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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to Boston Properties Third Quarter Earnings Call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session.
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, and welcome to Boston Properties’ third quarter 2020 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 all 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 would 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 should -- 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 the call, Ray Ritchey, Senior Executive Vice President and our regional management teams will be available to address any questions.
And now, I’d like to turn the call over to Owen Thomas for his formal remarks.
Thank you, Sara, and good morning, everyone. I’m joining you today from BXP’s New York office, where I’ve been working since New York opened in June and have more recently been commuting on public transit. New York City is slowly coming back to life with more open shops and restaurants, and our building census is over 15% and rising each week. All of our markets and BXP offices with the exception of those in New Jersey and Los Angeles are opened at bearing capacity limits set by local guidelines.
Despite a challenging recessionary environment, BXP continued to perform well in the third quarter, demonstrating the durability of our business. In the quarter, we collected 99% of our office rents and 97% of rents overall. We completed 811,000 square feet of leasing, 40%being either new requirements or expanding existing customers, and we increased our average net rental rates on our second generation leases by 20%. We entered into an option agreement to joint venture CityPoint South, a large scale multi-phase development site in Waltham, Massachusetts, that can accommodate both office and life science demand. And we completed the previously described acquisition of a 50% interest in the Beach Cities Media Center site in El Segundo. And since quarter end, we signed a 200,000 square foot 20-year lease with Volkswagen Group of America for their U.S. headquarters at our Reston Next development in Reston, Virginia. With the VW lease and previously secured anchor tenant, Fannie Mae, this 1.1 million square footprint property is now 85% pre-leased.
I am proud of our team at BXP’s resilience and fortitude in both assisting our customers and safely returning to work and delivering results for shareholders in a challenging time. Well over 50% of our employees are opting to work in the office subject to local occupancy restrictions.
Now moving to the economy. The course of the U.S. and global economic recoveries remain heavily impacted by the course of the pandemic. New COVID-19 cases are hitting record highs in the U.S. Fortunately for BXP, new cases per unit of population in the states where we operate remain at levels below the national average. While we anticipate a vaccine will likely become available by year-end, it is unlikely to be a magic bullet that immediately eliminates the pandemic given broad deployment will face issues around manufacturing, distribution, uptake and efficacy.
Though difficult to assess, we think economic conditions for the first half of 2021 will remain sluggish, but expect a more pronounced reopening of the economy and return to the office in the second half of 2021 due to distribution of a vaccine, better therapeutics and more individual adoption of health safety protocols as we all learn how to combat and live with COVID-19.
With many office workers still working remotely, there continues to be much speculation, not surprisingly, about the future of work and use of office space. To understand the current market environment and contemplate future demand, I will revisit the 4 key drivers of office demand I discussed last quarter, namely employment, location, density and occupancy or better known as work from home.
Job losses and the slowdown in economic activity due to the pandemic have been and will be the most important drivers of office market conditions for the foreseeable future. Recovery has commenced with almost 4 million jobs created in the third quarter, and unemployment has dropped to 7.9%, which is 6.8 percentage points below the peak in April, but 4.4 percentage points above the low in February. We are confident of economic recovery and believe our properties and markets will perform well over time given their proximity to resilient and growing tech and life science demand.
Regarding location, there continues to be speculation about companies moving from major urban environments to secondary markets or suburban locations. To-date, we have seen no evidence of pandemic-driven movement among our customer base to secondary cities or suburban locations.
On densification, it is clear that the pandemic has reversed the trend of increasingly dense work environments as companies are spreading out their employees for health security purposes. Doug, in his remarks, will provide case studies in BXP’s portfolio. With many companies not back in their offices, it is impossible to quantify this trend today. But we believe the reversal of densification will be a material tailwind for office demand over the longer term.
Finally, on work from home. We remain convinced that successful companies will work in person. It is increasingly clear to our customers and other business leaders that there are significant gaps in conducting business on a fully remote basis in terms of creating and maintaining culture, creativity and productivity as well as on-boarding, training and development. Again, Doug will provide several examples among our customers.
Following the pandemic, work from home will become more accepted, likely as a benefit offered to employees. However, space savings cannot be achieved unless employees schedule their work from home days and utilize floating workstations when in the office, which could be more difficult with the type of workforce employed in our premium assets.
