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Good morning, and welcome to Boston Properties. Second Quarter and 2021 Earnings Call. This call is being recorded. [Operator Instructions].
At this time, I'd like to turn the conference over to Ms. Sara Buda, VP of Investor Relations for Boston Properties. Please go ahead.
Great. Thank you. Good morning, everybody, and welcome to Boston Properties Second Quarter 2021 Earnings Conference Call. The press release and supplemental package were distributed last night and furnished on Form 8-K.
In the supplemental package, the company has reconciled our non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investor Relations section of our website at investors.bxp.com. A webcast of this call will be available for 12 months.
At this time, we'd like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements.
I'd like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President; and our regional management teams will be available to address questions.
And now I'd like to turn the call over to Owen Thomas for his formal remarks.
Okay. Thank you, Sara, and good morning, everyone. I'm delighted to report that for the first time since the pandemic, I'm together with Doug, Mike, Sara and our Boston team for this earnings call, and all BXP employees returned to the office on July 6.
BXP is emerging from the pandemic with strength and momentum as evidenced by improving financial results and rapidly elevating leasing and investment activity. This morning, I will cover the economic recovery that is underway in the U.S.; BXP's momentum in terms of financial results and leasing; private equity capital market conditions, particularly for office real estate; and BXP's capital allocation activities focusing on 4 new investments we announced this quarter, including our official entry into several new markets.
So the U.S. economy, awash with fiscal and monetary stimulus, is roaring back as we exit the pandemic. U.S. GDP growth was 6.4% in the first quarter and predicted to be higher for the second quarter and for all of 2021. Over 850,000 jobs were created in June, and aggregate unemployment decreased to 5.9%. Industries that use offices have been less impacted by the pandemic and the employment rate for their workers is lower.
Despite the annual inflation rate rising to 5.4% in June, the 10-year U.S. treasury rate has dropped to around 1.3% and the Federal Reserve's rhetoric remains succinctly dovish, given it believes recent inflation is driven by transitory factors. High economic growth and low interest rates create the ideal environment for strong real estate investment performance.
Now BXP's financial results for the second quarter reflect the impacts of this recovery and an increasingly favorable economic environment. Our FFO per share this quarter was $0.10 above market consensus and $0.12 above our own forecast, which Mike will detail shortly. We completed 1.2 million square feet of leasing, more than double the volume we achieved in the first quarter and only 10% below our long-term second quarter averages.
Our clients are making long-term commitments, the leases signed in the second quarter at a weighted average term of 7.5 years. Many are expanding as was the case with 2 large media and tech clients in L.A. And building quality is increasingly important as evidenced by strong tour and leasing activity at the GM Building, Reston Town Center, Colorado Center and the view floors at Embarcadero Center.
We believe this activity and performance supports our repeatedly stated position that tenants are committed to the office as their location of choice to collaborate, innovate and train all critical for their long-term success and that concerns about the work-from-anywhere impact on the BXP footprint are overstated.
Moving to private equity market conditions. $15.7 billion of significant office assets were sold in the second quarter, flat to last quarter, up 77% from the second quarter a year ago and down approximately 44% from 2019 pre-pandemic levels, and it remains 23% of commercial real estate transaction activity. Cap rates are arguably declining for assets with limited lease rollover and anything life science related, given lower interest rates.
Notably in Cambridge this last quarter, a REIT agreed to purchase Charles Park vacant, though, with identified tenants for $815 million or $2,200 a square foot. Also One Memorial Drive in Cambridge, a fully-leased 409,000 square foot office asset, is under agreement to sell for $825 million or over $2,000 a square foot and a 3.8% initial cap rate.
Moving to BXP's capital market activity. We had a very active and successful quarter with acquisitions. All of the investment strategies we have described to you over the last several quarters are represented in the 4 new investments we recently announced, which aggregate almost 2 million square feet. These strategies are: grow in life sciences, enter the Seattle market, acquire high-quality assets that need redevelopment or refreshment at discounted valuations due to the pandemic; and acquire office assets in partnership with private equity investors through a joint venture investment program we set up with GIC and CPP, 2 leading global real estate investors.
So let's start with our official entry into the Seattle region with the acquisition of Safeco Plaza. We have previously discussed the Seattle areas having a strong real estate market as well as a logical expansion region for BXP's gateway strategy. The Puget Sound region is the headquarters location for leading global employers like Amazon and Microsoft and has one of the largest clusters of computer science workers in the U.S.
Seattle has experienced high levels of population and rent growth, given its expanding technology and life science employment base, and is much more affordable than other major technology markets, given no state of Washington income taxes and lower real estate costs for both office space and housing. Rent, land values and building values are lower in Seattle than any of our other core gateway markets.
The broader Puget Sound market has the scale and growth potential to afford us opportunities to both acquire and develop in multiple districts of Seattle, Bellevue and other Eastside markets. We have had a BXP executive, Kelley Lovshin, who's joined the call this morning, based in Seattle for well over a year. We have an attractive pipeline of additional investment opportunities currently under review and will build out a full-service real estate execution team over time.
Safeco Plaza comprises 800,000 square feet, has a LEED-Platinum certification and is located in the center of the Seattle CBD with convenient access to rail, ferry and highway transit option. The building is currently 90% leased with 6 years of weighted average lease term at rents that are approximately 30% below market. Safeco Plaza offers generous ceiling heights, 360-degree views and timeless architectural features. And our strategy is to refresh the ground plane lobby and amenities and re-lease the building at market rates in the coming years.
Liberty Mutual, which acquired Safeco, is the anchor tenant leasing 68% of the building. BXP will own either 51% or 33.3% of the property, depending on whether 1 or 2 private equity investors join the partnership. We believe our basis in the acquisition, which is $465 million or $581 a square foot, is very favorable relative to replacement costs and recent office trading activity in the Seattle market.
We believe Safeco Plaza to be a very attractive investment opportunity with a future redevelopment play, given the quality and location of the building, our going-in basis as well as the cash flow we receive from existing tenants during the refreshment process. We have a nonrefundable deposit posted and intend to close the acquisition in early September.
We are also entering a new submarket for BXP, Midtown South in New York City with the acquisition of 360 Park Avenue South. Midtown South has become New York's strongest submarket in terms of rent growth and vacancy, given it is the preferred location for many technology occupiers, New York City's most rapidly growing business segment. 360 Park Avenue South comprises 450,000 square feet and is in a prime location at the corner of 26th Street, 1 block from Madison Square Park.
The transaction will close and the building will be vacated by a long-term corporate user later this year, which provides us the opportunity to plan in advance and subsequently execute a complete refreshment of the building. With generous ceiling heights and a unique elevator configuration, allowing for 2 separate dedicated lobbies, we believe the building will appeal to both large and medium-sized users seeking marketing and brand expression opportunities with their space.
In terms of economics, we're paying $300 million for the building or $667 a square foot, which leaves us significant latitude relative to comparable sales to budget generous building enhancements. The acquisition structure is also creative and we think favorable for BXP. Consideration for the purchase will be the assumption of a $202 million mortgage on the property and the issuance of $98 million of OP units in BXP's operating partnership.
We are committed to complete the transaction on December 1 of this year, and the number of OP Units issued at closing will be determined by BXP stock price at that time, but with a floor of $111 a share. In other words, we would benefit by issuing fewer units if our share price continues to rise through the closing date, but our downside is capped by a floor. Most importantly, the tax deferral inherent in our contribution structure distinguished our proposal such that it did not have to be the highest price to yield the seller the highest after-tax value.
One of our joint venture investment program partners will likely join this investment by funding all of the capital needed for the refreshment resulting in their owning up to a 50% interest in the project over time.
Next on acquisitions, we added to our life science business and entered the Montgomery County, Maryland life science market through the acquisition of a 7-building 435,000 square foot office park located in close proximity to the Shady Grove Life Sciences Center, the premier cluster for life sciences in the Washington, D.C. region. Montgomery County is the fourth largest life science market in the U.S. and home or proximate to several large biomedical institutions such as NIH, FDA, John Hopkins University and the University of Maryland.
