leases, no NOI margin is imposed since only the mark to market impact of expiring leases is included. So there would be no corresponding increase to expenses associated with this revenue.
Obviously, not all the expirations during this period will be renewed. We budgeted for leases that don't get renewed based on a 60% renewal probability and 7 months of downtime. This represents an approximately $20,000,000 NOI growth offset. That takes us to the last component of potential additional NOI growth through 2019, dollars 21,000,000 associated with the lease up of existing vacancy and our in service and redevelopment properties. Dollars 4,000,000 of the $21,000,000 relates to the lease up of 95 Jackson and Maxwell, the balance of available space at 95 Jackson and the entirety of Maxwell through stabilization.
The lease up of the in service office assets account for the remaining $17,000,000 of NOI in this category. We've assumed average net absorption of 50,000 square feet per quarter plus the lease up of the 4th Intraction asset until we reach 93.5 percent leased at the end of 2019. In terms of aggregate square footage, this amounts to 470,000 square feet of net absorption over the next 7 quarters, roughly 3.8% of square footage of our in service office portfolio. We've assumed rents for leases on our existing vacancy are executed at 15% mark to market and grossed up for tenant recoveries and parking and other revenue, subject to the same adjustment for base year resets on gross leases. We've also assumed an NOI margin of 70% with respect to the rents and other revenue associated with these new leases.
Our projection of $461,000,000 of NOI and 18% growth for full year 2019 is impressive, but our growth prospects don't end there. We have the mechanisms in place for NOI to reach $516,000,000 beyond 2019, representing another 14% growth in comparison to our beginning in 2018. Dollars 43,000,000 of this additional $55,000,000 of NOI would come from the delivery and lease up of EPIC, Harlow and Westside Pavilion. Target stabilized yields for these projects are in our supplemental. Another $12,000,000 of NOI would result from the stabilization of Campus Center following a period of lease up over next year.
Collectively, our growth through 2019 and beyond points to NOI more than 30% higher than NOI as of the most recently completed quarter. I think we can all agree that, that should bode well for the future. So with that, I'll turn to a discussion of our current intrinsic value and the implied NAV discount. I'm quite certain that the analysis I'm about to walk through is well understood by many of you. The punch line is that our stabilized office portfolio is trading at an implied cap rate that I just want to emphasize that.
Our stabilized office portfolio is trading at an implied cap rate, 127 to 177 basis points wide of market cap rate for high barrier West Coast markets, not to mention exceptional credit quality and significant upside on in place rents. Let's quickly walk through the building blocks step by step. We begin with $7,600,000,000 of total capitalization based on Monday's closing price of $33.86
$605,000,000
of our enterprise value is attributable to our studios based on a cap rate of 5.5 percent on Q1 twenty eighteen annualized NOI for Sunset Gower and Bronson and 4.5% cap rate on Q1 'eighteen annualized NOI for Sunset Las Palmas. The lower cap rate on Sunset Las Palmas accounts for its stabilized value potential and results in a value materially in line with our purchase price from May of last year. $89,000,000 is attributable to our land. You can find a detailed description of our valuation assumptions for these land assets in the appendix. Dollars 165,000,000 of our enterprise value is allocated to development projects EPIC and Harlow.
Again, cost and yield assumptions are in our supplemental. We've applied a 5% cap rate on the stabilized NOI for these assets, then deducted the remaining cost to complete. We did not discount the resulting value to present value as we ignore cash flow prior to stabilization for simplicity. $253,000,000 of our enterprise value is allocable to redevelopment projects 95 Jackson, Campus Center and Maxwell. Cost and yield assumptions for 95 Jackson and Maxwell are in our supplemental.
We've deducted we've applied a 5% cap rate on the applicable stabilized NOI then deducted the remaining cost to complete. With respect to Campus Center, we've applied a 6% cap rate on the stabilized NOI assuming we achieve a $2.20 per square foot net rent then deducted the remaining cost to complete to get this asset to stabilization. As an important aside, as Drew and Art both mentioned, our rent assumption here is considerably lower than the rents being pursued by our competitors. As with the development properties, we did not discount the resulting value for these assets to present value as we've ignored all cash flow prior to stabilization. The 2,300,000,000 dollars attributable to our lease up office assets reflects the value of substantially all those assets at a 4% cap rate on Q1 2018 annualized NOI.