Now moving to private equity market conditions for office assets, transaction volumes are down 60% for the third quarter versus last year and 42% year-to-date. Buildings in tech heavy markets with long weighted average lease term are selling for pre-COVID cap rates. And life science-related assets are also in strong demand. However, there is limited activity for assets with lease-up and/or rollover risk due to bid-ask spread and pricing. Buyers want a discount for lower rents and slower lease-up and sellers believe in a full market recovery and can inexpensively hold on by refinancing.
Some of the fewer deals completed in the third quarter of note are, Genesis Towers in South San Francisco sold for $1 billion, nearly $1,300 a square foot and a 4.75% cap rate. This 780,000 square foot 2-tower complex is 96% leased, built for life science use and it’s sold to a healthcare REIT. This deal illustrates the high level of liquidity available for life science related assets.
Reservoir Woods East in Waltham sold for $330 million to a REIT. The property is comprised of a 313,000 square foot leased office building, a 202,000 square foot soon-to-be-vacated office building that will likely be converted to lab use and land with development potential of approximately 440,000 square feet. Assuming a land price of $80 per developable square foot, the buildings, one of which is essentially vacant, would be valued at $575 a square foot.
In Santa Monica, 2041 Colorado is under agreement to sell for $166 million, which is $780 a square foot and a 4.3% cap rate. This recently repositioned 93,000 square foot property is 100% leased with a long weighted average lease term and is being sold to a domestic life insurance company.
In Reston, Patriots Park was sold for $325 million or about $450 a square foot and a 5.6% cap rate. This 724,000 square foot asset is fully leased and sold to an asset management company. BXP built and subsequently sold Patriots Park in 2014 at roughly the same valuation.
In the Bellevue, Washington Spring District, 2 new buildings comprising 540,000 square feet long-term lease to Facebook are under agreement to sell for $565 million to a fund manager. Pricing is approximately a 4.5% cap rate and $1,050 a square foot.
Moving to BXP capital activities. Last quarter, I described a relative dearth of new investment deal flow due to the early phases of the pandemic and low refinancing costs. This past quarter, we’ve experienced a modest uptick in new acquisition opportunities and expect our pipeline to grow into 2021. Though nothing is imminent, we are actively looking at new investments with private equity joint venture partners.
We did complete an option agreement to become a 50% joint venture partner with a local developer in CityPoint South, which is a 42-acre site supporting 1.2 million square feet in Waltham proximate to our CityPoint asset. The deal structure includes a favorable fixed land price with the option to close on individual sites in a phased manner based on market conditions and our ability to secure prelease commitments.
As part of this development, we will be completing new interchange improvements onto the I95 Route 128 enhancing access to our entire Waltham portfolio. Waltham, already a mature life science market, has recently seen a significant increase in leasing interest from life science tenants and this site allows for the development of both office and lab properties. This investment provides a significant boost to our growing life science business and will create more life science critical mass for the opportunities we have already identified for potential lab development and redevelopment in Waltham.
We also continue to invest in our development pipeline, which currently stands at 8 development and redevelopment projects comprising 4.3 million square feet and $2.4 billion in total investment. The commercial component of this portfolio is now close to 80% preleased, with aggregate projected cash yields at stabilization of approximately 7%.
Our development pipeline is an underappreciated asset of BXP that we expect will add approximately $200 million to our NOI by the end of 2024.
This quarter, we placed into service 2 residential projects, Hub50House, the 440-unit residential component of our Hub on Causeway mixed-use development in Boston. And the Skyline, a 402-unit multifamily asset located at the MacArthur Transit Station in Oakland. Both assets are heavily amenitized and of the highest relative quality in their local markets. Initial lease-up has been slow given the operating environment, but both assets will provide BXP NOI growth in future quarters.
And a final word about the investment opportunity in BXP shares. Our office portfolio continues to demonstrate resilience with an outstanding base of creditworthy tenants across sectors. With the future delivery of our leased development pipeline and recovery potential in our parking, hotel and retail portfolios, we have a solid growth story. From the peak in early 2020, our FFO per share is down 14%, but our share price is down 50%. Our dividend yield has gone from 2.7% to 5.3%. At BXP’s current share price, our underlying asset cap rate is around 7% and private market cap rates, as I described earlier, are materially lower. Clearly, at our current stock price, we think the value story is obvious and glaring.
To conclude, 2020 continues to be a challenging time for many types of real estate, including office, as the pandemic continues to take its toll on the economy. However, all pandemics and recessions eventually come to an end, and we are confident in BXP’s market position with long lease terms, minimal near-term lease rollover and strong liquidity to invest opportunistically.
