Douglas Linde
President at Boston Properties
Thank you, Helen. And good morning everyone. Today, I will cover BXP's continued strong performance as demonstrated in our second quarter results, high-level trends in the economy and in-person work effecting BXP, current private equity capital market conditions for office real estate and BXPs capital allocation activities.
BXPs financial results for the second quarter reflect the continued positive impact of the post-pandemic reopening of the major cities, where we operate and the increasing needs for our clients for securing high-quality office space. Our FFO per share this quarter was well above both market consensus in the midpoint of our guidance, and we increased our forecast for full-year 2022. We completed 1.9 million square feet of leasing, more than 160% of our leasing volumes in the first quarter, and 140% of longer term average leasing activity for the second quarter. This success can again be attributed to not only our execution, but also the enhanced velocity achieved in the current marketplace for premium quality workspaces which are the hallmark of BXP's strategy and portfolio.
It's clear over the last quarter that economic conditions in the U.S. and globally have deteriorated. The key culprit is inflation, which as it continues to reach new highs set off a chain reaction of events, starting with the Federal Reserve taking in signaling severe tightening measures, interest rates rising across the yield curve, volatility and losses in the public equity and debt markets, and now, increasing concerns that the U.S. economy may experience a recession. This evolving operating environment is having several impacts to BXP's operating activities.
Though our leasing activity has been very strong for the last few quarters, we anticipate headwinds, at least in the short term. Business leaders are generally more reticent to make large capital allocation decisions, such as a lease in an uncertain economic environment. Before the summer season, office usage by our clients continue to gradually increase. There is increasing evidence, that many businesses have or will tighten up in-person work policies as economic conditions worsen. Many of these companies also significantly increase their workforce during the pandemic without increasing their available space. These factors should help offset at least partially the recessionary headwinds to space demand.
Our capital costs have increased, which Mike will cover in greater detail, due to higher interest rates and credit spreads and private market debt financing both for construction and existing assets a significantly more challenging to arrange. As discussed in prior quarters, inflation has increased construction costs for new development. Though the cost for our launch development pipeline are essentially already locked in, the cost of potential future developments continues to increase. We are not able to predict the depth or length of the current economic slowdown. As a result, we are positioning BXP for relative success regardless of the economy's trajectory, by carefully managing leverage, while continuing to selectively invest in opportunities with the highest return versus risk characteristics.
In terms of real estate capital markets, transaction volumes for office assets slowed to $18 billion in the second quarter, down 40% from the first quarter and flat to the second quarter last year. Though volumes are down, liquidity remains for the higher quality assets that often trade to institutional buyers not requiring leverage, Cap rates have increased at least 10 basis points for the highest-quality assets, with limited leasing exposure and more assets of lower quality and-or with riskier income streams.
Availability of financing is a key market driver. There were several transactions of note in the second quarter. In the Seaport District of Boston, a developer recapitalized 451 D Street with a fund manager for $708 million. This 480,000 square foot building was fully leased and pricing was just under $1,500 a square foot, and a 4% cap rate. In El Segundo, 555 South Aviation Boulevard sold for $206 million to a fund manager. This 260,000 square foot building is fully leased and was extensively renovated in 2018. Pricing was $790 a square foot, and a 5% cap rate. And lastly in Sunnyvale, Moffett Green was sold to a pension fund advisor for $875 million, The four-building 720,000 square foot complex is fully leased to Meta and sold for just over $1,200 a square foot and a 4.5% cap rate.
Regarding BXP's capital market activity, we closed on our previously described Madison Center acquisition in Seattle for $730 million and continue to selectively pursue acquisitions in our core markets with financial partners. On dispositions, we completed the sale of VA 95, an older 11-buildings 733,000 square foot suburban flex office park located in Springfield, Virginia for $27 million, which represents pricing of $173 a square foot, and a 6% cap rate. Bought in 1981 and developed by BXP over time VA 95 was an early and successful investment by BXP that no longer fits well with our corporate strategy. We are making good progress in the sale of several additional assets in the Washington DC market, which we intend to use to fund the Madison Center acquisition through reverse lifetime exchanges.
If these transactions are successful and including two sales already completed this year, total dispositions for 2022 could exceed $850 million million, allowing BXP to both raise incremental liquidity and reallocate capital on a tax-efficient basis from the Washington DC to the Seattle markets.
Our development pipeline continues to deliver accretive projects to our in-service portfolio and is consistently were charged with new starts. This quarter, we delivered 325 Main Street in Cambridge, a 414,000 square foot building, in which the office component is 100% leased to Google. Our $418 million investment in the project is estimated to have a first-year cash yield on cost of 8.7%. In Reston, Virginia, we commenced the development of a mixed-use project in Reston Next, comprising a four-storey 90,000 square foot jewel box office building and a 508-unit highly amenitized residential complex. Most of the residential units will be located in a notable 39-story tower, which will be the tallest building in Reston. BXP will own 100% of the office component and a 20% interest in the residential and partnership, with an institutional investor. This project is the next step in the full build-out of our very successful Reston Next development within Reston Town Center.