As of Q1 2018, neither CU nor 4th and Traction were contributing cash NOI, so we value them separately, which I'll touch on in a moment. With respect to the other lease up assets, we've applied a 4% cap rate on current NOI to appropriately reflect their stabilized value potential. Upon stabilization, the implied value equates to just shy of a 6% cap rate on stabilized NOI. I want to repeat that. If you take the value that's created out of the 4% cap rate on current NOI and you hold that value and then you stabilize the NOI on those assets, it implies close to a 6% cap rate.
As for Q and 4th and traction, again, cost and yield assumptions are our existing supplemental. We've applied a 5% cap rate on the stabilized NOI for these assets and deducted the remaining costs to complete. The resulting was also not discounted to present value similar to our other development properties. The other cash the other components of our enterprise value, other assets and liabilities and cash simply tied to our Q1 2018 balance sheet. The remaining $4,100,000,000 of enterprise value is attributable to our stabilized office portfolio.
Q1 2018 annualized NOI for that portfolio was 268,000,000 dollars Taking this all together, we end up at a 6.5% cap rate on our stabilized office portfolio. If we value these assets within an appropriate range, our shares should be trading at $40.15 at a cap rate of 5.25 would be trading at $41.76 at a cap rate of 5 4.75%, again, on our stabilized office portfolio. As of Monday close, our stabilized office portfolio was trading at an implied discount between 24% 37% at the same cap rates. Of course, that's a value on historic NOI. The discount would be even higher if we used full year 2018 NOI for our stabilized office portfolio.
This final slide provides a side by side comparison to our office peers of FFO growth and current consensus NAV discount. As you can see, no office REIT is projected to generate higher FFO per share growth since 2012 than Hudson Pacific. Meanwhile, we trade at the highest discount to NAV among our West Coast office peers and virtually every other office REIT except for the New York centric companies. We appreciate that the FFO growth that we're showing here largely looks to historic results, though it carries through to the end of the current year. However, it underscores our track record of consistently delivering exceptional growth as we recycle assets, capital development and redevelopment opportunities and take advantage of lease expirations and vacancies.
We have every confidence that we will continue to achieve sector leading growth. Thank you.
Drew, Bill?
Art? We lose Art?
Do I not see him? I know he lost a lot of weight, but I think
I could still see him.
Anybody know where Art is? No questions on leasing at this time.
Well, first,
I think you're not liked, right? I'm going to pass it around.
First of all, I want
to thank everybody for their participation today. And we're going to open it up to questions. I'm sure some people have some questions at various different levels and I'm going to try here he is. Yeah. Grand entrance.
So who wants to start? Yes.
We talked a little bit about 2 parts? 1, in terms of new markets in the studio business on one side, how do you think about how much
you want studio business to be part of the portfolio?
Is there a certain target or sort of level you don't want to get to? And then second, in terms of international, I consider Canada International. So I don't see all your passport, whether that gives you an element of going back home, getting into Vancouver with a broad institutional ownership, but how you think about that transition and how close you are to doing that?
Great. Yes. So and I'll take them both. So, on the first the Studio Media business from our standpoint is going to be an ever growing business. Now, will it even remotely get close to the core offices?
The answer is no. It's just not physically possible for us to buy that much. That sort of stems into the next piece, which is, as I said, I mean, we're not looking specifically today any specific asset. And for us to enter a marketplace, we would have to do more than one deal. Wouldn't make any sense to go buy just a studio without a vision in, say, Vancouver or Atlanta and then say we're done.
We have to buy much more than one and have a stronger presence to grow that portfolio. There are tax considerations in Vancouver, in Canada. We definitely have room on our bad income aspects there on a positive basis. Now, there is clearly the bigger question is, is the currency arbitrage, right? And today, I think it's $0.72 or something like that.