BXP has the franchise, capital and business strategy to emerge from the pandemic and recession with strength and momentum.
So let me turn it over to Doug.
Thanks, Owen. Good morning, everybody. I think I might have misheard what Owen said when he was talking about one of the asset sales. The building in -- near Colorado Center in LA was $1,700 a square foot, not $700 a square foot. So if I misheard that, I apologize.
My comments this morning are going to focus on our office and our life science leasing activity. But first, a couple of remarks on our ongoing operations. So as Owen said, government and public health leaders continue to encourage businesses to work from home. And with very few exceptions, business leaders have not required their employees to return to the office.
Massachusetts was the first of our markets to pull back restrictions. And while office occupants are allowed to be at 50%, our urban census has been pretty steady at about 9% for the last few months. Our suburban Boston portfolio includes about 5 million square feet and 33 single-story to 6-story buildings. Virtually every tenant employee drives their own car to work. The census is here is about 5%.
In Northern Virginia, the second market that relaxed restrictions, companies are actually required just to social distance and there are no limits to the occupancy threshold, and employees drive to their office. We estimate our census is well under 15%. At this time, the return to work is not about transportation constraints, and it’s not about elevator constraints either.
Our New York City towers have the highest census at about 16% daily and more than 23% of the people who have badges in our CBD New York City buildings are going to work at least once a week. While a number of our retail tenants have reopened with volume restrictions, traffic is subdued and many food service and other amenities still remain closed. While there is some urban retail street activity, we suspect it is more from local walkable residents and not from people coming to work every day. Monthly parking passes have not yet begun to rebound and transient parking continues to be pretty light.
If people are not coming to the office, then they’re not paying for monthly parking, and they’re not shopping or dining in the areas close by our buildings.
We opened our Cambridge Hotel in October, and it’s running under 10% occupancy, and we are simply trying to cover incremental operating expenses and put people back to work. Room sales are predominantly leisure guests, not business travelers, and there are no food and beverage operations being offered at the property. As you’ve heard or read from a lots of brokerage reports, market leasing activity is very light. In the context of the comments that Owen and I just made and the continued uncertainty regarding the public health issues, this should be expected.
What I hope will be very encouraging for everybody on this call, investors and analysts here, is the level of Boston Properties activity right now. This is what really matters for our performance. In previous down cycles, our portfolio and our operating team have outperformed the market, and we believe this is happening again.
I’m going to start with our Boston area operations. This quarter, we completed a post-COVID lease with Columbia Threadneedle Investments for 83,000 square feet at our Atlantic Wharf property on space it is currently leased and does not set to expire until the end of 2021. While Colombia had targeted Atlantic Wharf as a great option, we were actually not originally considered since we didn’t have available space that can meet their occupancy window. We were able to structure an early termination of an existing tenant who is expiring to accommodate the new tenant’s timing, and we quickly completed a 13-year lease. The cash rent on this lease will be 30% higher than the expiring rent fully grossed up, and there are future rent increases. This is important because even though the markets are seeing higher availability, and rents and concessions may change, our leases continue to have significant embedded growth, particularly in our Boston and our San Francisco portfolios.
In suburban Boston, our life science activities continue to accelerate. We are close to completing a lease with a single-tenant for the entirety of our life science conversion at 200 West Street, a 138,000 square feet. We’ve actually grown the building.
To preempt the question, we have spent about $140 a square foot upgrading the base building for lab use. And if you amortize a portion of the lab TI against the lab rent, we will achieve an incremental return on cost of about 10%. The base building is just being completed, and this tenant will be in occupancy in mid-2021.
We are in the final stages of completing a full building as is extension with an early stage life science company at 100 Hayden Avenue, 56,000 square feet, which will kick-in when our direct lease with Shire Pharmaceuticals expires in mid-2021. This one only has a 40% increase in rent. We also have an LOI with a healthcare company for the entirety of our 63,000 square-foot building at 195 West Street in Waltham. As Owen said, we have a 1.2 million square feet joint venture at CityPoint, and we’ve also put our plans together to develop 180 CityPoint, 310,000 square feet as a life science building.
We’re also studying the conversion of some of our Winter Street office assets in Waltham to life science and are pursuing permits for additional life science or office buildings on existing land holdings in Waltham and Lexington.