The 4 million square foot Shady Grove submarket at the epicenter is currently 3% vacant with rising rents. We are paying $116.5 million for the asset or $267 a square foot and intend to convert the entire park to lab and life science use over time. There are 7 buildings in total, 3 of which are vacant and will be converted to lab immediately. The remaining 4 buildings are 63% leased and will be converted to lab use as leases expire and office tenants vacate over the next few years.
The entire site is 31 acres and can accommodate additional ground-up development depending on demand. There is a strong backlog of space requirements in the market, and we are already competing for a large build-to-suit in addition to other requirements. We have a nonrefundable deposit posted and plan to close the acquisition in August.
And lastly, in the second quarter, we completed another life science acquisition, 153 and 211 Second Avenue in Waltham, Massachusetts. These 2 existing lab buildings comprising 154,000 square feet and 100% leased to Sanofi are located immediately adjacent to our 200 West Street lab conversion property, which is almost complete and expected to deliver in the fourth quarter of this year.
This was an off-market transaction completed at a price of $100 million or $650 a square foot and a 6.4% initial cap rate. Sanofi's lease is short term and below market. The site comprises 14 acres and has 120,000 square feet of additional development rights, which could be increased when combined with the excess development capacity of our adjacent 200 West Street site.
Life sciences is a rapidly growing segment of our overall business. Today, Life sciences at BXP is 3 million square feet, representing 6.4% of our total revenue. We have 920,000 square feet of lab redevelopment and development projects currently underway that are experiencing strong user demand and expected to deliver in the next 36 months. And we have approximately 5.5 million square feet of future conversion and development opportunities under our control in the Cambridge, Waltham, Lexington, South San Francisco and now Montgomery County markets. Within 5 years, assuming continued strong market conditions, we could more than double the amount of BXP's revenue that is generated from the life science sector.
Regarding dispositions, we have an agreement to sell our Spring Street Office Park in Lexington, Mass, for $192 million or $575 a square foot. We expect the sale to close in September as part of an exchange with the 2 life science acquisitions mentioned previously. Year-to-date, we've completed or committed to dispositions aggregating $225 million in our share of gross proceeds and are considering additional asset sales in 2021.
And as a reminder on investment activities, though we did not add to or deliver from our active development pipeline this quarter, we have 4.3 million square feet of development underway that is 71% pre-leased and projected to add approximately $190 million to our NOI and 3.7% to our annual NOI growth over the next 3 years.
On a final and important personnel note, John Powers, who, as you know, is the Head of our New York region, told us he would like to retire at the end of this year. We conducted a thorough external and internal search and are very excited to have Hilary Spann join BXP as an Executive Vice President. Hilary has many years of real estate, management and investment experience as a senior officer of CPP and prior at JPMorgan Investment Management, having completed $12 billion in investments in New York City alone. Hilary will join BXP after Labor Day and commence her duties as New York Regional Manager at the beginning of 2022.
So in summary, we had a very active and successful second quarter with strong financial results and multiple new business wins in the leasing and investment markets. BXP has a strong growth ramp, driven by improving economic conditions and leasing activity, the recovery of our variable revenue streams, delivery of a well-leased development pipeline, completion now of 4 new acquisitions, a strong balance sheet and capital allocated from large-scale private equity partners to pursue new investment opportunities as the pandemic recedes, a rapidly expanding life science portfolio in the nation's hottest life science markets as well as low interest rates and decreasing capital costs.
Finally, I want to express my sincere appreciation for the BXP team, which is back at the office, serving our clients and winning new mandates with great care, expertise and enthusiasm.
Over to Doug.
Thanks, Owen. Good morning, everybody. Obviously, we have a lot to talk about on the transactional side. I'm sure there'll be some questions on that, but I do want to spend a few minutes talking about the leasing markets and the activity that we're seeing.
There's certainly no question that we're on the precipice of significant change in the atmosphere around in-person work. But more announcements come out every day. The fact remains, there's still some uncertainty and there's some repetition about COVID-19, the Delta variant and whatever the next thing is going to be.
So the transition period that we are now in, as many organizations like ours encourage or require their employees to come back to work, it's going to take some time. So there are going to be some ramifications to that. Many of you participated in our NAREIT meetings, and my comments this morning about impact on work from home, I think, are going to be pretty consistent with what we talked about during that conference.
The impacts on space needs, they are going to really vary depending upon the size of organizations, which we like to put in 3 categories. So the first are the really large employers. And honestly, they are moving forward with plans for space based on long-term growth plans, hiring that's occurred over the last 16 months and thousands of open job requirements that they are trying to fill right now.
Then you have really small organizations that are very stable. And they have all recognized that very little is going to change regarding how they utilize the real estate. Maybe some will work more from outside the office, but everyone is going to continue to have a dedicated workspace in their facilities, and they're really not impacting the amount of space they have.
And then there's a third group, which is an important group. And the third group of midsized organizations or younger companies that are experiencing growth, but where it's very unclear is how their organizational culture is effectively going to be built, if people are or aren't in physical contact. And I think those companies are going to have to take some time to figure that out. Will it work or won't it work? And we don't believe that this is going to happen immediately. We think it's going to take 6 to 12 months. And it's going to really depend, quite frankly, on how they're doing from a competitive perspective, how are their peers doing in their industries and does it matter that they're not in contact with each other all the time.
When surveyed, most employers prefer to have their teams together as much as possible to enhance efficiency and collaboration and serendipitous idea generation, et cetera, while many employees declare their preferences for some or more remote work. Well, with a tight labor market, employers are acknowledging the reality. There will be an increase of work that takes place outside the office, and this will incrementally moderate some space growth in the short term. But these same companies may over time add collaborative spaces to accommodate their teams when they're all getting together, and they may eventually decide that people need to be back more frequently.
Unlike any other prior recession, there have been thousands and thousands of new positions created and there are lots and lots of job openings across the service sectors, the technology sectors, the life science sectors, the generators of office demand in our markets. And we believe many of these jobs are going to lead to space absorption over the coming years.
Employees are returning to their offices with very few reminders of COVID restrictions, and they're getting together formally in meeting rooms and collaboration areas, and they're taking the time to reconnect their breakfast and lunch and dinner in restaurants. In many of our CBD assets, we have access control, so we can sort of see what's been going on in our competitive building set. So comparing to February of 2020 in New York City, about 50% of the employees who had cards are now coming to the office at least once a week. And that number is about 34% in Boston and 20% in San Francisco. So it's very different from market to market.
Our sequential parking income grew about 20% from the first quarter. And while we've not seen monthly parking permits pick up, tenants are driving in and paying for daily parking. We actually think that monthly parking permits will be a good indicator for the increase of office frequency in Boston and San Francisco. In Boston, true transient parking is actually up, and we've actually had to close portions of the Prudential Center garage around lunchtime every day during a couple of days in July due to lack of capacity, believe it or not.
At Embarcadero Center, we've seen about a 20% pickup from the low point on monthly parking, but we're still only at 60% of our historical high. So we have a long ways to go on parking. We expect to see improvements during the rest of the year. And at the end of the year, we think we're going to be at about 70% of where we were in 2019 on a full year comparative basis.
As you listen to the apartment company calls, you're hearing about the dramatic increase in occupancy in urban areas. The employees are moving back into the cities, into those same apartments, which, by the way, didn't grow during the pandemic. And so unlikely they're planning on working at home in those apartments on a frequent basis. And we're seeing this in our portfolio as we move from 51% occupancy in January to 82% at the Hub House project, that's the Hub on Causeway project, from 10% to 41% at Skyline in Oakland and from 79% to 93% at Reston Signature.
And then our restaurant activity is up materially and only is really being limited now by the challenges that the operators are having with labor, both in the front and the back of the house. We have begun to move away from percentage rent assistance to our retail tenants and back to contractual fixed rent. Believe it or not, in Reston, we actually had a tenant request a modification back to fixed rent because the percentage rent was creating a higher payment to us.