So, obviously, that can swing both ways. But right now, it's near relative well for the last 4 or 5 years. It's right around the $0.70 $0.72 so it hasn't moved. But we have to keep that in consideration too. Institutionally wise, you're absolutely right.
I mean, you'd have to make a big headway. I think we're much more interested in the office sector in Vancouver, because it is really a great marketplace to be a part of. So Yes, I think we would. I think on the office side, we probably would use a partner. I think we've clearly got one partner who kind of likes that marketplace already, who's our only partner we currently have.
So, it seems like a good fit.
Yeah?
The question was talk a little bit about the key regulatory risks in our marketplaces, because we actually didn't touch on it. So, there is several and we can start right here in Los Angeles is the first. And the presentation that Spencer gave us, one of the things he did mention was the NIMBYism and the likes of that. What you're finding in Los Angeles right now is the City Council and the Mayor are in the process of putting a proposal in place that I think our team, Chris Barton and Chris Pearson, who are the experts in the marketplace and Chris is over in the left corner and you can talk to him after, feel that it's going to come through, which is upsizing on density and it will be a density and a height increase around all the metro areas of Los Angeles to increase the growth. It will be both on a residential and a commercial basis.
So, it's the first time they're proposing that. Clearly, there has been a lot of talk in Los Angeles, but also in all of our main markets on the homelessness issue and cost of living. And so, we would not be surprised to see something affect real estate in all forms and functions other than residential for some form of a fee structure. Clearly, that's the case that happened in Seattle. I think we were in Seattle and it was a last Tuesday night.
We'd go tonight, right? We'd go last night. We were there for a big broker dinner that we hosted. And I got the pleasure of sitting at a table with the Facebook, Google and Apple brokers, who all were absolutely bar none furious about what happened in Seattle. And the prelude to that is that they were saying, hey, it's not the fact it was $500 or it's not the fact it was $275 The fact is that there's no game plan.
And so, it was just tax them, because they're making money. And the reality is, I think there is not a conscious business from what I've been told in Seattle of the main guys and businesses have now come out and spoken I think a lot more vocally after last week, specifically Starbucks and Zillow. Zillow, yes, right. And said, it's not just the money because this is we needed a plan and we're all willing to contribute to what's going to happen in the validity of it. But how much of those dollars are actually really going to get to the bottom line and what's going to happen?
And there's been, I think, a little bit of a shock around this just was sort of women's class and Amazon was the voice. And I think a lot of the CEOs wish that they had a voice too. So those are probably the 2 main ones that we've seen, but they both revolve around densification. And clearly, as you can see by our presentation, I mean, the biggest concern if you're a West Coast person, the biggest concern you would have is cost and affordability and future of residential. And so that's going to trigger a lot of things that could be potentially unfortunate to our businesses.
Yes. Just a combined question with Martin. You have a lot of growth, but you're not giving any comment down here. You spoke about a JV partner. So maybe if you could wrap in your thoughts on funding all the stuff
that you have planned? And then
Mark, how that affects your annual library as part of how the dispositions factor in? I don't know if that's in your bridge or is that incremental to the case I'm
Yes. So that was an easy one. We provided a cash on a live bridge, right? So the funding considerations around, say, the EPIC or West High Pavilion and so forth, it's going to hit interest expense. A lot of that gets capitalized.
But it wouldn't factor into the bridge itself, right, because it's falling below the NOI number.
Right. But if you're selling assets, do you
Fair enough. Yes. No. Sorry, I didn't quite appreciate that part of the question.
Right now, that analysis you just saw assumes no asset dispositions or acquisitions. So, we'll have to adjust, I suppose, if and when we make an announcement on either one of those fronts.
But the capital aligned today to our current in place development is already taken care of. Yes.
I mean, we have 850,000,000
dollars of immediate capital availability, not counting cash and cash equivalents. So everything we have that we would potentially need to fund, need to fund, even if we made no dispositions, is easily covered with what we've got.
Anybody else? Nobody is going to talk about Mark stuff? It's so simple.