Finally, in Waltham, we are close to completing a 75,000 square-foot lease with a technology company that will bring 20 CityPoint’s office space to 100% leased. That was a building that was put in service earlier this year.
Turning to Northern Virginia. This quarter, we completed 2 additional leases with Microsoft to expand and extend their premises in Reston Town Center. They leased an additional 45,000 square feet and extended the 2028 expiration on 164,000 square feet to 2033. We’ve also completed another 96,000 square foot of leases, 8 transactions during the quarter there. We are in negotiation on 5 more leases, totaling 65,000 square feet, for vacant space in the Town Center.
As Owen said, we signed our 20-year lease with VW at Reston Next. And while we had to contract Fannie Mae’s premises in order to accommodate VW, we’re now 85% leased, and both of the tenants have rights for short-term growth.
Just as an aside, if you look at our development properties and include the leasing at 200 West Street, the office portfolio lease percentage will be 80%, and this includes Dock 72 at its current leasing of 33%.
Moving to New York. In New York, on July 1, we completed a110,000 square foot 15-month extension at the General Motors building with a tenant that had an early 2022 expiration. The tenant was negotiating for a relocation and COVID-19 resulted in a reevaluation of that decision. The General Motors building is our most active single asset in the entire company. Since June 1st, we’ve had 15 unique in-person tenant tours for tenants ranging from 3,000 square feet to 40,000 square feet, and we’ve converted 2 to leases. For comparison purposes, we had about 20 tours in our entire Boston CBD portfolio and 16 at Embarcadero Center since June 1.
We’ve made some progress with Ascena/Ann Taylor at Times Square Tower. We expect them to continue to lease about 150,000 square feet of office and retail space, with cash rent commencing in January of 2021.
We completed a 1-year extension for a 70,000 square foot tenant at 510 Madison, bringing their expiration into early 2023. And we’ve done 4 small tenant transactions at 250 West 55th Street, totaling 17,000 square feet. Two weeks ago, we completed a full floor post-COVID lease renewal at 601 Lexington Avenue for 30,000 square feet.
In Princeton, we’ve seen absolutely no New York City outmigration tenant inquiry. But we’ve completed 5 transactions, including 2 expansions for about 40,000 square feet, and we have an aggregate of about 100,000 square feet of active conversations at Carnegie Center.
Our California properties have been subject to essential worker-only restrictions until yesterday in San Francisco. In Santa Monica, we continue our renewal negotiations with our 2020 and ‘21 expirations. In the Silicon Valley, we’ve signed an LOI for 68,000 square feet with a life science tenant to utilize available office space at 601 Gateway in South San Francisco beginning in the fourth quarter of ‘21. Our Gateway JV is planning the conversion of 651 Gateway, which is a 293,000 square foot office building to lab, and we hope to start that construction in late 2021.
We are finalizing lease with a 31,000 square foot life science tenant in our North First buildings down in San Jose, and we’ve also seen life science tenant interest for our Mountain View Research Properties that are single-story structures that in the past have had both wet benches and clean rooms.
Activity at our San Francisco CBD assets, where we’re just under 96% leased and have 415,000 square feet of tenants expiring in the remainder of ‘20 and ‘21 has been greatly impacted by the governmental restrictions, as I said, which were listed yesterday on a partial basis.
The third quarter only produced 3 transactions totaling about 23,000 square feet at Embarcadero Center. However, we have 114,000 square feet of new near-term expirations that we have gotten contractual commitments on renewals that have been exercised, and they are simply subject to a rent reset. The expiring rent on that 114,000 square feet is $61 a square foot fully escalated gross.
I want to end with a brief comment on space utilization. Since we’ve seen a number of REIT analysts make some assumptions about reductions of office space utilization going forward, largely due to work from home. I’m not going to give you our opinion. Rather, I’m going to provide a series of decisions that our customers are making in our Boston market post-COVID.
