Douglas T. Linde
President and Director at Boston Properties
Good morning, everybody. After a moment of silence to Bob. I'm going to start. In early 2023, we established our baseline leasing expectations for our portfolio of about three million square feet in occupancy. As Owen commented, we ended the year with 4.2 million square feet and the fourth quarter included our 467,000-square-foot early renewal with Snap at Santa Monica Business Park. We executed about 500,000 square feet more than we expected in 2023, and it was primarily pulling forward some 2024 transactions. The Snap lease was part of our baseline expectations and interestingly it was only one of two leases in excess of 130,000 square feet that we executed in the portfolio during the year.
On 12/31/22, so over just over a year ago our in-service occupancy was 88.6% and we finished the year 12/31/23 at 88.4, essentially flat. Our in-service portfolio is 49 million square feet, so 20 basis points amounts to 98,000 square feet, sort of a rounding error.
Maintaining portfolio occupancy in the current environment is an accomplishment in its own right. Our large lease expirations in 2024 are 200,000 square feet at 680 Folsom, 230,000 square feet at Seven Times Square where we own 55%, and 230,000 square feet at Carnegie Center and they all occur in the first half of the year. A few comments on WeWork. We are actively engaged in lease modification discussions at our four units Dock 72 in Brooklyn and our three sites in San Francisco. Our occupancy expectations assume we reach agreements that result in a smaller overall footprint and a reduction to the $33 million of rent, they are currently paying. To state the obvious that we work on mergers from bankruptcy as an operating business that is positioned for success. Mike will discuss the impacts in his same-store property performance for 2024.
In '23, the US often markets experienced negative leasing absorption. This included the BXP coastal cities as well as the major Sunbelt and Midwest markets basically everywhere.
How are we thinking about the broad market for '24? If you look at the most recent labor statistics, while the US added 216,000 jobs in December, only 5% were categorized as professional and business services, a.k.a., true office-using jobs. The pace of job reductions related to the slowdown in the business economy has slowed, but we continue to see employee layoff announcements across a wide variety of industries, particularly technology. The US economy may not enter a technical recession, but no one should assume that the soft lending is going to stimulate a pickup in office-using employment. Operating in this macro-environment, it's hard to envision any dramatic pickup in market leasing absorption in '24.
We think overall earnings growth for our clients and potential clients will improve and are optimistic it will lead to employment and space additions just not right away. However, we're not counting on a market recovery to maintain BXP's occupancy. Our leasing, construction, and property management teams will lean in on our operating prowess to gain new clients and market share as clients choose premier properties that are in sound financial condition for their workplaces. This is how we will lease known expirations and cover vacant space.
The bifurcation of client demand between the East Coast and the West Coast continues to be very wide. San Francisco, West LA, and Seattle are dependent on technology employers. Traditional technology demand growth continues to be weak and more times than not renewing technology clients are reducing their leased premises. Snap is a case in point. We were successful in executing a forward-starting 10-year lease extension commencing in '26 for 467,000 square feet. However, the transaction does include an early termination of 140,000 square feet at 12/31/24. We can't require clients to lease more space, but we can meet their workplace needs.
The leasing excitement on the West Coast in '23 was all about growth from AI organizations in the City of San Francisco, where we saw over a million square feet of positive absorption from the industry in the San Francisco CBD in '23. There have been billions of dollars of recent investment in this growing ecosystem, and there are additional clients in the market. But let's acknowledge that these other AI organizations are predominantly seed or early round funded entities and not at the same scale as an open AI or anthropic. Their leasing is focused on small footprint built opportunities that are available at significantly discounted terms, relative rents being achieved in premier. However, all demand is good demand in San Francisco, if it translates into absorption.
The Seattle CBD continues to have very little active demand other than lease expiration-driven exploration. Our vacancy in Seattle increased by about 100,000 square feet in the second half of '23 due to WeWork's termination as well as the giveback of a floor from a technology company as part of a five-floor lease extension at Madison Center, again technology company staying with us in our portfolio, but reducing some space.
The entertainment industry union contract settlements are clearly a positive for West LA but there continues to be pressure from streaming profitability, industry consolidation, and job reductions in the gaming and media space that is impacting overall demand growth. The concentration of the strongest user demand which will be the source of occupancy pickup is still broadly speaking, asset managers, including private equity venture, hedge funds, and specialized fund managers and their financial and legal advisors. These organizations are the heart and soul of our New York City activity and are an important sector of the Boston and San Francisco CBD demand as well. In some instances, these clients are growing their teams and capital under management but in many cases, or in all cases they want to occupy premier workplaces.
To illustrate the point, during the quarter, we completed a 25,000-square-foot expansion for an investment bank in Manhattan, a 17,000-square-foot lease with a foreign bank that's relocating to one of our other properties in Manhattan, a 10,000-square-foot lease with a venture capital firm that's relocating to Embarcadero Center, a 30,000 square-foot renewal with a private-equity firm at Embarcadero Center, a 74,000 square-foot renewal with the law firm at Embarcadero Center and a 15,000 square-foot renewal with a long-only manager in Boston. This is where the demand is going to come from.