Sublet space continues to be a major topic during many of our conversations with investors. Last quarter, I described the dynamics of opportunistic sublet space and discussed our belief that many of the visceral announcements made by tenants that we're putting space on the market would reverse as organizations begin to plan their in-person work strategy again. This quarter at 535 Mission, a tech company without subletting any space, withdrew 40% of their 100,000 square foot availability. In Manhattan, CBRE is reporting that there has been a drop of about 5.9 million square feet out of a total of 19.3 million square feet that was put on post-COVID, and about 67% of that was backfilled by the prime tenant.
Yes, there is a lot of sublet space on the market, but a large portion is going to be reoccupied. Some is not actionable because of short terms. It has unworkable existing conditions or, quite frankly, users just don't like the comfort of the lessor's profile. And some of it is getting leased, like the 3 floors that were completed at 680 Folsom in San Francisco that Macys.com had on a sublet market. The headwinds from sublet space exists, but they are going to dissipate as companies begin to come back to work.
Now as I pivot my remarks to the Boston Properties office and life science portfolio specifically, I'm going to describe a level of activity that I think is counter to the headlines of weak market conditions across the office sector in the United States. The BXP portfolio includes a number of iconic, high-quality, well-maintained and continually upgraded assets. When there is market weakness, our assets outperform. We spent a lot of time discussing our portfolio vacancy last quarter and our forward expectations. We experienced quicker-than-expected revenue commencement on signed leases and saw basically flat vacancy relative to the prior quarter.
We were down 10 basis points on a 45 million square foot portfolio. And this included taking back 66,000 square feet of nonrevenue space that I talked about last quarter at The Hub on Causeway from the cinema that had never opened. We now have new signed leases for 640,000 square feet of space that have yet to commence and are not included in our occupied in-service portfolio. So on a relative basis, here's my view of the markets, and I'm making it based upon activity in the portfolio, active lease negotiations, tours, RFPs from best to least.
Boston Waltham, we don't have any available space in Cambridge, so we have no activity there. San Francisco CBD, Northern Virginia, Midtown Manhattan, Peninsula, Silicon Valley, West L.A., Princeton and finally, D.C. CBD. All the transactions I'm going to talk about are post-COVID negotiations, meaning they all began in the latter half of '20 or into 2021. So just to change things up this quarter, let's start with L.A.
Last quarter, I acknowledged our disappointment that we were unable to keep a 200,000 square foot tenant at the Santa Monica Business Park. Less than 30 days later, we had a signed lease for 140,000 square feet of that space to a growing tech company. During May, we completed a 350,000 square foot long-term extension and expansion at Colorado Center with a media company. In total, this 490,000 square feet had a weighted average expiring rent that was effectively equal to the starting rent of that space, and 200,000 square feet of the expiring rents were at above-market holdovers.
This follows our immediate release of the 70,000 square feet vacancy that we had from a defaulting tenant in the first quarter. We have a number of smaller deals in negotiation in Santa Monica Business Park, and we're responding to requests from tenants that would prefer to go direct on some of the sublet availability at Colorado Center.
In Boston, during the second quarter, in the CBD, we signed 6 leases totaling 55,000 square feet, and the average rent starting represented a gross roll-off of about 20%. In each case, the tenant was either renewing or expanding. We have 7 additional leases in the works totaling 70,000 square feet. Obviously, most of them are small, since we don't have much in the way of availability in our Boston portfolio.
In the suburban Boston portfolio, we completed 60,000 square feet. The average weighted cash rent on those leases was up 17%. Life science organizations are dominating activity in this market. We commenced construction on 880 Winter Street, that's the lab life science renovation that we're doing in Waltham, and have signed an LOI for 16,000 square feet. We started the building on July 5 and are exchanging proposals with over 180,000 square feet of tenants for the 220,000 square foot building, and it will be delivering in August of next year. We've been responding to new inquiries just about every week on that space. Asking rents in the market for lab space are in the high 60s to mid-70s triple net, which are well above our underwriting when we planned this project about 15 months ago.
Many of you have been asking about inflation and construction costs. When we do our construction budgeting, we always include an escalation expectation. So those numbers are baked into those numbers in our supplemental. It varies depending upon the labor market conditions, subcontractor availability and material costs. We bid and our on budget for both 880 Winter Street and 180 CityPoint. So we figured out what the escalation would be and we hit it. Currently, we're carrying about a 4% to 6% escalation for base building jobs that we would bid in 12 months.
Now turning back to leasing. In Waltham, we're negotiating leases for another 70,000 square feet of space with life science companies at Bay Colony, that's adjacent to 880 Winter Street, and our Reservoir Place building. Our new acquisitions at 211, 153 Second, which Owen described, have a lease expiration in the late '22, and the current rental rates on the space are dramatically below market. The expirations will land right in the sweet spot of the current demand in the Boston and the Waltham and the Lexington submarkets. There is some pure office demand in the market. And with more and more buildings being converted to life science, we actually expect the office market is going to tighten dramatically over the next few years.
In New York, we continue to have significantly more tours than we had in comparable periods in 2019, and the second quarter is actually up significantly on a sequential basis from the first. We completed 10 office leases totaling 90,000 square feet, including another full floor expansion at 399. In total, gross rents on leases signed this quarter were about 20% lower than the in-place rents. We are negotiating over 400,000 square feet of additional leases, including almost 250,000 square feet at Dock 72.
The majority of the New York City leases will be for terms in excess of 10 years, and we include 2 more expanding tenants at 399 Park Avenue. Activity at the street plane of the buildings is also picking up. We signed up a new fitness provider at 601 Lex, a new fast casual restaurant at 399. And we're negotiating a lease for all of the available restaurant base at Times Square Tower, and we plan on opening The Hugh culinary collective at 601 Lexington in September.
In Reston, our buildings continue to have extensive activity. This quarter, we completed over 170,000 square feet of leasing, of which more than 100,000 square feet was on vacant space. In addition, we have active negotiations on another 72,000 square feet, including almost 60,000 square feet of currently vacant space. Reston Next is moving towards completion with the first tenant expected to take occupancy by the end of 2021. We have another 85,000 square feet of office renewals in negotiation in Springfield, Virginia. Retail leasing is roaring back in Reston Town Center. We've negotiated 35,000 square feet of restaurant transactions and have almost 100,000 square feet of cinema, fitness and soft good transactions in the Town Center.
Pedestrian activity in Reston Town Center is as active as any location in our portfolio. Office rents are basically flat to slightly down on the re-let, since the expiring cash rents have been contractually increasing by 2.5% to 3% for the last 10 years.
In San Francisco CBD, we completed 5 transactions totaling 54,000 square feet with an average roll up of 8%. Why is it so low this quarter? While the square footage was impacted by a full floor transaction, it starts in the mid-90s where the tenant elected to forgo any TIs for a lower rent. If you exclude that transaction, the mark-to-market would have been 17%. In addition, we have 8 active lease negotiations involving 143,000 square feet with an average rent starting of over $100 a square foot. That's over $100 a square foot in this purportedly terrible market in San Francisco.
The bulk of these spaces are in the higher floors in Embarcadero Center, and they all have used. Pedestrian activity at the street plane, particularly in the CBD of San Francisco, has improved over the last quarter, but it's still well behind Boston, Reston and New York. And this has affected tenants' appetite for making space decisions. However, medium-sized technology users have begun to look for space. Sublease absorption has picked up in the city with about 1 million square feet of withdrawals or completed transactions. And as I said earlier, Macys.com did 104,000 square feet at 680 Folsom, our building.
In Mountain View, we continue to see a constant flow of medical device and alternative energy and automotive and other R&D users looking for space. We completed a full building lease with an energy company with a healthy 60% markup in rent. And we have another 21,000 square foot lease in negotiation. There are some large tech tenants in the market today looking for expansion space, and one recently executed leases for about 700,000 square feet of availability that was in Santa Clara. We are certainly pursuing those tenants for Platform 16, and we have begun internal discussions about the appropriate time for the speculative restart of this building.