First, one of our large tenants in Cambridge had a contractual right to give back 190,000 square feet of office space in July. The right expired unused. Second, one of our large hundreds of thousands of square feet tenants in Boston has completed a space planning process as part of a total reconfiguration of their premises, that takes into consideration COVID planning considerations and their seat count in that premises is down 30% from pre-COVID, 30%. Third, Columbia Threadneedle was downsizing from 156,000 square feet pre-COVID. They signed a 13-year lease for 83,000 square feet, which was in line with their original search requirement. Fourth, we are trying to find space in our Back Bay portfolio for a 75,000 square foot private equity firm, and we are actively asking tenants if they would consider early terminations. This tenant is currently leasing 60,000 square feet. Fifth, we’re managing the build-out of a large multi-floor installation for a technology tenant in 1 of our new buildings. We continue to move forward with the space build out on the entire premises as planned. Sixth, we have a 70,000 square foot technology antenna in Waltham with a 2031 expiration. We’ve made a proposal for them to relocate into 100,000 square feet in June, with an expectation that they’ll take another 100,000 square feet over the next few years. Finally, to show I’m not -- I am being objective, we have a 77,000 square foot consulting firm as a tenant in the CBD portfolio with the June 1, 2021 expiration. This entity is part of a large corporate merger that was announced in late 2019. Pre COVID, we were discussing a 2-year extension. Today, we’re having no discussions, and it’s unclear if they will do anything prior to their lease expiration.
Despite being in the midst of this COVID-induced recession and the corresponding slow repopulation, we continue to have leasing activity and tenants continue to make long-term space commitments. In previous down cycles, as I said before, our portfolio has outperformed, and this will happen again.
This concludes my remarks. Mike?
Great. Thank you, Doug. Hello, everybody. Good morning. I’m going to cover the details of our earnings for the quarter, and I’ll also provide some insight into our expectations for the fourth quarter and some comments on how we are thinking about 2021.
For the quarter, we reported FFO for the third quarter of $1.57 per share. Our earnings were in line with consensus estimates if you exclude the $0.06 per share of charges for the write-down of $6 million of non-cash accrued rent and $4 million of accounts receivable. The $10 million of tenant write-offs this quarter were substantially less than last quarter. And once again, they were focused in our retail clients. In particular, our theaters and health clubs are not demonstrating the ability to pay rent consistently, and we’ve elected to write-off unpaid rent and recognize all rent going forward from these 2 categories on a cash basis.
Our office portfolio remains strong, and we continue to see no meaningful credit weakness among our office tenants. As a reminder, the office portfolio comprises over 92% of our current revenue and collections continue to be strong at 99% of our third quarter billings.
Similar to last quarter, we have provided a page in our supplemental financial package that describes all the COVID-related impacts to our portfolio.
Occupancy this quarter did decline by 90 basis points as we expected, primarily from a known tenant move out of 234,000 square feet in Princeton and 100,000 square feet of transitionary vacancy between tenants in Reston Town Center. We’ve already signed leases for this space in Reston, and we expect it to be occupied in 2021. We partially offset the impact of the occupancy decline with revenue growth from a full quarter of contribution from our 100% leased 1750 Presidents Way development in Reston that we delivered in the second quarter, and $2 million of growth in our parking revenues.
Parking revenues grew by 15% from last quarter. And while this is on a small base, it is a good sign of increases on our building census and mobility in our cities relative to the second quarter.
I want to start my discussion of our expectations for the fourth quarter and 2021 with comments on our leasing exposure for the rest of the year. We report 1.6 million square feet of leases expiring in the fourth quarter. We are actively working on renewals for over 525,000 square feet, and we currently have approximately 400,000 square feet of space that we anticipate will be vacating. In addition, we have 675,000 square feet in this grouping of the tenants whose leases we have terminated, but they have not yet vacated their space. So they’re still in occupancy. We expect that these tenants will remain in place until a resolution is reached. We have not been recognizing revenue from these tenants in Q2, Q3 or Q4. So there’s really no financial impact until we either negotiate a lease amendment, such as within Ann Taylor, or we get the space back and obtain a replacement tenant.
We expect our year-end same-property occupancy to be between 90% and 90.5%. We also will be adding Dock 72 to the in-service portfolio next quarter, which will negatively impact the headline occupancy rate, but have no impact on our NOI run rate.
We expect these changes in occupancy will result in a portfolio NOI run rate for the fourth quarter that will be relatively flat to the third quarter, inclusive of the $6 million of accrued rent write-offs. This assumes we have no new charges in the fourth quarter.
Looking ahead to 2021,we have 580,000 square feet of signed leases in our same-property portfolio that are not currently in our run rate. We expect that these tenants will commence occupancy and revenue recognition in the first quarter of 2021. This includes 170,000 square feet at 399 Park Avenue, which will reach a 100% leased and 40,000 square feet of space at the GM Building.