Repeat it please.
I think the question was at Westside Pavilion the activity we have with the negotiation wherein is it multiple users, is it one user? The answer is it's one user. The 1,200,000 square feet of active prospects, right? That's actually 4 users, right? And the 2 as I mentioned, 2 of those are proactively testing the space now on their own nickel.
So to start, we talked about buying premium core products. With all the upside opportunity and redevelopment and new development, why would you put any capital to work at a low cap rate under long duration core and outlook?
So, we balance it out. I didn't say only solely core. It's going to be core, core plus and value add. And so but today anything that we are looking at has a value add component to increase the NOI almost immediately. I can't think of a project that we're looking at right now that's just pure core.
And the only reason we would actually buy a pure core asset is if it actually has synergistic value to an asset beside us or in the marketplace that we have that helps the overall portfolio. And in a lot of those incidences, we would probably bring a JV partner.
Maybe for Garu, you talked about regulation
Well, I think yes, so the question was the impacts of cost inflation on new supply and the cost of development, correct? I think there's 2 things. 1 is, I think I mentioned in my presentation, as the cost of construction has increased, it's been forcing rents to go up. So, for new developers who want to achieve their cost of capital returns, rents are starting to rise. That obviously benefits us as with existing product and our lower basis in those assets.
But I think too and this goes to the VSP program that we've talked about in specifically, is that with the rising costs of construction in general, a lot of our competitors just will simply either not front costs like we have forward spend of our TIs as we mentioned on the VSP in advance or aren't even able to be able to clean up some of the buildings because of their own capital constraints. I think with our healthy balance sheet being a public company, we have a specific advantage over many of our competitors in the Valley and the Peninsula in this rising cost sort of market.
Anybody else?
Yes. Atlanta, which is Studio business, can you expand a little bit what's being talk about what submarket within Atlanta that is expanding and sort of why Atlanta more than sort of other potential markets?
Yes. I'll take the latter and then Alex is going to jump in on the former. The concern and we've chartered this a long time and I've been to all these other marketplaces and look, you go to New Mexico and then all of a sudden the tax credits go away. You go to Detroit and the tax credits go away. They're not sticky marketplaces.
We've seen as Bill put on his slides on his presentation, we've seen that Atlanta and Vancouver are really in a position where they seem to be holding. We're also back channeling through Apple and Hulu and Netflix and the likes of that and the new content players who are actually leasing sound stages for 5, 7 10 years. So, it's not just this is a short term window. Alex, you can sort of talk about some of the markets that we're looking at, the specific submarkets.
Sure. So in Atlanta, there's nothing really kind of in downtown in the urban core. It's all slightly on the perimeter. When you think of Atlanta, the opportunity so there's more production happening in Atlanta right now when you factor in feature films and add television than any other market in the United States. I think when we look at our clients like Netflix, which Bill can touch upon, they're shooting a lot of productions there.
And I think as a landlord of choice, we see an opportunity where we could leverage those relationships and bring it to a market like Atlanta, New York or even Vancouver. The other thing is not too dissimilar to LA. Current ownership is fragmented. It's non institutional. And with the scale in the platform that we've created with our studio facilities, we think there's a real opportunity to go in there, acquire potentially a couple of these facilities, leverage our relationships, leverage our operating platform and create value.
Maybe a follow-up to that. Can you just talk a little bit about what the size of studio market is and put it into context with LA?
Yes. Can you repeat that? So the question was just overall size of the market in Atlanta and how does that compare to LA? I think if you look at Atlanta, if you even look at New York and Vancouver, you're probably talking about right now in each market 3, 4, maybe 5 facilities at most that would be of institutional quality and something that I could see us potentially pursuing. So not too dissimilar to L.
A. L. A. Obviously is a much larger market. You have the major media conglomerates that own their own facilities and then the independents like us.
In these markets, it's truly just independents. None of the major zones own their own facilities. And like I said, it's probably no more than 5 in any given market. And when you look at number of stages, any of those facilities are very much akin to what we own in LA. So, it's not something that you're going to go into a market and all of a sudden we're going to own 20 facilities in 100 stages.
