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. First and foremost, I want to thank you all for coming. I know that many of you traveled cross country or came from ICSC, and we're just thrilled that you're here joining us live for our second biannual Investor Day. As you can see from the agenda in your folders, we have a terrific lineup this morning of management and guest presentations. I'm just going to run through that high level.
We're going to start with our Chairman and CEO, Victor Coleman, who will 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 will 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 in Silicon Valley.
Former Head of Global Workplace for our tenant Uber, Adony Beniares , who 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. Finally, the grand finale always, we'll hear from Mark Lammas, 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. 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, note in the folders you have all the bios from the speakers for today and from yesterday as well. There will be one Q&A period only following Mark Lammas's presentation, and all of our speakers will be available to answer questions, so please hold them until that time. There will also be one 10-minute break after Spencer Levy, and we're going to have some great snacks, so step outside and enjoy those. We're going to do our very best to stay on track time-wise 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 presentations 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. 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 Pacific Properties, I wanted to create something very special. As Hudson has grown exponentially, we've stayed true to who we are. We're always looking to do what's next.
We believed in the upside of our Northern California assets, but we wanted the right partner to run them. We'd known Victor a long time. We love the company he built. This is the 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 looked 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. 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 media and 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. That means creating workspace that creative people want to be in and around.
That level of innovative thinking is really powerful. 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. They help Angelenos succeed and thrive.
Innovation, integrity, collaboration. A focus on execution with an eye for opportunity. They're 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.
With that, I give you our Chairman and CEO, Victor Coleman.
Good morning, everybody. Thank you, Laura. Well, that's kind of like a puff piece. 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. It's nothing but a group effort at Hudson. We have a phenomenal team, which I'm going to get into a little bit. Everybody here, senior management inclusive, these guys are awesome. You guys had a good time last night? I did. 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. We're going to jump right into this. I think, as Laura said before, I'll 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. With that, we continue to invest and focus in the epicenters of innovation, tech, and media. It's something we've 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 of factors that provide us with a lot of staying power, and perhaps the most important is the intellectual capital in our marketplace in a very established industry clusters. The most cutting-edge thinkers and doers want to be in these marketplaces.
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, 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. Both tech and non-tech sectors are very active in the foreseeable future, we're going to take a little closer look at our positioning and what our markets are and where our sub-markets are and how we go from there. In Los Angeles, it's very unique. Right now, as you all know, we're the largest independent owner of studios in the U.S. 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 three studios, which Bill's going to talk about, we have an additional two and a half million square feet and growing immediately to almost three and a half, and then from there, hopefully to four and a half 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's going to discuss, the growth has typically been in the media side here in L.A. 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.
The last and most important thing in L.A. is we have very limited supply, which we're going to get into as well today. If we 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 three key marketplaces, as you well know, Foster City 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's going to talk about the competitive edge that we have in those markets, the tenant mix that's there.
Our assets in that marketplace are 87% leased, and our expirations over the next four 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. You know, as we all sit here today, the big three, Facebook, Google, and Apple. Go to the city. What do we say about San Francisco? I mean, we own 2.3 million sq ft 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, South of Market place, 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% below market right now, and we have some unique opportunities with the Vault space and our 1455 asset. Our mark to market is well in excess after this year of 30+%. 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, 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've focused on Pioneer Square, South Lake Union, and the Denny area. Our portfolio there is 94% stabilized. Not much roll until 2019, but in 2019, our mark-to-market roll 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. 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. [Firebase-type] 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 finer 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% of our tech tenancy, public and private companies, have a valuation of $1 billion or greater.
60% of our tenants in that same sector group have a valuation of $10 billion or greater. Stabilized force, tenancy that's more than just sticky, they're stable and growing. When you invest with us, yes, you're getting tech exposure, you're getting the best exposure for the out-performers. Looking at the capital allocation since inception, 40% of our portfolio has been core-plus, 45% has been value-add. A 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%-7% for that property type.
If you look to 7%+, is what we've been looking at and achieving well in excess of that for our redevelopment, development assets. We like the risk-reward potential, the proposition of these types of projects. 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. Recaptured significant mark-to-market rents. Lease rolled over time. We put Google and Salesforce in. It's a 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, we love to tell it. A world-class headquarters facility for Netflix, an entree in Southern California, that was a former parking lot. 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, our Rincon's 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. 100% of the future projects in the near future are in the Los Angeles area.
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, 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, our financing outlines here are that we maintained 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 focused on our interest rate exposure and have a modest uncovered tenant base right now of debt on current assets. Most importantly, three years ago, we became investment-grade. I started off my presentation about talking about team, and that's the 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 and in all our markets have been unbelievable. This full team has led the marketplace in all facets. They combine their relationships. 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, 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 five times and resides at over 17 million sq ft, going to almost 20 with our development assets that are in play. Our market cap has increased 1,100% in eight 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 billion 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 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 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 million sq ft in this portfolio since our IPO. We've averaged 46% cash rent spreads. I know people have come to me, talked to our team, and said, "This is an old story." This is a really good story, and we like 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.
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 1,200 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 five 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. There are great assets in that portfolio that are dropping into the stabilization, like our 11601 or our 450 Alaskan Way asset, are going to be in that pool. Also, we do have some challenging assets, and we do have row 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.
We've got 1.2 million square feet of expirations in 2018 and 2019, and we're already ahead of schedule at a mark-to-market of 18-plus% on both years. We've got great momentum on the development/redevelopment pipeline. As I said, we have 1 million square feet coming to marketplace over the next two to three years. 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. Some of you may have seen a press release or two about a potential acquisition in San Francisco. While 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. As for something that I thought long and hard about talking about today. I put this slide up because I know there's several of you who are a little trigger-happy in writing shit. 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.
Any expansion in our company will be in the 2 existing business lines, an office line and our studio line. 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 of Vancouver are between the ages of 20 and 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 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. 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's 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 leased stages for multiyear terms. It's a marketplace we're also going to get educated on.
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 cusp 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. 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.
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, can I get my coffee?
Thank you.
Thank you.
Thanks, Victor. Just to be clear, that's Vancouver, Canada. Someone just asked me. Our next speaker is Arthur Suazo, our EVP, or as I often say, MVP of Leasing. Art, please come forward.
Wow. Thank you, Laura. MVP of Leasing, I don't know about that. I just want to win a title, so thank you very much for 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 our 10s of people listening around the world on the webcast, welcome. I was going to say it's very difficult to follow Victor because Well, he's Victor. It's very difficult to follow Victor. Because this is the most important topic of the day, no problem. I'm going to have your attention. 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, 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. I just wanted to frame that up for you. Whoops. The cat out of the bag. I wanted to frame that up for you. 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.
I'm not just excited, I'm 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. 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. It's because of that that we're all very, very confident about what's coming in 2018 and 2019. 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 4.8 million square feet of space. That's 2.2 million square feet of new deals, 2.6 million square feet of renewal deals.
This is exhibit A, that we've been extremely busy. Exhibit B is my hairline. You remember me with a pompadour, don't you? Two years ago. We've been extremely busy, but of these executed deals, I want to say 3.6 million square feet of those deals, 3.6 million 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. We're not done yet. Listen, 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 2.7 million square feet of deals expiring in all of 2018 and into 2019. Nobody, especially me, is taking their foot off the gas. I'm encouraged because we're way ahead of schedule. 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. That's great news. Let me explain to you what I mean by coverage, and then we're going to dig into the 2018 and 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 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, they were done at a 31% mark to market. Again, very impressive. If you look to the bar chart to the right, it simply just shows the relationship of the composition of our coverage on the renewals for 2018.
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. 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 two of our biggest expirations next year. You often ask us who are they. Well, InvenSense in San Jose for 140,000 square feet. Capital One up in Seattle. It's about 130,000 square feet. We backfilled just about all of that space. I think we have one of the floors left, but we have activity on that. We're really moving in the right direction. Once again, the bar chart just demonstrates the coverage on that activity across all of our markets. We're not slowing down at all.
We're executing the ground game. We are moving. 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. 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. 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. As you can see, from Q2 2016, we increased our pipeline by 1.1 million square feet.
If you think about it, we've leased on average about 600,000 sq ft of deals per quarter since Q2 2016. We haven't just reloaded the pipeline. That's a whole different story. You reload the pipeline. By the way, I had a great slide for that, but it was inappropriate. Reloaded the pipeline. We've grown the pipeline. I had bandoleros, the whole thing, but I can't. Said a different way, we've grown the coverage from 52% on the availability to 70% on the availability. Again, very encouraging, and to me, this is the most important, because this is our lifeblood. When you ask me, "Hey, Art, such and such deal going to make, what's going on at " 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. Again, very important, and I wanted to underscore that. 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. Where you think we need activity, we have it, and the team's doing a great job of executing. I keep saying they do a great job of executing the game plan. They're filling up the pipeline, they're growing the pipeline, because that's our lifeblood. What does that mean? 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. We've been running a play out of this playbook since the beginning of Hudson.