All of these movements with -- after all of these movements, our current development pipeline of 11 office, lab and residential projects, as well as View Boston, the observation deck at the Prudential Center aggregates 4.2 million square feet and $2.6 billion of investment that we project based on delivery date and lease up assumptions to add more than $190 million to our NOI over the next five years at a 7.5% average cash yield on cost when stabilized. The commercial component of our development pipeline is 49% preleased.
So in summary, we had another very successful quarter with above-expectation, financial performance, strong leasing success and significant investment in capital reallocation activity.
Let me turn the call over to Doug. Thanks, Owen. Good morning, everybody. So our last conference call is on May 3, and over the last 86 days, the conversations on the demand side of our business have really shifted from, as Owen described, return to work in space utilization to the pace of job growth and job reductions, as the impacts of the Fed's actions move their way through the economy. While leasing activity has slowed some across every market, new lease transactions that have been in documentation during the first half of the year across all of our markets and not just with our tenants, continue to move towards completion. In our portfolio, none of our active lease negotiations have been scrapped. And I think that's important relative to how we have seen other quote unquote dramatic slowdowns occur, where people and companies have become much more cautious about what they're doing. There is however, less urgency with clients to make new commitments. As we consider our expectations for leasing completions in the back half of 2023, we are obviously factoring in the impact of the slowdown in the macroeconomic activity, business performance and reduced overall demand for space. The availability rate, defined by third-party brokers that look at the entirety of the markets continues to appear to be very elevated across virtually every office market in the country, and our markets are no exception. Last quarter, we described the work that CBRE Econometrics did on the availability in the premier assets in the urban markets. Availability of space is at lower levels among premier buildings, these assets continue to get more than their proportionate share of market demand. And there are still premier building micro markets like the Back Bay in Boston or View Space and Class A buildings in San Francisco that are still performing really well, meaning rents and concessions are equal to, if not better than pre-pandemic. We have moved away from looking at the percentage of card access swipes relative to February of 2020. It seems to be talked about in that Wall Street Journal every day and are now measuring the daily and weekly utilization of seats. We've got pretty good data on daily utilization in our Boston Back Bay and New York City assets, where the customer makeup is dominated by traditional financial services, and professional services firms, i.e., very few technology companies. Here, we're seeing about 70% of the debts being used on a weekly basis, with about 50% of the employees using this space. three, four or five days a week. Now, when we compare utilization from 2020 pre-pandemic, the striking difference is the daily difference, where we saw 80% of the employees coming in three or more days a week in early 2020-2019. There was a ramp-up, as Owen said, between March and June, but it really has plateaued as we began the summer. Some business leaders, including few renowned technology CEOs are becoming sterner in their message to employees regarding the importance of in-person daily activities in traditional office space. This may lead to greater daily utilization as we end the summer holiday season. We'll be able to tell you about that as we look at our September data when we talk to you in October. In the last week, we've seen announcements from some of the tech titans Amazon, Meta, that acknowledge that they're trying to figure out how they're going to match their human capital with the utilization of physical space. Changes in the labor market supplier also going to impact these decisions. And as I said last quarter, I think this is going to be a journey, when any industry expert could tells you, they know how business is going to use their space, or what they even think remote or hybrid work actually means in 2024 is grossly overestimating their expertise. Getting to our performance. The second quarter was a great leasing quarter for BXP. This is now the fourth straight quarter of strong overall leasing activity in our portfolio. To remind everybody, beginning with the third quarter of 2021, we've signed 1.4 million, 1.8 million, 1,2 million and this quarter 1.9 million square feet of leases. So that 6.3 million square feet of signed leases in the last 12 months. This activity has occurred in the midst of the Delta variant the Omicron variant, remote work fits and starts and most importantly, significant labor market headwinds. As we speak to you this morning, we have signed leases on more than 975,000 square feet of in-service, vacant space that are not yet in our occupancy figures. About 50% is going to commence in 2022 and the remainder in 2023. At the end of the second quarter after completing the 1.9 million square feet of active leasing, we have an additional active lease portfolio in negotiation in the in-service portfolio of 1.3 million square feet. 640,000 square feet would cover currently vacant space, the most will go into service in 2023 and the other 650 involves currently leased space, so aka renewals or replacement tenants. Known expirations for the remainder of 2022 total under 1.7 millionft square feet. Over the last four quarters, our occupancy has improved by 90 basis points and stands at 89% as of June 30. We expect to see a slight decline over the next few quarters as we wait for all of these signed leases to commence, but in spite of even our less robust leasing expectations, we should see occupancy pick up slightly in 2023 from today's level. The development portfolio includes 1.1 millionft of signed leases that have yet to commence and that excludes the lease of 290 Binney Street. And these buildings are not included in our occupancy figures this quarter. Reston Next will be included in the in-service portfolio