It's going to be very similar to what we've done here.
And just I would add
to that, that, again, on the feature film side, only about 9% of feature films are done in Marvel, they will go in and shoot a movie there on 10 or 11 or 12 stages. There's no way you could do that in New York or Los Angeles. So, that feature film market is there. I think
the second part of it is, you have to buy television shows and do like
an A level, which is a
star driven stuff and the B level, which is a non star driven stuff. So, you take, for example, Netflix show Stranger Things, which is a kid show, no stars in it, high risk, They shot that in Atlanta. And so, I think you're going to
see as these streaming companies grow, they'll have their A level talent shooting in LA and sort of their B level talent shooting in these lower cost markets. And just one other point because I know there's going to be conversations over periods of time at these markets. That's not usually exclusive to say we're not going to be buying in Los Angeles. There still is potentially 4 studios that we can purchase in Los Angeles that we are still pursuing at various different levels that are not marketed studios at this time,
but we have relationships.
I mean, I'll just continue on the studios.
Can you talk about the difference in cap rates and IRRs between LA, Vancouver, Atlanta and New York?
Yes. Go ahead, Alex. The question was talking about various different cap rates and IRRs between Los Angeles as opposed to the new markets that we're looking at.
Sure. So in all these markets, there are trades that have occurred. Sort of pinpoint to say, hey, what's the stabilized cap rate for a studio in any of these three markets? It's tough to pinpoint because there aren't comps. That being said, I think for us to go into one of these markets, take the risk to invest in a new market, it's safe to assume that our projected return and what we would look for would be outsized relative to what we maybe buy stabilized studio here in LA.
So, north of the tenant on IRR?
On an unlevered IRR basis, I would say high single digits to low double digit.
Alex, just to make sure to reconcile that back to the bridge we just provided, our studios are undergoing a transformation in terms of the tenor of the leases. So the majority of the stages now or the vast majority, all the 2 stages at Bronson are now under 10 plus year deals with credit. And Bronson is now seeing that very same trend. And I mean, Golar is seeing that very same trend. So, we've naturally adjusted our historic cap rate valuation for those studios to reflect that long term credit quality.
And just as a sidebar to that, I think we're pretty conservative. I know we're pretty conservative because the most recent comp on a studio was Culver and that was purchased. And it's sort of hard to quantify, but it was purchased for $700,000,000 They're building 250,000 square feet of space and they master leased it to Amazon and they just got valued at $900,000,000 at a little over 4 cap. So, I think we're still very conservative on our numbers that marks at the front of the table. I know that chaps Alex more than anything else, but it's a deal that you sometimes you don't get them all.
Anybody else? All right. With that, before I call Laura up, I'd like to thank this team here, thank our senior management team for a fantastic Investor Day. So round of applause, please. I'd also like to just recognize Laura's team over there in the corner.
Girls, please stand up. Natalie, Christy, Sam, Sam and Lisa. So and of course, Laura Campbell.
Great. So we'll just wrap things up real quick. I want to thank everyone again for coming and taking time to spend the time with us. A couple of quick announcements. We have boxed lunches for you out in the foyer.
So feel free to grab them and eat in the room or take them as you go. We have shuttles outside at the Wilshire entrance. Our team will be outside for people going to airport, sorry. So our team will be outside and can help direct you. Also, in your folders, we've included a survey, and we are always looking for ways to improve.
So if you could please take a few minutes and fill it out and hand it to our team on the way out. They have a goodie bag for you. So you can pick that up and they'll take your survey. And then most importantly, I echo Victor's sentiments. I wanted to thank all of our presenters.
This is not what they do every day, and it's a huge endeavor. So thank you all very much, and thanks to the entire management team for their support. And I also want to thank our Board for coming. So many of you are here, and we're honored to have you. That's really terrific.
And my team, you're awesome. I'm so glad that Victor recognized you. And thank you all so much and we'll see you and talk to you very soon, I'm sure. Thanks.