Victor and I have been running this play since past lives, at different companies. For 20 years, we've been running this because it works. It's a two-pronged approach that we run in tandem, and we try to get to shirted close on every deal, and it sounds corny, but whether it's a 1,000-foot deal or it's a 300,000 sq ft deal, we're running this program in tandem, and our team is executing flawlessly, as you can tell by the momentum we have. Let's start with 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 quick. 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's a necessary evil.
Almost a joke. 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. 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 third-party brokerage teams on the ground. It moves into our seasoned HPP leasing team, and it includes all the senior management at Hudson. We forge these relationships. We foster them, and again, we're out always trying to establish better relationships. How do we do that? 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. We have brokers coming up to us going, "Hey, how can I get invited?" 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 second base, on third base. We're not reinventing the wheel, and these guys, they appreciate it because the deal's getting done faster. What happens when the deal gets done faster? Yes, we appreciate that too, because we get rent earlier.
For them, deals get done faster, they get paid faster. Let's not forget that part of the equation. We marry this up, and again, we run it in tandem with the enhanced tenant experience. 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. You heard Rob Jernigan talk about it yesterday. 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. We re-amenitize space for the tenants, and we enhance their experience there for sure, but what we do is they use it as a recruiting tool. 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, 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 two 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. 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 challenging space.
It was a forward spend of tenant improvement dollars to creatively enhance spaces like, oh, I don't know, subterranean spaces that were impacted by mechanical rooms and things like that. Well, it worked. We leased the space up even faster than we had imagined. Guess what? Not only has it worked, but over the last three years, we've built out 800,000 sq ft of VSP space. That's 144 suites. We've leased 76% of these suites faster than we would have imagined. There's no way we could have done this level of work in the last three 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 sq ft of space that we're building, and we're trying to keep up with demand.
Again, we deploy these spaces strategically across the portfolio in the areas where you think we need to, Silicon Valley, the Peninsula, and we do it in a 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. We know this from the intel on the ground that we're getting from our third-party brokers, and again, it is working, and it's moving the needle in a big way. The volume of these certainly is moving it in a big way. This is our bread and butter. Peninsula, Silicon Valley. This is our bread and butter. 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 availability, and this is it.
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. Let's take them one by one. If this thing cooperates with me. Metro Center. 171,000 square feet of availability. As you know, it's the tower. It's the high-rise tower, and it's the two Hillsdale buildings. Drew and his team on the ground have done an amazing job of reimagining the entrance and creating a grand lobby. He's also activated spaces in the Hillsdale buildings that is really kind of indoor, outdoor space that a lot of the tenants are using. 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 Hillsdale building. Again, we're very successful. Oops. Metro Plaza in San Jose. Wow. This is a great case study for VSP. 122,000 square feet available. We had a couple big move-outs, and we're making the space more attractive to the smaller tenants that are dominating that market. 55,000 square feet of deals in negotiation. I say it's a case study for VSP because that's like 12, 13 deals. 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. 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. Cisco moved out. We knew that was coming.
We underwrote it as such. We looked at it as an opportunity to unlock more value like we've done in other assets. Once again, Drew and his team, hard at work. They reimagined not only the entrance. Right? Not only the entrances and the lobbies, they created a large-scale VSP on the second floor that looks phenomenal. They just finished the work probably about a month and a half ago. We had a great open house. The market got to see this in all its grandeur. He reimagined the campus. Indoor, outdoor space, activating the athletic fields. I've got to tell you, the 2.8 million square feet that's really looking in the greater Silicon Valley, those are the things that they're looking for. 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. Stay with us. Moving to the Arts District, 220,000 square feet between Maxwell and Fourth & Traction. We've changed our strategy a little bit on Fourth & 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 22,000 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. Again, you can see 200,000 square feet of active prospects.
Derek told me just before I walked up here, and 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." That's more good news coming. All right. Epic in Hollywood. I think you had the opportunity to see the igloo, right? You walked in the igloo, and it's an amazing marketing piece for us. I hope we don't upset anybody by calling it an igloo.
Yeah.
Any Inuit Americans, I apologize. It's an amazing building. Chris Martin and his team, they took the best pieces of Element, ICON, and CUE, and they created the best building in L.A. I swear to you, this thing. You saw the views. You saw what it's going to look like. 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're negotiating, as you know, on the entire building, and we've got another proposal for about 200,000 square feet. It's barely out of the ground, too, by the way, so we have a lot of momentum. The active prospects, listen, 1.5 million square feet.
There are no large blocks of space in Los Angeles, and certainly nothing of this caliber. Again, there's a lot of momentum at Epic. We continue 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. Though we do have 110,000 square feet of negotiations going on, by the way, those are big users for that type of building 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.
It's going to get leased, but rest assured that there will be a little bit of a battle going on. Oops. Oh, man. Somebody grabbed the clicker from me. I'm excited. I told you I'm stoked. Moving on to the Westside. You saw that amazing presentation and panel yesterday with Alex, Jeff Pion, and Rob Jernigan. 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 at the epicenter. That's a bad word here in Southern California. It's not the epicenter. It's the confluence of the major transportation corridors, and it's unbelievable. I feel fantastic about our opportunities here.
Now I can let the cat out of the bag. We're in negotiations for the entire building. We have 1.2 million square feet of active prospects. The active prospects, again, there's two tenants on that active prospect list. They're each about 200,000, 250,000 square feet. They're programming, they're space planning it on their own nickel because that's where they want to be. I feel really bullish about what's going on here, as I do about all of the buildings I've talked to you about, including the VSPs and how that's driving our activity in a big way. 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. We're going to just keep working the ground game as long as we can.
Thank you very much for your time. Look forward to questions later.
I don't know, Art, you're a pretty tough act to follow, too. That was great. 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 NAIOP, ULI, and other well-known industry organizations. Now he's here to share his insights with us. First we're going to show a brief video. Then you'll hear from Spencer. Thank you.
Good morning, everybody. The title of today's presentation is called "The History of the Future," 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 U.S., but focusing specifically on these markets. To set it up, people have been trying to predict the future since the beginning of time, 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. The reason they get it wrong is twofold. Number 1, they're inconsistent. For people who follow economics, you'll know that John Maynard Keynes is probably the lion of left-of-center economics, always looking for fiscal stimulus when there's an issue.
What did the left-wing guy say to do in the event of a downturn? He said, "Unleash the animal spirits of capitalists." 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. The left-wing guy says, unleash the capitalists. 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 on one hand that. Problem number 1 is inconsistency. Problem number 2, which is something that everybody in this room deals with, is that looking at the future is both art and it's science.
That picture of the Mona Lisa there was painted using artificial intelligence. Why is it art and science? Because the science of forecasting is wrong the moment the model comes out of your machine, you must take into consideration the art, where is the art? The art is called behavioral economics, of taking a look at the behavior, not only of the people out there, trying to predict what they are going to do, humans are inherently very difficult to predict. 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. 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. This is the key assumption that impacts our forecasting, both on a macro basis market by market. I had a conversation 2 weeks ago with my global heads of economics around the world, what is our house view on the next recession? Our house view is that it's going to be about 2 years from now. I mention that because when I spoke on a stage like this 5 years ago, you know what our house view was then?
Two years.
Thank you. Audience participation. I said to my people, I said, "Well, make the case for why the recession is going to be about two years from now." They said, "Well, inflation's going up and interest rates are going up, and employment is so tight, we just can't grow any faster." I said, "Well, in my experience, recessions don't start with a whimper. They start with a thud." What are the thud factors that could take us down? Could be macro, could be a China hard landing, could be an emerging market debt crisis, could be domestic, could be a monetary error, we raise interest rates too quickly, or the number 1 risk factor in the world is a trade war. Don't take my word for it.
McKinsey came out with a study two weeks ago, 55% of the world CEOs say that is the number 1 risk factor in the world. I listen to those things and I think, 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's been walking on eggshells, which brings us back to trade war. 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 three things in the world that matter: facts, logic, and leverage. Leverage is what he's trying to create through his words. I'm not trying to defend his words, but I am trying to suggest he's not going to cut off the U.S.'s nose to spite its face on trade, despite what his surface rhetoric might suggest. Let me address the second issue, which is not only when that next recession is going to be, whether it's two years out or four years out, and I think it could be longer, is interest rates. Interest rates go hand in hand with the other I word. The other I word is inflation. In my opinion, I don't worry that much about inflation.