So to summarize, our leasing activity in the second quarter accelerated. Our portfolio is in great shape in L.A. We continue to see strong economic transactions in the CBD of Boston, our suburban Boston portfolio and the CBD of San Francisco. We have significant activity in Reston and are covering our vacancy. New York tour activity is strong. We're doing deals, but economic terms are weaker. We are expanding our life science investments across the company. And in Greater Boston and South San Francisco, our new construction is seeing strong demand at escalating rents. Mike?
Thank you, Doug. I'm going to start my comments by describing our earnings results, which, as Owen mentioned, significantly beat our expectations. We reported FFO for the quarter of $1.72 per share, which is $0.12 per share better than the midpoint of our guidance. About $0.06 of our outperformance came from earlier-than-anticipated leasing and better parking, retail and hotel performance, which I would consider core revenue outperformance. The other $0.06 is from unbudgeted termination income and expense deferrals that we expect to incur in the third quarter.
Our office portfolio beat our expectations by approximately $0.02 per share from accelerated leasing. We had several larger leases commence earlier than we expected, including our 350,000 square foot renewal and expansion with a large media tenant in L.A., a 65,000 square foot health care firm in suburban Boston and 3 technology tenants in Reston totaling over 100,000 square feet. All of these leases were in our full year assumptions and were completed faster than we anticipated.
Leasing in our residential portfolio also improved this quarter, exceeding our revenue projections by $0.01. The improvement was across the board with our stabilized residential buildings exceeding our occupancy assumptions by 100 to 200 basis points and the recently delivered projects at The Hub House in Boston and Skyline in Oakland seeing even stronger absorption. While market rents continue to be below pre-pandemic levels, concessions are starting to dissipate.
Our parking, hotel and retail income exceeded our expectations by $0.03 per share. As Doug detailed, these components of our income stream have started to improve, which should continue as activity levels grow in our cities. The other 2 areas where we exceeded expectations were in termination income and lower operating expenses. Our termination income totaled $6.1 million, which was $0.03 above our budget. It came from 2 sources. First, at 399 Park Avenue, the building is full, and we have more demand than available space. This quarter, we were able to accommodate one of our expanding financial services tenants by recapturing 50,000 square feet from another tenant. The transaction resulted in $2 million of termination income in the quarter.
And second, we received about $4 million in unexpected settlement income from tenants who defaulted on their leases last year. We categorized this as termination income. While we anticipate a modest amount of termination income every quarter, we do not assume receiving any additional settlement income this year.
Finally, in our operating expense line, our maintenance expenses came in $0.03 per share lower than we anticipated. We've deferred these costs and expect it will be incurred in the third quarter.
One other item I'd like to point out is that we reported second quarter same property NOI growth of 8.9% on a GAAP basis and 7.5% on a cash basis over the second quarter 2020. The strong increase, honestly, is primarily due to the charges for accrued rent and accounts receivable we took in 2020 related to tenants impacted by the pandemic. If you net out last year's charges, our GAAP same-property NOI dropped by 1% year-over-year due to lower occupancy. However, our cash same-property NOI grew by 3.8% year-over-year, as free rent periods expired, and we've converted those to cash rents in 2021.
This quarter's leasing statistics also require explanation. The total company in New York City leasing in particularly were negatively impacted by 2 retail leases in New York City. Excluding retail, the mark-to-market on our New York City office leases was positive 6% on a gross basis and positive 8% on a net basis. And office leases in the total portfolio demonstrated strong rental increases of 14% growth and 21% net.
Now I'd like to turn to our expectations for the rest of 2021. For the third quarter, we provided guidance of $1.68 to $1.70 per share, $0.03 above consensus estimates at the midpoint. At the midpoint, our third-party guidance -- our third quarter guidance is $0.03 per share lower than our second quarter FFO. Again, this is due to the outsized termination income and expense deferrals from the second quarter. Net of those 2 items, our third quarter guidance is $0.02 to $0.04 per share higher than the second quarter.
In the office portfolio, our occupancy exceeded expectations in the second quarter due to early lease commencements. For the rest of 2021, we anticipate occupancy will be relatively steady. As Doug mentioned, we have 640,000 square feet of signed leases that have not yet commenced occupancy. We expect 450,000 square feet of these leases to occupy before year-end.
In addition, we have another approximate 600,000 square feet of both renewal and new leases in the works for 2021 occupancy. This activity, combined with already signed leases, are expected to cover the 1.1 million square feet of lease expirations that remain in 2021. With stable occupancy, the current run rate for the in-service portfolio is a good proxy for the rest of 2021.
We are expecting consistent quarterly improvement from our other income sources, primarily from our parking and the continued lease-up of our recently delivered residential properties. Our assumptions result in $0.02 of projected incremental NOI growth from -- in the third quarter from these sources.
We also expect growth from the acquisitions that Owen described. Acquisition activity, net of dispositions, will add approximately $0.01 to our third quarter NOI and $0.02 to the fourth quarter.
So in summary, after adjusting for $0.06 of higher termination income and deferred expenses from the second quarter, we project our in-service portfolio for the third quarter to be higher by $0.02 at the midpoint and our net acquisition and disposition activity to contribute $0.01.
While we are not delivering any developments into service in the third quarter, we anticipate incremental growth from developments in the fourth quarter that will accelerate in 2022. We anticipate that we'll start to recognize revenue as the first tenants commence the occupancy at our $270 million Hub on Causeway office tower in Boston in the fourth quarter. And by mid-'22, we expect this project that is currently 95% leased to be generating a stabilized NOI.
We also expect to deliver our $50 million life science lab conversion at 200 West Street that is 100% leased in December of this year. It will be at its full run rate in 2022. Our development deliveries will accelerate and be more meaningful to our earnings growth in 2022. In addition to the deliveries in Q4 of this year, next year, we have $1.7 billion of developments slated for delivery and initial occupancy, and they're 85% leased in the aggregate.
Overall, we're thrilled with our results this quarter as the markets continue to recover. Our leasing activity is exceeding our expectations. Our variable income streams are improving. Our development pipeline is on track to add future growth. And we're taking advantage of opportunities to acquire some unique assets at favorable prices that we expect will generate additional future earnings growth and value creation.
Operator, that completes our formal remarks. Can you please open the line for questions?
[Operator Instructions]. Your first question comes from the line of Alexander Goldfarb with Piper Sandler.
The first question is, Mike, as you guys think about your earnings growth and dividend growth, you have the new $2 billion JV, which obviously provides a lot of capital that it lessens the need for dispositions or external -- raising external equity. So with the potential for more dispositions this year, is the BXP view that earnings growth and dividend growth will come first, meaning that dispositions will be limited in such a way that it really won't impair FFO growth? And that way, all the development and life science stuff and all the good stuff that we see will flow through into earnings next year, the year after, et cetera?
Yes. I mean, Alex, our goal is to continue to grow our earnings over time, no doubt about it. And we've got a very significant development pipeline and acquisition pipeline that we're working through to add to that growth over time that should result in additional dividend growth over time. So dispositions are a way to recycle capital. And we select assets based upon what we think their growth potential is, and we reinvest that capital into assets that we think are going to generate higher returns over time.
Yes. The only thing I would add is we've been selling $200 million to $300 million of noncore assets for about 5 to 7 years, and we're running out. We have fewer of them in terms of the noncore assets.
Okay. That doesn't sound like such a bad thing. It sounds like you've cleaned the cupboard well. The next question is the rebound in the ancillary income, meaning the parking, the hotel and the retail. I think last quarter, you guys spoke about $130 million or so of sort of missing income that was impacted by the COVID shutdowns. How much of this was back in the second quarter? And then what are your thoughts for timing of full restoration?
So the -- it was actually revenue of $130 million that we were talking about in those areas. We do have some of it back. Obviously, the hotel, which used to generate about $15 million of NOI is still losing money. So that has not -- it's improved slightly, but it hasn't improved significantly at all. And the other areas on an NOI basis, we are somewhere around $60 million to $65 million short of where we were before on the retail and the parking.