Including these leases, our New York City portfolio is 97% leased, and it has moderate near-term rollover exposure outside of Ann Taylor, which Doug described. As a reminder, we’re currently recognizing zero revenue from Ann Taylor. So their extension and a portion of their space will add to our earnings in 2021. This group of signed leases also includes our 125,000 square foot lease with IDG in 140 Kendrick Street in Suburban Boston, and the next phase of our lease with Microsoft in Reston that totals a 165,000 square feet.
We also have deliveries in our development pipeline that we expect will add to our revenue in 2021. We expect to commence revenue for our 200,000 square foot lease with NYU at 159 East 53rd Street in the first quarter. And later in 2021, we expect to deliver our 630,000 square foot Hub on Causeway office tower that is 94% leased, and our life science lab conversion at 200 West Street in Waltham that Doug described.
Outside of the office portfolio, while we’re encouraged that our hotel has reopened and our parking revenues are growing, we still expect a slow ramp-up from these areas next year.
The other item to keep in mind for 2021 is in our interest expense line. We expect to repay our $850 million, 4.3% unsecured bonds in the first quarter of 2021 with cash. We do anticipate lower capitalized interest next year as we deliver developments, but the net impact is that our interest expense should be lower in 2021 than 2020.
So to sum it all up, we expect our fourth quarter funds from operations to come in closely aligned with this quarter. This assumes no additional tenant write-offs. For 2021, we expect to return to earnings growth. We have signed leases that are coming in the revenue, we expect a positive mark-to-market, particularly in our Boston and San Francisco leasing, we have several lease developments delivering and we expect to benefit from lower interest expense.
That said, we do have a manageable 6.5% of the portfolio subject to expiring leases next year. We’re working on renewals to cover many of these leases. But for those that vacate, we anticipate an active marketing program that will include white-boxing vacant space and completing turnkey improvements in certain cases. And this could result in modestly lower occupancy in 2021 as we wait for tenant spaces to be built out to commence revenue.
While we would love to provide earnings guidance as we have in the past on this call, there remains significant uncertainty as to the pandemic’s length and severity and the impact on the overall economy. We hope to return to providing detailed forward-looking guidance again in the future.
That completes my remarks. Operator, I’d appreciate it if you could open up the line for questions.
[Operator Instructions] Your first question comes from the line of Derek Johnston with Deutsche Bank.
Just on the work from home trends changing the dynamics of the business. We do have strong historical data on the cyclical impacts of recession on offices. But there does seem to be some evidence of a secular shift here as well. How do you view, and could you address further the possible work-from-home secular risks and office space demand? And this is specifically, as you speak directly with business leaders.
So, Owen you want to start?
Yes. Why don’t I? Well, as I mentioned in my opening remarks, we continue to think that successful companies will be primarily in -- will primarily conduct their business in-person. The customers that we talk to, the other business leaders that we talk to, I think it’s becoming increasingly clear to them that they’re missing something with everyone working from home. Building culture, creating strategy, I hear, loss of productivity, loss of creativity, and then of course, all companies hire and on-board new employees. How do you do that, when you’re working from home? So, I think the importance of the in-person workplace is clear. That being said, I do think, there will be more work-from-home offered to employees as a benefit.
And as I mentioned in my remarks, I think for companies to save office space as a result, employees will have to schedule their work-from-home, not everybody can be out on Friday. And then, when the employees come to work, they’ll have to have flexible work stations and they won’t be fixed. And we do have premium assets and the kind of workforce in those assets may be less inclined to want to participate in such a program in that manner. So, that’s the way we see it shaking out at this time.
I would just add. Again, I just went through, in our -- just our Boston market, literally immediate current decisions that were made, that refuted the whole notion of work from home reducing the utilization of office space. Okay? I mean, those are just -- those are facts. Those aren’t a comment by a pundit in a -- or a talking head in either the Wall Street Journal or on some evening news cast. And I’d just make the other following comment, which is, in 2017there were a whole host of futurists and pundits who are describing the demise of the single vehicle utilization and the fact that autonomous cars were going to fundamentally transform the way people were going to buy and own cars and that our parking garages were going to basically become derelict structures with no utilization.
I would tell you that I think a lot of the thinking that was behind that was just simply wrong. And so I think it’s fair for people to describe their views on what work from home might be. But I think that there is another side of the equation, which Owen described, and we’re pretty strong believers in the fact that people are going to be coming back to work in volume, and they’re going to be using their office spaces. And quite frankly, in 2022, we’ll know what the answer is.