We did see an uptick in January from the wages went up. There are four 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. 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. The number 1 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. If you take a look at the curves of 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? That's a key question about global trade as well. There's another reason why I'm optimistic we're going to go a bit longer than the two years that our house model might suggest. The tax plan, highly stimulative. Lower corporate rates, more liquidity, more incentive for CapEx. I also think it's going to be quite good for our industry in two specific areas. One is multifamily, because it changed 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 against bricks and mortar retail is overblown. Secondly, a disproportionate amount of the benefits from the tax plan help people at or below the median income level. 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. The tax plan's 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. What is that going to mean?
It means everybody's going to move from New York, California, and Illinois to Florida, Nashville, Texas, South Dakota. Think that's going to happen? It's not going to happen. You are going to see some marginal movement, and 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 two of the three 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. 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 from 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. 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. 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 tats? 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. Why do you think that is? Do you think that is because people like beer more today than they did five years ago? No. What this is a reaction to the forces of globalization and automation, and people are adapting. This is one of many examples I can give you of adaptation to those forces. 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.
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. Globalization is not a one-trick pony. Globalization is four things. It is the flow of money, information, services, and goods. Some of them are objectively good. Flow of information, flow of money, great. It's the flow of services and goods where it's gotten complicated. Because of the displacement of so many people because of the flow of goods, people are now adapting. By the way, the school of thought that all growth is good is now the pendulum is swinging back, even among some traditional economists saying, "You know what?
Maybe these transitional costs need to be taken into consideration." The key thing you need to think about is global trade actually going to slow down? When you think about globalization, you think, oh, 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. Based upon a recent book two 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.
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. Healthcare. I put a picture of my recently departed 100-year-old Grandma Bess on the screen for two reasons. Number one, I like looking at pictures of my Grandma Bess. Number two, 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'm a huge fan of tech, media, much like everybody in this company is. 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. 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. Healthcare is enormous. 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. Who's moving into these denser urban markets? Young, highly educated people. 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 fourth 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. 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. Airplanes are extremely important, I think are going to get more so. When we poll our investors, they ask, "Well, what's the most important thing for your project?" You go from the macro to the micro, and the micro is still commuter rail. 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.
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 are driven 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% unlevered 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, everything else was below that. Here's one piece of bad news.
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-one ratio. We think that interest rates are going to go up modestly and that it might have a 15-25 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 would 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.
Why do they have this high growth? Reason number 1, foreign money. 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 if 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 rate. Los Angeles, San Francisco, two of your top markets are two of the top 10 markets in the United States for foreign money. We look at this number very carefully, and the percentage in San Francisco is one of the highest in the United States.
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. 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. The percentage of foreign capital in San Diego is near zero. Foreign money doesn't go there. It doesn't have the dynamism. You want to go to the dynamic markets that have high percentages of foreign money. Seattle is about half that, also dynamic. The other capital that we track, we don't just track foreign money, we track venture capital.
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 U.S. 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 two years. Two good reasons, one other reason. Two good reasons, one 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. It has more room to run, potentially, than those markets. As we talk about the recession, you can't just say the recession's in two 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 three years ago when the price of oil dropped, but now they are coming out of it. 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? 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. Where were the jobs formed in the first quarter?
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 U.S. 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 U.S. 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 laggard.
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. 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 U.S. What does that mean? It means that MIT, Harvard, and the other schools produce too many tech graduates, and they've 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.
Notwithstanding the fact that these markets are super tight, they are attracting the smartest talent in the U.S., and smartest and also the highest quality talent in the U.S., which leads me to my ranking. We rank the top 50 tech markets in the U.S., and San Francisco is the clear winner. They're not just the clear winner, they're the 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 one 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. Atlanta, I agree with what was said before, is the market that's on the rise.
If you take a look at Los Angeles, Los Angeles is number 24 on this list, Los Angeles isn't a one-trick pony in the high-tech business. They have the creative industries where they are number one. I would say that high tech is not necessarily the destiny of Los Angeles, but it's part of the story, which is good. Tech type does matter. If you take a look at the type of job growth across the different types of tech, high tech is the 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. One of the things I mentioned before is that the tax plan is now going to increase the number of renters versus buyers. 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. When I say it's not going to change, it changed slightly in the first quarter. In the first quarter, it changed slightly, where we had a 50 basis point increase in the percentage of buyers versus renters. You know where the homeownership rate is today? The homeownership rate today is the same rate it was 50 years ago. Ultimately, you're not seeing much gain.
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. Who is this little age cohort right here, the 40-54-year-olds? Those are the Gen Xers, my generation, who had the command decision to buy their first house between 2002 and 2007, which was the worst time in the history of creation to buy your first house, and we ain't buying it again. 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?" It's 125% of the cost of living. Look how far up New York is. More than double what it is almost in San Francisco. You know how they can afford to live there, and you know why you're still going to see growth in these markets? This isn't the number that matters. You know what number matters? This one. This number shows the value of the rental based upon the average tech worker's salary. You see it on that metric, they're still affordable. How do I know it's affordable? Typically, the danger zone for where you are unaffordable is 33%-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. 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 of 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. 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. In the old school industries, their stickiness has declined, as has their average headcount. Which are some of the industries that are driving us? Look, this is based upon first quarter information of our people that lease the most space. Technology, number one. Creative industries, which is really L.A., is also in the top five. Once again, folks, if there's one word that comes out of this, maybe it's two words, healthcare.
Massive growth driver, not only in traditional healthcare settings, but retail and office. In New York City, healthcare is taking more and more space as well. When you take and break it down by market, you can see tech is driving several of your markets, but here we are in L.A. Creative industries, number 1 driver of your space. 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. There are three 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 suggest is less likely.
The third bear is the scariest of all, and don't let her pretty little red ribbon fool you. That's the black swan bear. Hard to predict, as we talked about this is the history of the future, not sure where that's going to come. 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 than 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?
I tell a funny story about that.
Sure.
I did a TV gig about 6 months ago with Maria Bartiromo, and I said, "The one question you can't ask me is, 'Where is Amazon going to go?'" Because we represent them, they're a great company. They have lots of great choices. What's the first question I get on the air? That question. Look, the funny answer is that as you take a look at our top 50 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 place. Really talent and infrastructure are the two ones. 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. There's as many caveats as I can give. A lot of people think it's going to be D.C. I think a lot of people think it's going to be D.C. because the number 1 competitor for Amazon isn't Walmart, it's regulation. There, they might have a better shot of doing it. 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 rent control play out here, both in downtown and elsewhere as far as municipalities trying to encourage development, obviously often happens when you start to
Here's the headline. It's the wrong solution to the right problem. It's the right problem. Affordable housing's the right problem. We should be talking about it. We should find a solution to it. In addition to the solution that California's putting forward, Portland just put in a requirement that you have a 20% portion of your space assigned to it. Seattle just put $250 a head tax on employees. 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. That to me is the worst of all solutions. 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. It's an impossible problem. The number 1 problem really isn't lack of affordability, it's the lack of ability to build due to nimbyism. That is really the number 1 problem. 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. It will retard growth of building new units. I will say this firmly, affordable housing is a crisis we need to solve, but these are not necessarily the solutions. Yes, sir.
Can you comment a little bit more on co-working and its possible impact on WeWork's growth risks?
Sure. Co-working right now represents about 2.5% of the New York City market, and it depends upon where you think that percentage of the space tops out. I've heard numbers like 5%. Hard to say, because it really all depends upon my first question, which is when the next recession is. Because during the last great boom in co-working in the early 2000s, it had pretty tough impact on the space. Let's assume for the moment that it goes between 2.5% and 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? I think it's still disproportionately incubator space, but it's increasingly becoming a strategic option for traditional tenants.
I don't think the traditional lease, the long-term stability of space is ever going away, and I think will only be incremental demand, maybe moving into a new market or basically temporary space. I do think it could be 2.5% to 5%, and 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. 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?
We did an ad hoc study in my company on this, and we tried to determine where's the break point in your building where you can have this co-working space and maintain the same value, and we came up with about 20%-25%, which is a much higher number than I expected. We think that in today's market, that's the number. In the future market, it might be different. I'll give you one other example on this. You probably noticed that WeWork bought the Lord & 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.
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. If that happens, that actually helps the marketplace bring more of their space into other buildings. 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. Time for any more questions? Well, thank you very much, everybody.
All right. We're going to take a quick break now for about 10 minutes, we'll meet back here at about 10:05. Welcome back. We're going to get started again, next up we have Drew Gordon, our Senior Vice President of Northern California. Here comes Drew.