Yes. Like I said -- so we're -- with the end of the year, we're going to be at about 70% of our parking revenue. So that's a meaningful number for 2022 as people really start ramping up our monthly parking again.
Your next question comes from the line of Steve Sakwa with Evercore ISI.
I appreciate all the detail. And Mike, you sort of talked about occupancy kind of trending flat the back half of the year. I realize it's early to really give guidance or think about '22. But when you just sort of talk to your tenants and you think about next year's expirations and you kind of look at your pipeline, I guess, I'm trying to just sort of think through when you think the occupancy really starts to ramp in the portfolio? And how long do you think it takes you to get back to what you would consider to be normal occupancy?
So Steve, this is Doug. I'd answer the question in the following manner. We have relatively modest amounts of rollover in 2022. And we are covering vacancy today. The increase in our development activities that will happen in early '22 or late '21 are effectively buildings that are 100% leased. So if you look at our portfolio occupancy in the first few quarters of 2021, it will be picking up. I'm not smart enough to tell you when we're -- when we get to 92% or 93%. But that's -- I'd say that's the path we're on.
We're -- today, we're very high, 88%, I think what, 88.6% this quarter. So I would hope that by the end of next year, we're going to be in the 90s again. And we may be significantly higher than that depending upon the recovery in the market, and honestly, how well we do with our life science developments. Because right now, we are developing stuff that we believe we'll deliver are 100% occupied.
I think the other thing I would just add is, look, our rollover is modest. It's 6% in '22 and 5% in '23. A big chunk of it is in Boston, which is our strongest market. So we think we're going to do well there, and we're going to have roll-ups there. We also have some in San Francisco in the CBD, where again, I think we're going to see roll-ups. And as Doug described, we're already working on a lot of early renewals for '22 expirations that we think will exhibit roll-ups. There's very little in L.A. There's very little in D.C. And New York City has about 500,000 square feet in 2022.
Okay. And then maybe secondly, I don't know if this is for Owen or Doug, just maybe a little bit more commentary on the Seattle entrants. The Safeco sounds like it's got a little bit of vacancy for you to lease up. But I'm just curious sort of what other opportunities you might be pursuing? And I assume you're looking on both sides of the lake. And I assume it would have some kind of development focus. But maybe just expand a little bit on Seattle comments.
Steve, I'll start and Doug may want to jump in. As I mentioned in my remarks, I -- we have a very active pipeline of investments that we've been reviewing for probably 6 to 9 months. Kelley Lovshin, who is on the call, moved to Seattle in February of 2020. And with her help on the ground, it's been a very active pipeline. I think it's robust because it's: one, both acquisitions and development; and two, as you're suggesting, it's in multiple geographies. So we've been looking in the CBD of Seattle where Safeco is. We've been looking at South Lake Union. We've been looking at the Bellevue area and to the east of there. So -- we think there -- it's a robust pipeline, and I think we will have success in growing out our region in Seattle in the near and medium term.
And regarding Safeco, Steve, look, we are not looking to buy stabilized beautiful assets that are achieving a stabilized return of 3.5% to 5%, okay? That's not what we're doing. We're looking to find assets where we can create value through our operating prowess. And if you look at Safeco Plaza, it's an 800,000 square foot building that was built in the late 60s. It's got great bones. It's got great ceiling highs. It's got great views. And it's fine from an architectural perspective in the interior, but it's not fabulous.
And our goal is to do what we did at 100 Federal Street with that asset, which was make that building something that it wasn't, which was a building that tenants wanted to go to as opposed to just another nice building in a CBD that was sort of moving one way or the other with the market. And we are actually -- we've got to figure out exactly what it is we think we can do and economically how to do that. And honestly, I would say that we are -- while there is a little bit of vacancy in the building, we're not in a rush to lease the space in the building tomorrow because we want to make sure we understand what the building could become and sell what it will be, not what it is.
And so we're going to be thoughtful and constructive with how we do that. And obviously, it's a weaker market today than we believe it will be in 12 months and 18 months. And we hope when we're at a point where we've done the work, the building is going to have a very different reputation and a very different positioning in the building. And we're going to use the Boston Property skill set to do that.
Your next question comes from the line of Jamie Feldman with Bank of America.
Clearly, you've become more active on the value-add investment side here. Can you just talk about how the competitive landscape is changing? And what we're likely to see in terms of people willing to make more bets on vacancy and office across your markets?
Yes. I think as we described the last few quarters, we felt there will be an opportunity to pursue high-quality, but unstabilized real estate at pandemic discounts. And we think we're seeing that in the market. I think the capital for office real estate for anything that's leased with a long weighted average lease term or certainly anything life science is robust, highly competitive. I could argue cap rates are going down. And as Doug just said, that's just not -- we don't see that value creation for our shareholders. What we want to do are things like Safeco that are not stabilized, great bones. And we think the competitive landscape for those kinds of assets is less than it is for the leased assets.
And I think if our thesis holds true, which we obviously think it is, which is people are going to return to the office, I think the capital will follow what we're doing. And I think those transactions will get more competitive. But Jamie, I wouldn't leave you with the impression that there are not other bidders for these assets. But as you see from our success this last quarter, we have been able to buy quite a few things. And I think that is an indicator that pricing is somewhat different for that sector of our market.
And then how are you -- or how did you underwrite whether it's stabilized yields or IRRs? And what are you and your partners looking for at this point?
Yes. We're -- look, we mark the market rents to market. If we think there's a change in market rents based on what's occurring, we underwrite that. I think we're conservative in the lease-up. I think those assumptions actually drive the bus more than anything. And we feel like we're being appropriately conservative. But over time, what we're trying to achieve is approximately a 6% NOI yield over time.
Which isn't -- that's not an IRR, right? So that's -- when we get done, we're yielding in the low 6s with growth, obviously, because there are typically escalations in rents. And if you put some leverage on that and you assume some cap rate differential between what your yield is and what you could sell it at, it gives you a healthy IRR.
Okay. And then just a follow-up to a comment you made earlier, Doug. I think you were talking about either the Bay Area or Mountain View specifically about maybe tech -- larger tech looking for space. Can you just talk like big picture across all the markets about what we should expect to see from big tech? And clearly, they drove the market ahead of the pandemic. I'm just wondering what we might see coming out of it?
I think, honestly, you're going to see very much what you saw in the 2016 to 2020 era, which is big tech is looking for really thoughtful, talented people. And they believe that the markets that they're currently in have some of those people and then there are places where they think they can expand. And so -- I mean there's a rumor that Facebook is looking for a couple of hundred thousand square feet in the Boston marketplace. We can tell you that there is a rumor that there's -- that Google and that Amazon are looking for additional space in the Silicon Valley.
We see the requirements of what's happening right now in Bellevue and the amount of space that's under construction that we believe Amazon is going to be growing into. They don't announce when they do a lease, but that's the perception. So I just -- I think you're going to see more of the same. And these companies have enormous appetite for space and for talent. And whether or not antitrust impacts them from -- if it's 1 company or 2 companies or 5 companies, which obviously is a consideration, I do think that the growth is still going to be there.
Okay. You didn't mention New York. Any thoughts there?
Look, Facebook is -- put a fork in the ground in their campus, which they've done very quietly on the far west side. John Powers is on the phone. You can comment about other technology demand. I mean we've announced that -- the market knows that we're interested in doing 360 Park Avenue 2 weeks ago. And obviously, we announced it last night. We've seen a significant amount of large tech demand for that building. So I don't think that New York is at all being left behind. In fact, I think it's similar to what's been going on.
Remember that in 2020, Google and Facebook took -- and Amazon took some very large pieces of space. People forget, Amazon took the entire Lord & Taylor former WeWork headquarters building, which was almost 800,000 square feet, right? Google took 1 million square feet out of 500 Washington Street. And Facebook, I think, has amassed over 1.5 million square feet in the Hudson Yards. So that just happened. So I don't think we feel any differently about New York City. John, do you have any other thoughts?