in 2022 without the 200,000 square feet signed Volkswagen lease that won't commence until 2023. We are going to see an increase in contribution from these assets, even though they will show a reduction in our reported in-service occupancy, A good portion of the vacancy in our Boston suburban portfolio is now comprised of space in buildings we have actually vacated, as we plan our next group of future life science conversions. When we commence redevelopment, these assets will be taken out of service. So let's talk about sort of my ranking of the markets, it goes into sort of three tranches. The Boston CBD stands out as the most active of our portfolio and it is by itself in the traugh tranche. And by CBD, I'm really referring to the Back Bay, because that's where we have the majority of our portfolio. The New York City, Reston Virginia really leases under 25,000 square feet; San Francisco, again, smaller tenants leases under 25,000 square feet; and Washington DC, DC CBD make up sort of the second tranche. And then Suburban Boston, South San Francisco, Mountain View, Princeton and West LA make up the third. Activity on the East Coast is stronger than activity on our West Coast portfolio. I think this is a function of the composition of customer demand, which has a much heavier weighting of market occupancy from traditional financial services, and professional services firms on the East Coast, versus technology and media companies on the West Coast. I think the big changes from the last quarter in our portfolio, are the increased level of leases we're actually working on in our DC CBD portfolio and then the slowdown we have seen in the Boston suburb. Now, to be fair, we completed over 220,000 square feet of suburban office leasing in the suburban Boston in-service portfolio during the second quarter, where the average market rent on second-generation space was up 34%. In addition, all of the life science leases we were negotiating at 880 Winter Street were executed this quarter. We signed three separate leases, totaling 72,000 square feet and that building, and it's now 97% leased with expected occupancy in September for the first tenant. We also signed two leases at 180 CityPoint, our next life science delivery totaling 140,000 square feet. So, if you include the 570,000 square feet on Binney Street, we actually executed over 775,000 square feet of life science leases during the quarter in our Boston portfolio. 2021 was an extraordinary leasing year for life science. And the slowdown we are now seeing in the office leasing activity is also being felt in the life science market in our suburban Boston and suburban San Francisco and suburban Montgomery County portfolio. The biotech Index, IBX is down significantly from a year ago and fewer private companies are getting funded, which translates into a drop in active requirements relative to last year. I would note, that the big pharma companies continue to have an appetite for new space in our markets. Early stage life science tenants and their investors, with an eye to slowing down their capital outflows are also pushing more of the capital spend needed to fit out space to the landlord in the form of a higher TI demand. In the Boston CBD, we completed 253,000 square feet of leases, the markup on that portfolio is 18%. More than 450,000 square feet of our leases in negotiation are in the Boston CBD portfolio, and that includes 200,000 square feet of retail space that had been vacant. In the San Francisco CBD, there have been a few more large tech tenants that have completed leases in sublease space, but the bulk of the activity on a direct basis has been north of market and it continues to be concentrated in the premier buildings with professional services and financial services firms. This quarter, we did nine leases, totaling 96,000 square feet in the CBD portfolio, and the leases had a second generation increase of 37%. We also completed two transactions in Mountain View, with an uptick of only 3%. In other positive news on the West Coast, we completed a 60,000 square foot lease for the top three floors, that are vacant at Safeco Plaza in Seattle. When we purchased the asset in 2021, our plan included a major repositioning of the public and amenity spaces at the Fourth Avenue and Third Avenue street plans. We have begun to introduce our repositioning plans for the building, and this combined with our proven track record in creating great places and spaces allowed us to win over a current BXP West Coast client to Safeco Plaza. Activity in the DC region was pretty light during the second quarter, with the office transactions totaling only 43,000 square feet and eight retail transactions totaling 39. But as we look forward, we're negotiating over 270,000 square feet of leases for the in-service portfolio and 95,000 square foot of leases at 2100 Pennsylvania Avenue our newest development in DC. In the New York region during the quarter, the most significant transaction was 125,000 square foot extension at General Motors Building that got signed in early April and I described last quarter. In addition, we completed another 168,000 square foot of leases across the portfolio. There were some ups and downs in the lease-to-lease rent comparison, but together the portfolio had a slightly positive under 1% mark-to-market on the leases executed during the second quarter. We have multi-floor lease negotiations underway at 399 Park Avenue, 601 Lex, and last week we signed a 71,000 square foot two-floor lease at Dock 72. Total active leases in the New York City portfolio as of July 1 was an excess of 260,000 square feet. We have had four consecutive strong quarters of office leasing. We have incremental development deliveries, hitting in 2022 that will be at the run-rate in 2023. We still expect occupancy improvement in 2023, though at a reduced rate based on the slowdown in the economy. We continue, as Owen said, to feel really good about our portfolio position in each market and our lack of meaningful lease expirations in 2023, just over 2 million square feet puts us in a great position entering the year. We have a strong balance sheet, with low floating rate exposure and near-term maturities, so debt financing costs are going to be higher in 2023. In addition to his commentary on the second quarter performance, Mike will discuss our internal interest rate expectations and our financing plans, Mike?