Thank you, Laura. Good morning. Where's Brendan from Wells Fargo? There he is. If you guys haven't met Brendan, you should. He's one of our rising stars. This goes under the story of you know you're old when.
I'm standing next to Brendan watching the band last night, I look over to him, I'm like, "What do you think?" He's like, "Oh, this is really cool." I said, "Do you recognize any of these songs?" He looks at me, being very polite, and goes, "Well, maybe, like, on Spotify once or" I was like, "Yeah, no, I get that." He goes, "I texted my dad, and my dad knew every single song." I'm like, "Goddamn." I go, "Well, you should FaceTime him right now." Brendan's looking at me like, "I can't believe this guy knows what FaceTime is." What I should have said is Snapchat. You should have Snapchatted your dad. Anyway, good morning again. Welcome to Investor Day, or as we call it around here at Hudson, finals week. My name is Drew Gordon.
I oversee our Northern California portfolio, I have the distinct pleasure of, once again, reminding you all just how well our markets are doing in Silicon Valley and the peninsula. Before I get started, though, I ask you to enjoy the following short video that depicts examples of the re-imagining of our Bay Area portfolio. Okay. Today, I'll be focused on three areas of importance with respect to our Bay Area portfolio. First, I'll be discussing the strong real estate fundamentals I see today in the Peninsula and Silicon Valley markets that remain healthy and continue to exhibit signs of expansion. I'll also call out several examples of growing barriers to entry, barriers that bode well for our portfolio of existing properties. Second, I'll 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. Equally as important is that this demand aligns perfectly with the majority of our current availabilities in our portfolio. 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. 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 two sub-markets. 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 4.2 million square feet in the Peninsula and a staggering 19.2 million square feet in the Valley. Additionally, we're experiencing very healthy single-digit vacancy rates in both markets that have declined 530 basis points and 660 basis points 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 sublease space, two factors that we do not see as material risks to our portfolio, 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 1.7 million square feet in Q4 of 2017 and 2 million square feet in Q1 of 2018.
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&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 $104 billion in 2017, but the Bay Area saw an even more impressive increase that year of $35 billion , 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&D spending in the Bay Area, approaching $100 billion in 2017. As many of you know, R&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 wreck in the Bay Area, though I don't think those concerns were raised by anyone in this room, maybe those who no-showed 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 28.1 million square feet, and their planned expansions in San Jose equal an impressive 10.8 million square feet of new growth. Facebook, which is the new story in the Bay Area, who currently has 1.3 million 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.
Here's where it gets a little more interesting, 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 of Bayhill Office Center in San Bruno two 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 a space at our Concourse project in San Jose after LinkedIn purchased a building in Sunnyvale. Second, a financial services firm is now in leases at our Techmart 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. 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 well. 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 right-sizing many of our availabilities through our vacant space prep program that Art has already alluded to in his presentation. This right-sizing matches up very well with the strength of the small tenant demand that we are seeing. How do we feel about our focus on small tenants? Well, we feel really, really good. Why? First, these small tenants provide us with exceptional diversification across all major industries. 66% are non-tech-related companies. Second, with 27% of these companies public and an additional 49% that have been in business for over 10 years, we're getting solid credit companies across the board. Lastly, our Peninsula and Valley portfolio includes a total of 520 tenants, 410 of which are under 10,000 square feet. That's 79%. We clearly have a small tenant portfolio.
These small tenants, in aggregate, represent only 27% of our total ABR, which is our analyzed 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, so do I, it's often considered a canary in the coal mine of sorts. Two years ago, there were growing concerns over the impact of sublease space in San Francisco. 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? 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. In this environment of rising construction costs, providing no TIs simply kills deals. Lastly, the average sublease terms available today are relatively short, four to five 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 nine months, none went to properties offering sublease space. Zero. 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. 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. Of that amount, 50% has already been pre-leased. Lastly, 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.
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 2.8 million sq ft of active requirements that fit with our Campus Center availability and an additional 800,000 sq ft of actual deals in negotiations. This strong activity bodes very well for Campus Center once again. HPP Peninsula and Silicon Valley assets outperform the market in terms of both occupancy and rent growth. 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 NorCal team are incredibly proud about. From mid-2015 to now, Hudson's asset performance has clearly distinguished itself from its competitors. In our Foster City Redwood Shores portfolio, both occupancy and ABR growth are 500 basis points higher than the market. In the Palo Alto Research Park, our ABR growth is 1,200 basis points higher than the market. Finally, the San Jose airport market, we are 1,000 basis points higher in occupancy and 1,300 basis points higher in ABR growth. Impressive numbers for sure. Something, like I said, we are so proud about. 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 rein in growth 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 and new assets. A current example of this is that the city of Palo Alto recently enacting a restriction on new office development to the tune of just 50,000 sq ft annually, and rumors of an attempt by the same city to broaden this restriction to include the Stanford Research Park as well. I've highlighted on this slide the two 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.
In conclusion, all of our markets in the peninsula and the valley remain strong and robust, with impressive growth of both VC and R&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 sq ft, will continue to drive our occupancy and rent gains. 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. One last thing. When Victor led off and he talked about how important relationships are to us, it's absolutely true, our relationships with you and with our tenants.
We are very happy to introduce Adony, who we have worked with very closely over many years, who's been running real estate for Uber, and we value that relationship. We've been working with him very closely, and I'd like you to welcome up to stage Adony Beniares with Uber. Hey.
Hey, how are you?
Good. You guys can hear us both?
Yeah.
Good. Thanks.
You are more than welcome.
Before we get into the formalities of it, I don't recall, what was the size of the first lease we did with you guys? Do you recall what the size was?
It was pre-me. Travis had negotiated for the fourth floor at 1455, about 90,000 square feet. Since then, we've done deals, and we're up around 320,000 or 330,000 at 1455.
Your favorite landlord is?
Oh, it's right behind us.
Adony, talk a little bit about your roles both at Uber and LinkedIn first, at LinkedIn, and sort of what your responsibilities have been and were sort of in a broad aspect, so people get a sort of feel for it, please.
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 the daily operations on an ongoing basis. I did that at Uber, and I did that previously at LinkedIn, with the last four months at LinkedIn being more of a focus on daily operations as the company stabilized its growth.
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, successful companies, is at LinkedIn, we went from about a dozen sites, about 400 people, to about 6,000 people in about 30 sites. At Uber, we went from 15 sites and about 350 people to about 14,000 people in about 750 different sites.
Over what period of time was that?
Over about the same period, about four and a half years.
That's amazing, isn't it?
Yeah.
Wow. 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, please.
I'll break it into two parts. One is for employees. What we do for there is 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. 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. Ultimately, the other part is delivering on the business plan. 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 miss the boat.
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. Even at Uber and LinkedIn, when we were small, you think about things a little different. You have more transaction management than when you're big and you're managing things on a portfolio basis and an environmental basis.
Perfect. For a tech company like Uber, what's the biggest 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? What are you working at? Give us a feel for sort of an A to Z menu on that.
Yeah. The biggest thing, I'll keep coming back to this, it'll 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? It's the excitement of building something new. It's excitement about changing the world. It's excitement about enhancing their careers. 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. When they want to collaborate with people, they can collaborate. When they want to have heads down time, they can have heads down time. It's the right live, work, play environment for people.
Ultimately is the other things that are important to us is total cost of ownership. 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. I think about cost per square foot, and I think about cost per employee. The final thing is flexibility of space. We talked about first deal at Uber, you guys made a bet with us, right? It's 90,000 square feet. As a startup, you don't want to overburn 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.
On the other hand, you don't want to keep moving every year to two years because you don't have a landlord who's flexible enough to be able to adjust to your growth needs.
Got it. That sort of goes into the next aspect, which is planning. 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? You're 14,000 people. How far ahead did you plan to grow into space in markets like San Francisco or other markets around the world?
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 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. For our headquarter spaces is in 2015, we put a 10-year plan together with a five-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 toward 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. Then for smaller offices, 2 to 3-year plan.
Every year as the new business plan comes out, adjust and kind of adjust course a little bit. At the end of the day, when you look back, you're successful if you're sort of where you thought you'd be five years later.
this is something I think everybody wants to know. Do you care, and at Uber or even generally, do tech companies care about new, old, renovated construction? Does that hit the radar? If it does, tell us a little bit about that.
It's more about where the space is rather than its new, old, 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. On Market Street right now, we're in buildings that were built between 1906 and 1985. It's about the interiors more than the exteriors, as long as you have the basic amenities, right? Efficient floor plates, light coming in are the two biggest things from a facilities and employee point of view. Access to transit is high on that list, and the whole live, 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, we just heard a little earlier because, and everybody's seen in the paper, was WeWork's buying assets. 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.