I can just tell you that at the end of June, there were 295,000 open jobs posted. Most of those in tech in New York. So we're seeing a lot of expansion here.
Your next question comes from the line of John Kim with BMO Capital Markets.
On Safeco Plaza, according to media reports, the building has already undergone a fair amount of CapEx over the last 15 years, about $100 million. What do you expect in terms of capital spend to reposition the asset going forward? And can you remind us of your views on Liberty Mutual and whether or not you expect them to renew when their lease expires in 2028?
So we're not going to comment on what a tenant wants to do. Liberty Mutual purchased Safeco Insurance. Safeco Insurance has space on the sublet market. That would be an indication that they're not utilizing all their space. So that's probably an opportunity to have a conversation. With regards to what was spent on the building, almost all the capital that's been spent on the building has been on the bones of the building, not been on aesthetics, not been on place making. And that is -- that's going to be our primary focus in addition to making sure there's no deferred capital. We don't -- I don't have a budget I can give you. When we know what we're going to do and we present it to the Seattle office market, we will present it to you.
Okay. And on the co-investment program, are you looking at single asset transactions only? Or is the fund willing to look at portfolio acquisitions? And also, is there a possibility for BXP to contribute assets to fund?
We are -- we would definitely look at a portfolio acquisition. As you know, we tend to aggregate our company and our portfolio one asset at a time, either through acquisition or development. But that would certainly -- portfolio acquisitions would be included. And no, we have not had discussions about joint venturing our existing assets. I want to just -- I want to clarify a word that you used that I don't think is necessarily an accurate statement about what we're doing. It's not a fund. It's a co-investment program. So every asset stands on its own. One or both or neither joint venture partner might elect to invest in a particular asset, and they're not aggregated into a "fund." So I just want to clarify that because I think it's important for you to understand.
Your next question comes from the line of Nick Yulico with Scotiabank.
Doug, I appreciate you gave some color on leases signed in the quarter. Is it possible to just get the mark-to-market on those lease signings in the quarter? And I guess, as well, how we should think about what that number could look like for the back half of the year based on lease signing so far? I mean, obviously, the second quarter number was 14%. But how does that number kind of shake out for lease signings in the quarter and how it could look for the rest of the year for commencements?
Well, so timing is everything. And the reason I provide you with the information I do is because it is an indication of what is going on with the spaces that we lease today, which unfortunately, may not hit our supplemental statistics from a revenue perspective for 2 quarters, 3 quarters or 6 quarters. So I'm just trying to sort of give you a flavor of what is going on, on a relative basis, right? So it's very hard to sort of predict what's going to happen because I don't know which spaces we're going to lease and what the rent was versus what the rent might be on those spaces until it happens.
So again, on average, everything I said was as basically down in New York City of 20%. That doesn't mean the market is down by 20%. It may mean that those leases might have had a negative mark-to-market in 2019 because the rent went way up in a particular building and the market just never got to where the increases were. But so things were down in New York, and they were flat in Los Angeles, again, on the portfolio of space we leased based upon what was being paid and what will be paid on a cash basis.
And then the other places in Boston and in San Francisco, we were up about 20%. In Mountain View, we were up 60%. And in Reston, we were down, call it, 5% to 7%. But again, a lot of the space in Reston was vacant. So it wasn't down. It's actually 100% increase because that space had been vacant for more than 12 months, right? So that's the reason that we give you what we give you in terms of the data, so you can have a sense of what's going on, on a current basis.
Great. Very helpful. Just second question on the Midtown South purchase. Maybe you can give us a feel for rough numbers about how you're thinking about the additional redevelopment costs and potential rents you're targeting there?
So let me just make a few comments, and I'll let John Powers give a more verbose answer. We -- as Owen said, we bought the building for a very attractive basis. And we're going to be in this building for well under $1,000 a square foot. I'll let John talk about where rents are. Again, we're in the early stages of figuring out exactly what it is we want to do to this building. And I'm expecting John will say it's going to depend on who shows up. Because depending upon who shows up, they may want different things for the building. John?
The building is very attractive for us because it's being delivered vacant at the end of the year. So we don't even have the carry cost for this year. We're paying for it, as Owen said, at the end of the year. And it's very difficult to get a building in that market with good bones, and this has pretty good floor plates, and also get it back all vacant at the same time. So we're in the visioning stage now of this and putting it together. We had a session yesterday. It went very well. We think we're going to do some very interesting and different things in the lobby space there.
And we're -- we think there'll be a lot of interest from different types of tenants. It's very difficult to get identity if you're a 100,000-foot tenant or 150,000- or 20,000-foot tenant. Certainly, that's the case in many of our buildings, which are much larger. So this, I think, will be a very good branding opportunity, as Owen said in his comments, for some tenants.
Rents, it really depends upon the size of the lease-up. And we're budgeting some downtime, obviously, next year. And we may convert quicker. We don't know how the leasing is going to go on this. But I would say if you think of something with the 9%, that would be consistent with our underwriting. And we may do better than that, and we hope we will. Thank you.
Your next question comes from the line of Manny Korchman with Citi.
Just thinking of life sciences as a broader space, you guys are increasing your exposure there as are many other owners and developers. How should we think about sort of differentiating what you're building in overall supply versus what we're hearing in the headlines of seemingly everyone chasing life science?
Yes. So I think the most important differentiation, Manny, is that we already control most of the conversion and land that we're going to develop. I mentioned in my remarks, we already have 5.5 million square feet under control. So we don't have to go out and buy anything. And all those projects are in the nation's hottest life science markets. They're in Cambridge. They're in Waltham. They're in South San Francisco. They're now in Montgomery County, Maryland. So again, we don't have to go create the raw material to build our business. We already control it.
Now that being said, fortunately, this last quarter, we did find some things that we thought were interesting. We bought a smaller existing lab building that's adjacent to a project we already had in Waltham, which we thought was a terrific, attractively priced tuck-in opportunity. And then our D.C. team got very comfortable with the Montgomery County market and found a very interesting transaction to open up basically a new life science market for Boston Properties.
And we're in the process of closing the deal, and we're already in discussions with a number of users for that site. So we have high hopes. So anyway, I think that's the big difference is you hear a lot of people "getting into life science or growing in life science." We're going to do it by just executing on what we already control.
Owen, it's Michael Bilerman. I was wondering if I can follow up. In your opening comments, you mentioned the concerns about work-from-anywhere impact on the BXP footprint are overstated. And I wonder if you can distinguish sort of BXP relative to the whole office market. Because obviously, you've made that comment that it doesn't impact the BXP footprint, but I have to assume there's going to be some impact overall on office. Are you able to sort of tease out sort of your outperformance relative to the broader office market and why you believe it's sort of greatly overstated?
Yes. Yes, Michael, I think let me answer that in 2 different -- or I'll answer just 2 different questions. Look, I think we have said we don't -- we believe there will be some impact on the office market due to work-from-anywhere, but we just think it's overstated. If you look at the recovery of the office companies relative to other property companies and overall industry, it's much lower. So clearly, the market is concerned. It's not just about Boston Properties, it's about the whole sector and what this return-to-office profile looks like for office companies. So we acknowledge that's the case.
In terms of BXP's differentiation, I would say 2 things are very important. One, we like our gateway footprint. We would acknowledge that in the short term, cities in the Southeast, Southwest, they're opening more rapidly. And perhaps in the short term, they might have better performance. But we believe, over the long term, our gateway markets that are increasingly driven by tech and life sciences demand and have some barriers to entry are long term the best place to be.
And then the second thing that both Doug and I talked about in our remarks is applied to quality. If you look at the tour activity in high-quality building, our tour activity in New York is much higher in terms of number of tours this year-to-date than it was in 2019. If you look at assets like the GM Building, there's a lot of not only tour activity, but leases getting signed.
And as Doug said in his remarks, when you're in a soft market, people want to upgrade their buildings and they want to go to quality. I also think a lot of the future in terms of work from home is I do believe corporate leadership wants to have their employees return to the office. And one of the ways they're going to do that is to have great offices. They're going to want to be in great locations, and they're going to want to have great space in place. And that's what we try to do.