Our strongest activity remains in our Midtown Manhattan portfolio, the Back Bay of Boston, the urban core of Reston Town Center in Northern Virginia, and our Embarcadero Center assets in San Francisco. This quarter we executed leases of about 74 transactions. We signed 37 lease renewals -- 37 leases with new tenants. There were eight contractions and nine expansions among our existing clients with a net reduction of about 100,000 square feet across those 17 transactions. If you exclude Snap, the number is actually a positive 40,000 square feet. The bulk of the transactions were on the West Coast and the majority of the expansions were in New York City.
Total leasing volume this quarter was led by New York at 567,000 square feet, then 468,000 square feet in LA, 198,000 square feet in San Francisco, 153,000 square feet in Boston, and 140,000 square feet in the Greater Washington DC area.
I would highlight two leases that were actually -- this quarter. First, the Pratt Institute entered into a long-term lease for 63,000 square feet at Dock 72, a real accomplishment for the New York team and DoorDash executed a 115,000 square-foot lease, including 57,000 square feet of expansion at 205th Avenue again in Manhattan.
The mark-to-market of the leases that commenced this quarter, meaning they hit our revenue was flat as reported in our supplemental. The overall mark-to-market of the starting cash rents on leases executed this quarter relative to the previous in-place cash rents was down 1.8%. The starting cash rents on leases we signed this quarter on second-generation space were up 7.5% in Boston, flat in New York, down 15% in D.C., and overall on the West Coast, down 3%, but the San Francisco CBD was still up 19%.
At the end of the quarter, we had signed leases that had yet to commence on our in-service vacancy totaling approximately 750,000 square feet with 625,000 square feet anticipated to commence in '24. Our pipeline of active leases under negotiation sits at just under a million square feet today. We have only one transaction currently in negotiation over 70,000 square feet. Comparing this to last quarter, we were at 1.2 million square feet of active discussions at the same time and included the 467,000 square-foot Snap deal. We've seen an uptick in the number of active deals, but the size is smaller.
For modeling purposes, our 2024 leasing activity is anticipated to be about 3.5 million square feet. As of January 1st, 2022, so going back two years, our total expirations for '24 totaled 3.5 million square feet. On January 1st, 2024, we have 2.7 million square feet of current expected expirations. If we renew 25% of the remaining 2024 expirations or 675,000 square feet it means we will have renewed about 43% of our expiring square footage, which is sort of in line with our historical averages. We have executed leases on 625,000 square feet of vacant space commencing in '24, so effectively we need about 1.4 million square feet of leases that we have yet to execute on 2024 vacant space to have a rent commencement during the year to maintain a flat occupancy. That's what is built into the model and into -- same store.
As we look forward into the year 2024, we expect to have sticky occupancy defined as 20 basis plus to minus 120 basis points negative at the year, and that also factors in some tenant defaults in addition to contractual explorations.
During the year, we will have property additions and subtractions to the portfolio. These are not included in the current portfolio occupancy guidance. As an example, in the fourth quarter of '24, the two Waltham Life Science developments will join the in-service portfolio. They are 32% leased and include 300,000 square feet of vacant space that will hit the reported vacancy that's not part of our projections. We're just looking at our service portfolio as of today. And as long as we're on the topic of life science leasing, new life science activity across our two markets, as well as our entire portfolio continues to be light.
During the quarter, we actually had 137,000 square-foot known expirations of a life science lease in our Waltham portfolio, which impacted our sequential occupancy and there were no new leases signed in South San Francisco at 651 Gateway. In Waltham, we are seeing some tour activity and have made some proposals, but potential clients don't feel a sense of urgency to make a quick decision.
Before Mike discusses our 2024 guidance, I want to make one additional comment around the cost of potential new developments that Owen described. We are seeing more competitive pricing and tenant improvement projects. We have not experienced deflation in material prices or labor, but it's true that there is less work and we believe that this has resulted in lower pricing from the various subcontractors who want to maintain a certain size of business. As we think about new base building construction costs, we're hopeful that escalation is no longer part of the conversation and that the same pressures will bids that allow us to consider moving forward. However, there are lots of infrastructure projects, as well as institutional construction that is building a portion of the void from lower commercial construction in our markets.
Capital costs still haven't been received. Construction financing requires a significant capital discards for lenders and obviously results in a higher margin on top of the underlying SOFR. Everyone has a view on the timing and depth of Fed rate cuts, but if silver [Phonetic] goes to 4%, construction financing, if you can arrange it is still going to be very expensive and a significant drag on new construction starts.
Current market rents and concessions associated with available existing space don't support office -- new office development. To a potential client that requests for proposal for new construction understands it will involve appropriate lease economics to justify the new capital requirements.
So, Mike, it's time to talk about the quarter and guidance for '24.