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. For us, it really matters because we don't buy assets to make money on it. We're not investing in assets. We're investing in places where our people want to work. We look on a deal-by-deal basis, understanding whether it makes a difference to our long-term financials on buy versus lease.
Do we have extra capital we can use so we make that capital be more effective than sitting in the bank? Is that what our long-term vision is? 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 was the sweet spot for us. We've decided to date that that only made sense for our headquarter locations in San Francisco as well as our headquarter locations in Pittsburgh for our advanced technology group.
Got it. All right, a little bit of a plug for Hudson, just maybe not because I didn't ask you the question yet. 1455, tell us what drew you to 1455 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? It was quote unquote, by a very close competitor, peer. I shouldn't say peer, 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. 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. I can talk a little bit about conversations I had with Travis, because Travis did the first deal first. I came on right after we closed on the fourth floor. It was size of floor plates. It was growth potential. It was, honestly, the landlord relationship, punching windows in, right?
Yeah, we did that. How many windows did we punch in, Drew?
112.
112 windows, wow, okay.
It's turning dark space into bright space. It was flexibility in lease term to start with. It's also a small tech company with 300 people worldwide, while it's got a nice name in San Francisco in 2013, is Uber. Not quite the monster and the great company it's become. Kind of the early shove on, "Hey, we'll grow with you." When I came on board, evaluated everything. 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 made 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 a new use case isn't the easiest thing in the world to do. 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 the data center would be, just kind of penciling out ideas.
Perfect. All right, let's just talk a little bit more generally, and you could use your example at Uber, because you're so tied into the tech world. We've been talking a lot in the last couple of years specifically about, obviously, the migration up to San Francisco for big tech. Expanding up to San Francisco. Give us your feel for San Francisco versus Silicon Valley, Silicon Valley versus San Francisco, survivability of both, none, zero. Just sort of general thoughts around that, and we can drill down a little bit if you want to.
I don't think about it as migration, but expansion. Where it was 15 years ago, there was one or two companies who were based in San Francisco. San Francisco was, in my world, known as the startup and the incubator. When you got big, you moved down to Silicon Valley, is that's changed now. 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 San 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.
It really is about access to talent and that balance between making people's commute good compared to having people in the same office to work together.
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. Figuring out the key for us for being able to expand in multiple locations is the benefit that technology brings us. 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 cellphone.
Are people going back and forth? Employees?
The people start off by going back and forth, 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 to 1455, there's other tenants as well.
Thank you. Yeah.
We picked a strategy of expanding on Market Street, where we could use the subway and get from door to door in 20 minutes from any of our three buildings back and forth. What we saw for the first six months is people were spending their days kind of going back and forth between buildings, meeting to meeting to meeting. We saw them, interestingly, start scheduling multiple meetings in the same building and spending a day. Now we see people staying in their buildings and getting together less frequently in person.
Using technology bridge.
Bay Area, your general feelings. Obviously, it's the centric tech hub of the world. Your feelings about the Bay Area and the future of the Bay Area versus other markets that people are spawning and talking about, like Austin or like Boston or other places even outside of the U.S. What's your thoughts around that? Seattle, et cetera.
I think you talked about migration before. Again, I don't think it's migration, but expansion. Both you and Spencer Levy mentioned a couple things. You talked about yesterday that if you're going to be in content, you're going to be in L.A. 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, is if you're doing high tech and you're not in the 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. The Bay Area really is the tech center, and we and everybody else are going to continue to grow there. It's about access to talent and keeping people in your company.
You saw on Spencer Levy's chart, the top tech workers around the world based in San Francisco. That's not going to change for the foreseeable future.
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 realty we bought. 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, et cetera. Give us your thoughts on that.
It's-
As a Bay Area guy, too.
Pick the reason for your next recession, and as Spencer said, predicting the future is hard. When we look at the 2001 setback, we look at the 2008 setback, not a lot of, "Oh yeah, this is going to happen on this day." Is that tech is certainly not what it was in the dot com days that I went through. Is that it is stable, financial, well-funded public companies that are actually delivering projects, delivering products, and making money in terms of that. Will we see setbacks? 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 Spencer talked about healthcare. 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. If I can get my coffee delivered to me, although that's kind of a nice thing. It's really about the fundamentals of business, and I'll put a plug in for the rideshare guys. 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, I've got a couple just drill downs, then we'll open it up to some questions here.
Sure.
Firstly, Travis is living in L.A. now. I don't know if you knew that. He started a real estate company.
Yeah.
He's a direct competitor. I think he bought like a 28,000 sq ft office building right in Culver City. I know Art's a little nervous that he's going to compete with him, it's okay. Offshoots of Uber for an example. We have here in L.A., and it's become very popular now since San Francisco, is Bird. 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 has said, okay, we're going to see Uber expanding to Uber Air or Uber something else? Just give us a little flavor of sort of the progression of the business on that base.
Well, I'm going to talk as Donny, a facility guy, as opposed to any spokesman for Uber or whatever.
Got it. Understood.
It's kind of like a high-tech junkie.
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.
Yeah. Interesting.
It's what I tend to call kind of the invisible service providers, like the bikes, like the Sorry.
Scooters. Yep.
Lime scooters, bikes, all those where I just go to do something and there's no one there to help me. 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 airline. Now it's this cool invisible helper that just makes your life mostly easier.
It's just an offshoot of that. You talked about earlier rent versus buy, is that rehabilitation of old assets is a 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.
Yep.
That is a great future on reuse as opposed to replace.
Obviously the concern about employment, right? You're taking that risk expense factor and not necessarily negating it, but de-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 a space, something in your space, that you sort of said, oh, somebody came and said, "We need a swimming pool in the middle of the lobby." Something Is there anything like that that's come your way that you just laughed at each other at the end of the day that was the stupidest idea or the craziest idea?
Absolutely. yeah. It's got jobs ago, neither LinkedIn or Uber. We had a great idea on kind of flex space for a year, just don't do anything with it, people will be okay with it for a year. Just squeeze them into old data center space, into old warehousing space. It'll be a great thing.
Disastrous
Disastrous. 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. We're trying to squeeze into Uber so we don't have to take a significant amount more space before we kind of expand into Mission Bay." You have to make sure that light at the end of the tunnel is explainable and visible to your entire organization, and not this mythical light or this light that you say, "Hey, 4 years from now, it's going to be great.
Right.
Two and a half years from now, 30% of the people aren't going to be working there.
That's great. How about some questions? Anybody got any questions they'd like? Yeah
You just mentioned the Mission Bay campus. How does your space at 1465 and 1515 fit into that, and then eventual growth over time where Uber would want to be located?
Great question. We're modeling that. As I talked about, we had our 10-year plan with kind of five-year execution. We're currently working on what that second five 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 in San Francisco? Is it 15,000 seats in the-- I shouldn't say San Francisco. 12,000 seats in the Bay Area, 15,000 seats in the Bay Area. We're just going to keep working on that. We've got great leases for all of our properties going into the mid-2020s. Kind of adjust. Mission Bay will certainly be our headquarters, but not our only office space in the Bay Area. Yeah.
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. We need that floor." How much of that is assigned to a specific use or a function, and then that function's already out there in the space versus we're going to hire all these people, and then we'll move desks as we need them?
I tend to be on the more conservative side of facility guys, is I tend to keep the portfolio at kind of 85%-95% occupied with space coming on about two quarters before I need it. Causes a few problems, as we talked about with light at the end of the tunnel. When we see headcount growth, we take that as people coming in, not necessarily 2,000 front-end designers and 1,000 engineers. We tend to design space to be flexible for whatever group, and we colloquially talk about it 70/30, 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. Recruiters need more phone booths to make phone calls in. Finance guys need more space for transaction-based work. Engineers need more one-to-one desking than phone sales guys do.
We stay ahead of the growth by about six months, and then have the space about 70% standard, and then adjust for each team as they grow into it. Does that answer your question?
Thank you.
Yeah.
A few years ago when LinkedIn decided to expand their headquarters, they did it down in Silicon Valley. Uber decided Silicon City, Mission Bay. Can you contrast the two different strategies on why one company chose downtown and one in the Bay Area?
Off the top, I'll say, 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 hundred people, didn't stay centered where they were. I know from my LinkedIn days was we evaluated San Francisco. I should say we evaluated the entire Bay Area and said, "Yeah, 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 headquarter space in the Bay Area, heavily north of the San Mateo Bridge in terms of that. Then came to the realization, both objectively and subjectively, that staying near where you were born is a good thing. Anybody else? I can't see you over there. Yeah.