And the other question I had was, you talked a lot about sort of the employer versus the employee difference, where clearly, a lot of the surveys show that employees want significant flexibility. But obviously, when you look at the employers or CEO surveys, you get slightly different answers. With the Delta variant rising and sort of increased masking up in some of the gateway markets again, do you think that the tone with your tenants on the employer side just may be shifting a little bit sort of acknowledging we're going to be with this for a while, right?
Unless the vaccination rate increases meaningfully, it's going to be hard to get rid of COVID and all the protections and things that are happening that all sort of got relaxed a little bit when we had this euphoria that we were done with COVID. Do you think it changes or slows anything down should sort of the frustration with going into the office on the employee side where sort of both of these things sort of meet the head? I'm just curious how you think about that on a current basis, given what's happening.
Yes. We haven't seen much evidence of that. Our footprint, as you know, it tends to be in a more highly vaccinated parts of the country. So I think that's the first important point. I completely agree with the dynamic that you described of it, what is the employer preference and what is the employee preference. And I think that's a lot of the dynamic that's working itself out and determining office policies at this time. Look, the Delta variant could slow the recovery, but I don't think it's a matter -- I think the recovery is going to happen. So it's not an if question, it's a when question.
Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.
Just, Mike, I know you gave us the kind of the impact from the acquisitions in 3Q and 4Q. But can you guys just provide some going-in cap rates that we can think about initially for the different assets? Because I know you can kind of back into it, but the timing piece as we head into '22, I just figured it might be easy on a run rate.
I'd rather not give you explicit cap rates because we're -- these aren't closed and we have confidentiality agreements and such. I just would give you the following because I think this will be helpful. So 360 Park Avenue, as John Powers said, will be vacant in 2022. So I think the cap rate is obviously there. And the -- and as Owen said, the Shady Grove development, we intend to basically vacate all of those buildings as quickly as we possibly can. And so there's very little incremental income there. Safeco is a well-leased building at very below market rents. When we close, we'll be able to provide more detail on that. And I think we provided some detail on the Second Avenue and the...
6.4%.
And that's a -- if you back into that and you listen to what I said about where market rents are, you can get to where we think that's going to be in '22 when we release the building.
Okay. That's helpful. And then just a clarification on 360 Park Ave South, did you guys buy the fee or the leasehold?
We bought the fee interest.
We are buying the fee interest.
We are buying the fee interest.
And then just one last one. I've been asked a couple of times, and I'm just kind of curious myself. Is there any potential to redevelop the Cambridge Marriott into life science or office over time? Or is there something there that would stop you from doing that? If it made economic sense?
So the answer is there's nothing legally preventing us from having a conversation with the hotel operator about their contract, and there's nothing that legally prevents us from going to the Cambridge City Council and ask for a change in use there. So clearly, we have been successful and other -- doing other things like that in the city of Cambridge. And again, one of the things that people sort of -- I don't think they ignore it. They just don't appreciate it.
We're going to build almost 1 million square feet of new lab or office space in Kendall Square that is currently being leased at rents of between $110 and $140 a square foot triple net. We have to build a underground parking structure for the existing space, and we have to give some below-grade ground to the local utility company. But that's going to happen sooner rather than later. So we have plenty of opportunity to grow our Cambridge portfolio.
Your next question comes from the line of Caitlin Burrows with Goldman Sachs.
Earlier, you mentioned that the list of noncore disposition candidates were shrinking. So I was just wondering, as you go through these acquisitions and developments, how you generally plan on funding them? I know this quarter, you did mention the use of some OP Units in one of the cases. So would you identify other dispositions, issue equity, only do it when your cash position allows or something else?
I'll start to answer that, and then you guys can jump in if you want. Look, I mean we've got a very, very strong balance sheet, and we've got a significant amount of pre-leased developments that the money has already been spent and the income is coming in, in the next couple of years. So that balance sheet is only going to strengthen as that income comes in and brings our leverage down from a place where we're comfortable now, but bring it down to provide even more capacity.
So we will continue to fund through some modest asset sales, some additional debt capital and utilizing private equity to help on any kind of acquisition type of an activity. Typically, we want to do the developments on our own unless somebody else owns the land. And that's the only way that we can access that.
And we're comfortable with that strategy in the foreseeable future. That doesn't mean we would never bring in additional public equity into the company. That's really dependent on 2 things: one, the investment opportunities and profile that we think we're going to have over the next couple of years; and then obviously, what our share price is and whether we think that's an attractive cost of capital for us. So we look at all of those things when we think about funding future investments.
So just to sort of put a finer line on it, this is Doug, everything that we have done to date, we are funding with our existing capital capacity in addition to all of the developments that are currently underway and are very comfortable with our overall leverage, our use of capital in terms of where the dollars are going and how those dollars are coming in to the extent that we need additional capital to fund that. I mean everything that we've announced to date has been funded.
Okay. And then maybe just on the development pipeline, you guys went through a lot of the leasing that was done in the quarter. But it didn't look like the development pipeline, in particular, recognize that active leasing. So just wondering if you could go through the activity that you're seeing for those projects and expectations going forward?
Sure. So the only holes in our development pipeline to date are the Brooklyn Navy Yard, which is no longer part of development, which I described. And then our Reston Gateway project, which is -- and I'll let Jake and Pete Otteni, who are our regional team from Washington, D.C., talk about the leasing efforts there and sort of where we are.
Sure. This is Jake Stroman in the D.C. region. So on the Reston Next project, we have about 150,000 square feet left to lease in the 1.1 million square foot building. We've actually had some great activity, lots of broker tours that have come through that building. We have -- we're trading proposals with a full floor tenant right now. And we're also going to engage a factory program on an additional 30,000 square feet, so -- which has been very successful in the Reston market to date. So really good activity, hoping to convert a few of those opportunities to leases here soon.
And then, Caitlin, on the stuff in Boston, I thought I'd describe that. So at 880 Winter Street, which is part of our [indiscernible] pipeline now, as I said, we have a 16,000 square foot letter of intent already signed and we have 180,000 square feet of active proposals, some of which are actionable right now, and we're just arguing about economics. And then we actually are -- we are in discussions with some tenant at 180 CityPoint. These are not discussions that have gotten to the point where we have a letter of intent that we've said is close to being executable. That building also is later.
So the sequencing is 880 is delivered and ready for people to be working in it in August of 2022. And then about a year later, 180 CityPoint is available. And that's why I said, if you think about that, we also have these 2 new buildings that we've acquired at -- on Second Avenue with a lease expiration in the fourth quarter of 2022 to right in the sweet spot of where all this activity is.
I think -- if you listen to the market commentary on demand for life science, particularly in the greater Boston market, there's way more demand than there are existing opportunity to lease space. Lots of people are talking about building this supply. Most of that supply are larger projects that won't be completed until 2024 to 2026. So the sweet spot of the market, from our perspective over the next couple of years, has a significant amount of demand and very little competitive supply.
Your next question comes from the line of Brent Dilts with UBS.
Great. On Page 16 of the supplement, where you break out second-generation leasing info, it's pretty clear, the retail portfolio in New York still is a bit of a challenge. But I think in your prepared remarks, you referred to some current negotiations in that portfolio. So could you just talk about your outlook for a recovery there?
Yes. So I want to be very clear. So the reason that the numbers are as poor as they are in the retail portfolio in New York is because we took some space back or we re-leased some space on an as-is basis in 2019, okay, not in 2020, at the General Motors Building on Avenue. And the rents were dramatically lower than what the in-place rents were. That's the reason for the change, and that's effectively what happened. So we are now leasing vacant space, and the vacant space is obviously all going to be incremental.
The rents are market rents. They're depending -- upon where the spaces are, they're commensurate with what you would hear from a retail team. I don't want to negotiate rents on this call. But the spaces that we're negotiating, a fitness center in the basement of an office building or a high-quality restaurant in Times Square are very, very different because of the nature of the spaces and the marketplaces. But it's -- we are acting at the market.