There was a lot of talk today about tenants and incentives, that obviously is more focused around smaller tenants. I guess for a tenant like you guys, a very well-capitalized company, renegotiating leases, how important is the CapEx, the incentives that you can get?
It's total cost of ownership for me. The nice thing is when you are 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. That I look at it and I say, "Hey, if you're giving me $100 TI, my rent's a little higher, you give me $50 TI, rent's a little low." If I've got access to capital, 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?
I can always spend startup money somewhere better than my space, even though I need space and I 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.
As you mature, you evolve, does some of that go away?
As a 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 per square foot." We always come back to cost per square foot and cost per seat and cost per active employee. Those are the three big drivers in the world of facilities and real estate, is how do I burden the P&L and the business plan with the cost of doing business? Yeah.
You mentioned a lot of the workforce is starting to live in the East Bay, and you guys have had a changing strategy with respect to Oakland. Can you just talk about sort of pros and cons of the area and how you guys think about Oakland?
We still think, or I should say again, myself, not the Uber guy, right? For 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. We looked at it and decided that at this time, Oakland wasn't the right play for us, and instead we're focusing on Mission Bay. 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. Still high on it, but we feel comfortable with the 1 million sq ft we have in Mission Bay and the 800,000 sq ft we have on Market Street and the 150,000 sq ft in Palo Alto. That's a better fit for us now.
Great. Anybody else? No, we're good. All right. Perfect timing. Look. Look how cool we are. Exactly. Thanks, Adony. Really appreciate it. Obviously. The relationship, most importantly.
Thank you, Victor and Adony. 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. There's no better person to talk about that than our SVP of Sunset Studios, Bill Humphrey.
Thanks, Laura. Okay. 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. 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 and entertainment side, and you see how they really integrate well. Let's roll the video. Okay. We're going to talk today about the studio of the future, what's next for Sunset Studios. Let me start out, two years ago, I talked to you about the increase in demand for studio space, Class A office space, production office space. I'll tell you again, 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 grayed early, I still have a great perspective on it. 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 Tame Impala, waiting for the main act, Mark, to come on board here, who's sort of like Radiohead, who'll be coming out. I'm going to get you guys revved up here a bit, okay? 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.
There's a lot of different movements going on in the industry as the content guys and 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 three key points. One, demand is continuing to increase in Los Angeles, with Los Angeles benefiting the most from this. At the same time, the supply side isn't going to grow for stages and for production 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.
third, as Victor talked about in his presentation, we're going to keep an eye on opportunities outside of our Sunset Studios, Los Angeles, Hollywood portfolio. Right now, Los Angeles continues to be the epicenter. Continues to be the place where entertainment media is happening. There's 5 million sq ft of production space. There's over 300 certified stages, and we're right in the middle of it. Our primary services consist of three areas in terms of how we derive our revenue. One is stage and production office rentals. You have to basically rent stages, and there's areas around it. You need green rooms, you need places for wardrobe, you need storage areas. Also, we have office space. Office space is required anytime you have a show.
It's somewhere between 15,000-20,000 sq ft of office space required to house producers and directors and all the people that make TV. We also house people that don't do TV shows on our lots. For example, Starz, Fox, Empire show, they love being on our lots, but they don't shoot on our lots because they shoot on locations. As you can see in the picture on the bottom here, we can see that we have 35 stages, so it makes us, we are the largest independent operator stages in the U.S. It gives us a lot of clout. Our client base is really diverse. First of all, we do a lot of traditional media companies, ABC and CBS are very large clients of ours. We have a lot of clients in the branded area, HBO, Comedy Central, MTV, VH1.
On the streaming side, we've grown tremendously in this area. That's why the demand is up. We have a very long-term, 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. Take a look at this slide. This is an incredible piece of information here. There's over $60 billion of media production going on, and most of it's happening in L.A. A lot of it's happening in L.A. 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. The most interesting part of it is the orange bars. Netflix, Hulu, Amazon, Apple. What's really interesting about it, Hulu and Apple haven't even ramped up yet.
They're just starting to ramp up. Amazon basically just procured one of the top executives from NBC. Yesterday was in the Los Angeles Times. They're getting ramped up for TV. Apple's just entering the market, and a ton of money, they basically stole the talent from Sony Pictures. You're going to see more and more demand for programming. This demand, as I'm going to explain to you, is going to also create tremendous demand for office space in L.A. 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 million increase in subscribers in one quarter. It's astounding. The MPAA 2017 theme report stated, "Digital entertainment spend increased 20% domestically and 41% internationally.
Global streaming subscriptions are up 33%. Two years ago, I stated that traditional studios would be disrupted by this tech-media convergence, it's absolutely happening right now, it's actually happening right before our eyes, it's also growing tremendously. The tech-media convergence can be best summed up by a recent quote from Bob Iger, Chairman of Disney. Quote, "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." 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. Then there's other guys that have content, they're trying to put the two together.
AT&T's 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 a nationally recognized and a globally recognized brand. Disney-Fox is really a bit of a Trojan horse here because this acquisition gives Disney a majority hold of Hulu. As you may have not known, but Disney has tried two times to build their own software platforms and have failed because they're not a software company. 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. We're going to see that kind of explosion.
The point is that L.A. drives creative products supported by an expanding software infrastructure that continues to grow. This slide, 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 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. That's what really drives this gigantic economy here around this. Increasing content production continues to drive demand for studio and creative office space. 1.5 million sq ft of additional space has come on the market since I was up here two years ago talking to you.
As Victor pointed out, most of our development's occurring in Los Angeles, this is one of the reasons why. Jeff Pion talked about this yesterday, is that these companies are starting to grow. You see them in these big office buildings and say, "Wow, how can they keep growing?" But if you look at a studio lot, like a Fox or a Sony, what's happening, these companies are very efficient around how they manage their vertical infrastructure. 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 call it the horizontal production factory. Let me talk about the supply side for a minute. It's not changing. Land value is just too high in Los Angeles to build these gigantic stages 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. That's where the money's going to go. People are not going to go out and start building stages here. You also see on the right, what's happening is that a lot of L.A. studios are already booked. Our Sunset Bronson is 100% booked right now, 100% occupied, and our other ones are in the 90s. Back in the business, back not that long ago, everything was in about the 70%-75% range for occupancy. Now it's in the 90s. In fact, right now all the stages in L.A., I mentioned 300 stages, we're at 96% occupancy. It's a staggering number.
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. They don't need all this ownership. That's why we can partner with companies like this. What they're doing is, because they don't own studios, they're basically warehousing stages. Netflix, for example, they have a 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.
We're seeing this dilemma and this push and pull and really competitive nature happening in the industry for companies that do not own large production facilities. I'll include ABC in that because they're owned by Disney, and Disney lot, which originally an animation lot, is quite small. Sunset Studios is poised to capture this increased demand and create significant value. I'm going to talk about three key factors in terms of the studio of the future. One is the business model itself. The traditional model was, anybody who's old enough in the room, you watch traditional TV, it was all time sequenced, then they had ratings. There's 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. The streaming companies don't do that.
They don't have those metrics like that. They don't use Nielsen. They have tons of private data that they have. They know exactly what their shows are doing the minute they're aired because of streaming. They don't shoot on the 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 on 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. You need to create products that have a global appeal. You see these large dramas which are done on stages, they're done on our stages. Very high production values, very high costs. That's really good for us because we take those dollars in.
American comedy, for example, does not translate well in most foreign countries. That's why this big dramas, "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, they are really movies. They're just really long movies. Second point, technology is really, really important here. We haven't informally announced it, but we're doing the first 4K show. If you know what 4K is, it's four times the resolution of high-definition television. Netflix is doing a show called "The Fix" with us, and it's going to start shooting in two weeks in 4K. Why 4K? Because compression algorithms. It's not about the TV set. 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, they basically binge-watch programming. All right? My daughter's there. She's watching some show. She's 23 years old. A couple of years ago, she's watching a show on her bed, on her TV, like, "Dad, there's a show you got to see. It's called 'Friends.' It's just unbelievable." It's all about the compression algorithms around watching TV on a small screen. That's what 4K is going to take off on. The third point is that we're really well-positioned because we have premier Class A office space, and we can basically connect people to our office space and to our production environment, and that's exactly what Netflix wanted from us. Let's give you a brief history. Nobody's better positioned than we are right now, but nobody wanted to hear it from us. All right?
2008, I'll just quote, "Others have speculated that outsized studio lots, identifying or relocation will eventually go the way of the used car lots." I'll go on and quote, "In Gilmore Field, just south of Hollywood, where midget auto races circled the oval track back in the 1930s." That was a blog from 2008 when Victor bought Tribune Studios, which is now Sunset Bronson Studios 10 years ago. Here's a quote from Victor here. "We see a prime opportunity in creating a production network platform comprised of state-of-the-art facilities." He didn't say that two weeks ago. He said that 10 years ago. I think that we got it right. We have taken advantage of our location and our ability to expand the studio lots. ICON, CUE, Harlow, all part of our vision that Victor had 10 years ago.
I'm going to turn quickly to the three studio lots we own. First, Sunset Bronson Studios, our physical plant. We've just built 418,000 sq ft of Class A office space, fully occupied by Netflix. At the same time, we're upgrading our facades, the signage, because when you build new space like that, all the everything else starts looking really old. We have a whole program we've gone 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%. Our estimated value creation on profit center office is $152 million. Not bad, right? Sunset Gower Studios.
We developed back in 2008 the headquarters for Technicolor, their North American headquarters. We completed a parking garage extension. The big thing is right now is, as you can see in this picture, we've already submitted to the city a plan to build 423,000 square feet 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. What's exciting about this is, look at this diagram. Here we are with these four or five-story creative office buildings for productions. We have this tower going up, which will be for a creative office building. Maybe Apple will take it, I don't know. It's all integrated into the lot, with trucks and people and stuff going on. 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 he can walk outside and go talk to talent and just meet people, and they love that interaction. It's really fantastic. Since the IPO on this lot, we're up 136%. Not bad at all either. Okay, we bought Los Feliz 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 really needed some work. On an NOI basis, 11 months in, we're up 57%. Why? Because we've been really efficient around managing our expenses.
We've signed a five-year deal with Disney Channel, which again, as I talked earlier about, really needed stages and really wanted to lock some down. We've done our first 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. Right now, we're in the process, just ground up a building, Harlow, which is this building over here in the picture. It's a beautifully designed five-story creative office building, or it could be a production office building. We're really excited about owning this property, and we feel so far that this formula we created, we're proving it's being successful. Victor talked a bit about these three markets. Again, we're mindful of these markets because as LA 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. A lot of these players, as Victor said, they're not big-time investment companies. They're entrepreneurs. They're real estate people. In a way, got to keep an eye on them and see what they're doing. Atlanta's important. They have 150 stages there. All the feature film business has moved there. 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, here they are. I've got these giant studio buildings 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. Vancouver is the number 3 market in North America. These three markets are interesting for us to take a look at and to see if there's any kind of taking our model and we can use it there. I'm now going to sort of sum this up and do my little classwork here for you. Back in 2016, I said media companies will continue to spend significantly on programming. 12 companies are now spending over $1 billion on $61 billion spend. Not bad. I think I was right on that one.
Two, streaming companies are going to create additional demand for Class A office, 1.5 million of additional incremental space in the marketplace in the last two years alone, with record-high occupancy on the stages of 96%. Los Angeles will remain the preferred content production market, but supplementary markets will emerge. L.A. continues to be the large market, 51% of scripted shows, I showed you in that slide, with Atlanta, Vancouver remaining steady secondary markets. Supply is fixed in Los Angeles. The net increase in stages is zero right now. Yes, Universal's 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 one 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.
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 two years, because Apple and Amazon haven't ramped up yet. Disney, Hulu, if that transaction happens, there'll be more ramp-up there. I haven't talked about Verizon, another company that you might have read in The Wall Street Journal, was sort of behind the scenes with Les Moonves trying to buy CBS, and that's when this whole problem happened there. That's what my prediction is, that continued growth, and that continued growth then means continued growth on the office side as well for Class A office space. Class A office space is going to continue to grow as these streaming companies grow, as I showed you in that bar chart.
Los Angeles will continue to drive production with modest growth in Atlanta, and New York and Vancouver will maintain their current market shares. Lastly, minimal or no net increase in Los Angeles supply. In conclusion, I think that it's going to be a real wild ride here. I'm really, really excited about our market. Everybody just hold on to your horses, and we'll see what happens. Okay? Thank you for your time. Really appreciate it.
All right. Now what you've all been waiting for, we're going to have Mark Lammas, our COO and CFO. Just a quick note, after he finishes, we're going to take a quick minute, reorganize the stage so that we can bring everybody back up, and then we'll do our Q&A. 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 to kickstart 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. I'll just dive right in. This morning, I'm going to walk you through three 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.
In addition, much of the underlying information can be found in our supplemental reports. 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 % of market cap has never exceeded mid-30%, 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 million inaugural bond offering last October, as well as the recent recast of our revolving and term loan facilities. We've similarly dramatically decreased the % 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. 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 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, I think our track record is clear. We've successfully grown our company around a commitment to a fundamentally sound and sustainable capital strategy. Let's turn to what you've no doubt been waiting for, our Bridge to Success 2.0, so to speak. We've brought it back, 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. You all know, I like to get into details, 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 2/1/2018 annualized through 2019 of 18%, or a 10% compounded annual growth rate, with nearly 70% of that contractual.
Two years ago, if you'll 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, one-third of the NOI projection is speculative, of course, significantly improves the predictability of our NOI growth. This next slide, we've provided a breakout of $61 million of embedded NOI growth from a combination of three contractual sources, the burn-off of upfront rent abatements, signed uncommenced and backfill leases, and contractual rent bumps under existing leases. Approximately $27 million, 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% and 5% respectively of base rents are included in this component of NOI, though tenant recoveries have been reduced by one-third to account for base year resets on gross leases. Approximately $16 million of embedded NOI growth results from executed, uncommenced, and backfill leases over the next seven 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 one-third 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 one-third of the tenant recoveries associated with the expiring leases being backfilled.
The remaining almost $18 million 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 first quarter 2016 annualized NOI. 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 million of speculative NOI growth from three 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 million of NOI growth from our studios.
This is projected incremental NOI, assuming we achieve 6% annual NOI growth over our trailing 12-month NOI for our same-store studio assets and annualized trailing six-month NOI for our Sunset Las Palmas Studios as of the end of Q1 2018. We are projecting another $6 million 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 seven months of downtime. This represents an approximately $20 million NOI growth offset. That takes us to the last component of potential additional NOI growth through 2019. $21 million associated with the lease-up of existing vacancy in our in-service and redevelopment properties. $4 million of the $21 million 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 million of NOI in this category. We've assumed average net absorption of 50,000 square feet per quarter, plus the lease-up of the Fourth & Traction asset until we reach 93.5% 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 seven 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 rent 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 million of NOI and 18% growth for full year 2019 is impressive. Our growth prospects don't end there. We have the mechanisms in place for NOI to reach $516 million beyond 2019, representing another 14% growth in comparison to our beginning in 2018.
$43 million of this additional $55 million 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 million 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. 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 punchline 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 $7.6 billion of total capitalization based on Monday's closing price of $33.86. $605 million of our enterprise value is attributable to our studios, based on a cap rate of 5.5% on Q1 2018 annualized NOI for Sunset Gower and Bronson, and 4.5% cap rate on Q1 2018 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 million is attributable to our land.
You can find a detailed description of our valuation assumptions for these land assets in the appendix. $165 million 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 million 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 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 sq ft 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 stabilization. The $2.3 billion 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 CUE nor Fourth and Traction were contributing cash NOI, so we valued 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 and apply as close to a 6% cap rate. As for CUE and Fourth and Traction, again, cost and yield assumptions are in our existing supplemental. We've applied a 5% cap rate on the stabilized NOI for these assets and deducted the remaining cost to complete. The resulting value was also not discounted to present value, similar to our other development properties.
The other components of our enterprise value, other assets and liabilities, and cash simply tie to our Q1 2018 balance sheet. The remaining $4.1 billion of enterprise value is attributable to our stabilized office portfolio. Q1 2018 annualized NOI for that portfolio was $268 million. 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. We'd be trading at $41.76 at a cap rate of 5%, and we'd be trading at $43.55 at a cap rate of 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 these 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, tackle development or 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? Did 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. First, I think you're not mic'd, right? Here, pass it around. I wanted to thank everybody for their participation today. We're going to open it up to questions. I'm sure some people have some questions at various different levels. I'm going to try Here he is. Yeah. Grand entrance. Who wants to start? Yes.
You talked a little bit about two parts. One, in terms of new markets, and the studio business on one side, how do you think about how much you want the studio business to be part of the portfolio? Is there a certain target or a certain level you don't want to get to? Second, in terms of international, I'll consider Canada international, so I don't know if you still have your passport, whether that gives you an element of going back home, getting into Vancouver, where there's a lot of institutional ownership, but how you think about that transition, and how close you are to doing that.