Okay. Great. And then you have a decent amount of retail up for renewal in Boston in 3Q. Any color on how negotiations are for that space? Or if you've got plans to redevelop, et cetera?
So our biggest hole in Boston is at Lord & Taylor. And we have lots of active dialogue going on, on that space, which we haven't seen revenue on for over a year, I think, almost 16 months, which we now have back. The expiration that you're pointing to in Boston is actually not an expiration. It's a lease that is in litigation with the other anchor. They are now paying on a contractual basis. And I don't expect that, that lease will be terminated in the third quarter. Whether we are able to work something out with them on a long-term basis, unclear, but they're not going anywhere in the short term.
Basically, how we handled some of those leases where we had a retail tenant that defaulted, we terminated the leases. And then we -- in our rollout, we assume that it expires in the next quarter because they're sitting in it. And most of these tenants, we only have a couple left, but they're paying rent. And it's just a matter of time before we're able to kind of negotiate what the new deal will be. So the expirations in the third quarter in Boston are those situations. So as Doug described, we don't expect them to create vacancy.
Okay. And then just one last quick one on Seattle. I know you've already talked about it a decent amount. But do you have a target for where you want to get that market to as a percent of the portfolio over time?
Yes. So we -- I'll address that. Look, we set strategy top down. We like our gateway footprint, we think Seattle should be part of it. But the answer to your question is driven more by bottom-up opportunities. So we clearly want to be in Seattle. We're being aggressive there. We want it to grow. But it will be dependent on the volume and the timing of the attractive investments that we see.
Your next question comes from the line of Vikram Malhotra with Morgan Stanley.
Sorry, just to clarify on that retail lease at GM Building you mentioned, the 33,000 square foot excluded. Can you just remind us what that was and what drove that negative -- the big negative markdown?
There was a space at General Motors that had a big negative markdown. And then there was also a space at 601 Lexington Avenue. So -- and I'm not going to tell you what the rents are. Like I said, I'm not going to negotiate rents for tenants on the phone.
So just -- so those spaces were re-leased, and that's what drove the markdown?
Yes. And one of them was -- and just as an FYI, I mean, this is technical. One of them was actually paying 0 because they had defaulted on their re-lease. But we are using their what-was-contractual rent to define what the change in mark-to-market is, even though they hadn't paid rent in 6 months prior to the date that they terminated.
Okay. That's helpful. just given the talk we've had so far on employees wanting flexibility, employers maybe wanting slightly different things, I'm wondering if you can touch on 2 things. One, just sort of what you're seeing at your co-working platform and where you expect that to trend maybe in terms of just offerings in additional buildings? And then second, just on lease terms itself, are you seeing any variations in discussions on lease length or flexible options for termination or expansion, that would be helpful.
Sure. So let me just define what our platform is. So we have in Boston FLEX by BXP in 3 CBD office buildings and then 1 suburban asset. And the character of the leasing there has actually been that it's picked up significantly over the past quarter. We've done, I'd say, 6 or 7 deals, which have leased all of the space at our suburban location and the vast majority of our space at the Prudential Center location. And we're in activity at The Hub on Causeway.
And the nature of all those tenants are companies that don't know what their long-term growth is. They don't -- didn't have office space prior to the pandemic. They want to get back quickly, and they just need space because they want their people together. And they're saying, we want to -- we're going to take this for 6 to 9 months, and then we're going to figure out how much we need. And then we'll decide if we want to do additional flex space with you or we want a long-term commitment. And again, our spaces are generally 4,000 to 6,000 square feet max, and we have a few that are a little bit smaller. But it's -- that's the character of the spaces.
And I think, Vikram, we don't have plans right now to grow that business. I mean that could change over time depending on the economic performance, but we don't have -- we're not planning to expand it at this time.
Okay. Great. And then just -- sorry, just to clarify the lease -- the kind of the lease terms overall. Are you -- you're not seeing any change in sort of the components, whether it's term or just -- of out options or expansion options or anything like that?
In the perfect world, the tenant would like to have an ability to get out of their lease whenever they can. We obviously -- we don't provide that kind of flexibility. As I think Owen said in his remarks, our average leases that were signed this quarter were 7.5 years. Typically, we've been telling people that we have an average lease length of 8 years. So it's de minimisly less. But again, the leases that are in active negotiation right now are all on average 10 years or more, all the activity that I described, including the life science stuff.
And I would tell you that tenants would like -- as I said, would like to have more ability to be flexible in their space and buy their way out of leases. And occasionally, we are giving some of that flexibility after longer periods of time. You sign a 10-year lease, and you can terminate after the seventh year or something like that. But there really hasn't been any shift in the profile of the amount of time that the companies that are looking at our kind of spaces are expecting. And all of our build-to-suit stuff is still 10, 15 or 20 years.
Okay. Great. And then sorry, just last one. I know the -- you've talked obviously a lot about Seattle, and it makes sense strategically. Just thinking about other markets, one of your West Coast peers expanded into Austin recently. And I guess you can never say never. But if we look at the next sort of 2 to 3 years, is it a possibility that you look at any of the kind of key Sunbelt markets as more tech tenants expand there?
Look, we believe in our gateway strategy. We think Seattle was the logical expansion to -- as a gateway market. And there's plenty to do in the 6 markets we're in now. Vikram, you and others are focused on Seattle. I could argue we actually went into 3 new markets this quarter. One was the Park Avenue South, below -- Midtown South market. That's a new submarket for Boston Properties.
The New York market is 3x the size plus of Seattle. It's got -- it's multiple cities in and of itself. We just went to a new one. And then our D.C. team went into the Montgomery County life science market, which we hadn't been in before, that's managed out of the D.C. region. So I think those 2 deals are evidence of all the robust opportunities we have to expand our footprint in our existing "region."
Your next question comes from the line of Daniel Ismail with Green Street.
Great. Maybe going back to the development pipeline. Doug, I believe you discussed the speculative restart of Platform 16. Are there any similar discussions across the non-life science pipeline such as 3 Hudson or anything else?
I would say the only other project that is in our land portfolio this time that we're looking is the blocky residential development in Reston Next. I think that could be a start. You can see later this year, early next year.
And then to your question specifically, we're going to need a really large tenant commitment to start 3 Hudson Boulevard or to start 343 Madison Avenue, which, by the way, won't even be in a position to start for a couple of years or any of the other land holdings that we have in our more urban locations.
Got it. And then you discussed throughout the call today about the quality of your portfolio and the outperformance that it's generating. And I'm curious, within the leasing activity this quarter or in the pipeline, are you seeing any tenants trading up from Class B space to Class A?
I would say that we're not seeing people trading up from true Class B space because true Class B space is significantly less expensive than Class A, but we are getting tenants who are in what I would refer to as A minus minus buildings that are looking at our assets. In other words, modern inventory of office space that has really not been either amenitized as not -- where the landlords don't even understand what it means to create great place and great space, where they haven't made the changes to the infrastructure of the buildings, but where the building is well located.
And so those tenants are there because of that and they're sort of saying, "Wait a minute. Given everything that's gone on and the importance as Owen described of having great places for their employees to want to come back to and the health security issues that we've talked about ad nauseam for the last couple of quarters and how we're dealing with those things, there's just -- there's a flight to those kinds of environment that I believe is occurring."
And so to answer one of the questions that was asked previously, I do believe that there will be buildings that were built, call it, in the modern era, so in the '70s, '80s, '90s, 2000s, that have not been well maintained or well thought of with landlords who really aren't thinking about the long-term viability of their buildings. They be left behind in our core cities as people move to better buildings and better -- with better landlords and better activities for their customers.
And there are no further questions at this time. I will now turn the call back over to the speakers for any closing remarks.
Okay. Thank you, operator. We don't have any more formal remarks. And I just want to thank everybody on the call for their time and their interest in BXP. Thank you.
This concludes today's Boston Properties conference call. Thank you again for attending, and have a good day.