Great. Yeah. I'll take them both. On the first, the studio media business from our standpoint is going to be an ever-growing business. 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, we're not looking specifically today any specific asset. For us to enter a marketplace, we would have to do more than one deal. It wouldn't make any sense to go buy just a studio without a vision in, say, Vancouver or Atlanta, say we're done. We'd 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 net income aspect.
We've run that metrics, we feel comfortable that we can achieve the aspects there on a positive basis. Clearly the bigger question is the currency arbitrage, right? Today, I think it's $0.72 or something like that. Obviously that can swing both ways. Right now it's near a relative low for the last 4 or 5 years. It's right around the 70, 72, it hasn't moved. We have to keep that in consideration, too. Institutionally-wise, you're absolutely right. 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.
Would you use a partner?
Yeah, 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. Can you talk about some of the key regulatory risks in your office? I don't think you touched on that. The Seattle head tax. The question was, talk a little bit about the key regulatory risks in our marketplaces, because we actually didn't touch on it. There is several, and we can start right here in L.A. as the first. 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 L.A. right now is the city council and the mayor are in the process of putting a proposal in place that I think our team, Christopher Barton and Chris Pearson, who are the experts in the marketplace, and Chris is over in the left corner, you can talk to him after, feel that it's going to come through, which is upsizing on density. It will be a density and a height increase around all the metro areas of L.A. to increase the growth. It will be both on a residential and a commercial basis. It's the first time they're proposing that. Clearly, there has been a lot of talk in L.A., but also in all of our main markets on the homelessness issue and cost of living.
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 last Tuesday night. Did we go tonight, right? We went 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. The prelude to that, they were saying, "Hey, it's not the fact that it was $500. It's not the fact that it was $275. The fact is that there's no game plan." It was just tax them because they're making money.
The reality is, I think there's 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. Said it's not just the money, because we needed a plan, and we're all willing to contribute to what's going to happen and the validity of it. How much of those dollars are actually really going to get to the bottom line and what's going to happen? There's been, I think, a little bit of a shock around this just was sort of whimsically passed, and Amazon was the voice. I think a lot of the CEOs wish that they had a voice, too. Those are probably the two main ones that we've seen, but they both revolve around densification. Clearly, as you can see by our presentation, the biggest concern if you're a West Coast person, the biggest concern you would have is cost and affordability and future of residential.
That's going to trigger a lot of things that could be potentially unfortunate to our businesses. Yeah.
This is a combined question with Mark. You have a lot of growth delivery. You're not doing any common equity down here. You spoke about a JV partner. Maybe if you could wrap in your thoughts on funding of all this stuff that you have planned, and then Mark, how that affects your leverage ratio as part of how the dispositions factor in. I don't know if that's in your bridge or if that's incremental to based on whatever happens.
Yeah, that was an easy one. We provided a cash in a library, right? The funding considerations around, say, the Epic or West Side 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. If you're selling assets, do you?
Oh, fair enough. Yeah. No. Oh, sorry. I didn't quite appreciate that part of the question. Now, that analysis you just saw assumes no asset dispositions or acquisitions. We'll have to adjust, I suppose, if and when we make an announcement on either one of those fronts.
The capital aligned today to our currently in place development is already taken care of.
Yeah. We have $850 million of immediate capital availability, not counting cash and cash equivalents. Everything we have that we would potentially need to fund, even if we made no dispositions, is easily covered with what we've got.
Anybody else? Nobody's going to talk about Mark's stuff? It's so simple. Yeah.
I think Art mentioned that Westside Pavilion has lease negotiations with how they're building. Is that a couple of like users or are there multiple different-
Art, repeat it, please.
I think the question was, at Westside Pavilion, the activity we have, the negotiation we're in, is it multiple users? Is it one user? The answer is it's one user. The 1.2 million sq ft of active prospects, that's actually four users. As I mentioned, two of those are proactively test fitting the space now on their own nickel.
Victor, at the start, you talked about buying premium core product. With all the upside opportunity in redevelopment and new development, why would you put any capital to work at a low cap rate under long duration core asset?
We balance it out. I didn't say only solely core. It's going to be core plus, and value add. 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. 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. In a lot of those instances, we would probably bring a JV partner in.
For Drew, you talked about regulation being a bit of a supply constraint in the Silicon Valley. How about cost inflation affecting new supply and replacement costs?
Yeah. The question was the impacts of cost inflation on new supply and the cost of development, correct? I think there's two things. One is, as I think I mentioned in my presentation, as the cost of construction has increased, it's been forcing asking rents to go up. 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.
I think, too, and this goes to the VSP program that we've talked about, and Art 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, with the studio business, can you expand a little bit, talk about what sub-market within Atlanta that is expanding and sort of why Atlanta more than sort of other potential markets?
I'll take the latter, and then Alex is going to jump in on the former. The concern, and we've charted this for a long time, and I've been to all these other marketplaces and looked. 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 five, seven, and 10 years. 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 sub-markets.
Sure. 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. There's more production happening in Atlanta right now, when you factor in feature films and add it with 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's not too dissimilar to L.A.
Current ownership is fragmented, it's non-institutional, and with the scale and 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.
Can you, maybe a follow-up to that, can you just talk a little bit about what the size of the studio market is and put it into context with L.A.?
Yeah.
Just repeat that.
The question was just overall size of the market in Atlanta and how does that compare to L.A. I think if you look at Atlanta, if you even look at New York and even 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. 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 majors own their own facilities. Like I said, it's probably no more than 5 in any given market. When we look at number of stages in any of those facilities, they're very much akin to what we own in L.A.
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 and 100 stages. It's going to be very similar to what we've done here.
And just-
I would add to that, again, on the feature film side, only about 9% of feature films are done in L.A. now. Most of them are done either on location or in these very large sound stages that are in Atlanta. For example, take Marvel. 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 L.A. That feature film market's there. I think the second part of it is you have to divide television shows into an A level, which is the star-driven stuff, and the B level, which is the non-star driven stuff. You take, for example, Netflix show, "Stranger Things," which is a kids show, no stars in it, high-risk. They shot that in Atlanta.
I think you're going to see as these streaming companies grow, they'll have their A-level talent shooting in L.A. and sort of their B-level talent shooting in these lower-cost markets.
Just one other point, because I know there's going to be conversations over periods of time of these markets. That's not mutually exclusive to say we're not going to be buying in L.A. There still is potentially four studios that we could purchase in L.A. that we are still pursuing at various different levels, that are not marketed studios at this time, but we have relationships, so.
Maybe just continuing on the studios, can you just talk about the difference in cap rates and IRRs between L.A., Vancouver, Atlanta, and New York?
Yeah, go ahead, Alex. The question was, he's talking about the various different cap rates and IRRs between Los Angeles as opposed to the new markets that we're looking at.
Sure. In all these markets, there aren't trades that have occurred. To 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 returns and what we would look for would be outsized relative to what we maybe buy stabilized studios here in L.A.
[inaudible]
On an unlevered IRR basis, I would say high single digits or low double digits.
Alex, just to make sure to reconcile that back to the briefs we just provided. Our studios are undergoing a transformation in terms of the tenor of the leases. The majority of the stages now, the vast majority, all but 2 stages at Bronson are now under 10-plus year deals, with credit. Bronson is now seeing that very same trend. I mean, Gower's seeing that very same trend. We've naturally adjusted our historic cap rate valuation for those studios to reflect that long-term credit quality.
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 some $100 million. They're building 250,000 sq ft of new space, and they master leased it to Amazon, and they just got valued at $900 million at a little over a 4 cap. I think we're still very conservative on our numbers that Mark sort of put on the table. I know that chaps Alex more than anything else, but it's a deal that 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, round of applause, please.
I'd also like to just recognize Laura's team over there in the corner. Girls, please stand up. Natalie, Christie, Sam, and Lisa. And of course, Laura Campbell.
Great. 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 quick announcements. We have boxed lunches for you out in the foyer. 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 the airport, sorry. Our team will be outside and can help direct you. Also in your folders, we've included a survey. We are always looking for ways to improve. 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. You can pick that up, and they'll take your survey.
Most importantly, I echo Victor's sentiments that I want to just thank all of our presenters. This is not what they do every day, and it's a huge endeavor. Thank you all very much. Thanks to the entire management team for their support. I also want to thank our board for coming. Many of you are here, and we're honored to have you. It's really terrific. My team, you were awesome. I'm so glad that Victor recognized you. Thank you all so much, and we'll see you and talk to you very soon, I'm sure. Thanks.