That’s great. Switching gears. So you completed 2 developments in 3Q, both residential, obviously, a small part of your business. But given the environment, how do you anticipate lease-up and stabilization timing and your thoughts on achievable development yields versus initial underwriting?
So I’ll give you my perspective on this, and Owen, you can chime in. The lease-up is a lot slower than it otherwise was because at the moment, people are not moving around in significant ways in urban locations. They’re actually -- as you’ve seen, there’s been some outmigration. We expect that the lease-up is going to be prolonged, that if we thought we were going to be fully leased at the Hub on Causeway in late calendar year 2021, it’s going to be in 2022. And similarly, with Skyline, I think we had a 18-month to 24-month lease-up, and it’s going to be more than 24 months. I don’t know, relatively speaking, how much stress there is going to be on the rents. They’re really coming in the form of free rent for the most part in urban locations. And I think our yields are going to be lower. Our yields are going to be 20 basis points lower or 50 basis points lower? It will depend on that lease-up.
Yes. I’d say I agree with -- obviously, with that answer. I think we just comment that, both of these products are the best or among the best in their marketplace in terms of their quality, amenities and offering. And I think they will compete very well as this recovery, that Doug described, occurs.
Your next question comes from the line of Nick Yulico with Scotiabank.
I guess, can you mind just giving a bit of perspective on what you’re seeing in rents in your markets? How much are they down? I mean I think this is 1 of the big questions everyone is trying to figure out is, what is kind of the fallout in rents been so far? And whether things could get worse as leasing activity is not really picking up here in the back half of the year?
So the answer to your question is nobody knows. There are just simply too few transactions to have occurred to really have any sense. And it’s -- and I don’t think it’s because there’s not pent-up demand for leasing activity. I just think it’s because the health crisis has just prolonged people’s decision-making. I mean we are having success leasing space in 3 out of the 5 markets that we’re operating in, as I described, in Boston, urban and suburban, and Northern Virginia as well as in New York City. And so I do think there is some activity, but it’s not enough to "determine" where market rents are going to be. There’s more sub-lets based on the market, and that’s going to have an impact in the short-term on rental rates because, as you know, sub-let space generally gets discounted and that discounted rent is going to impact the marketplaces.
But we’re just not in a position where we can say how much rents are going to go down by. And then quite frankly, in a couple of our markets, we’re not sure they’re going to go down. I mean I don’t think they’re going to go down in Cambridge, Massachusetts. I’m not sure they’re going to go down in Reston, Virginia. But there are going to be places where there is going to be some pressure.
I do want to make one really important point, which is market rents on average don’t drive the growth of our NOI on a medium or a short-term basis. Occupancy drives it. Whether our rents are up or down by 5% or 7% or 10%, really isn’t impacting what’s going on from a total revenue perspective, occupancy is what’s driving that. And if we are able to, as we have in the past, drive occupancy in a weaker market because people want to migrate to better buildings, I think we will do on a relative basis well, and we will not have a significant degradation on our revenues because market rents are going down.
Second question is just about kind of strategic thinking here. You talked earlier, Owen, about value not being reflected in your stock price. It is at a 10-year low. It’s not just a Boston Properties issue, it’s happening to other office REITs as well. I guess I’m wondering at what point do you guys start thinking about doing something more strategic, look to joint venture assets, think about a stock buyback? I mean one of the points we are hearing is that longer-term lease assets with good credit tenants are selling for strong cap rates in certain markets right now. So at what point do you start looking at pieces of your portfolio in either joint venturing them or outright selling them? Thinking about recycling capital, not just into development, but maybe into your stock price or into your stock buyback, doing something along those lines?
So let me answer that question, which is obviously an important one, both from a use of capital and then a -- well, source of capital, then use of capital. So let’s start with source of capital. So we have been selling assets. We didn’t talk about it on our opening remarks because we don’t have anything active per se this quarter. But year-to-date in 2020, we’ve sold over $700 million of assets. So we’ve been selling. And I agree with what you’re saying. I think we will continue to do that selectively with selective assets.
One of the issues that we have faced in the past with this has been all of our major assets have a very significant tax gain in them. So if we sell them, we can’t keep the capital or we can’t keep all of it. And we have to make either a regular or special dividend as a result. But our income has dropped and our dividend has been flat, and so we can include some of these asset sale gains into our regular dividend, so we don’t face that issue now. So again, we sold $700 million this year, and I would anticipate that we will continue to be selling assets at a little bit more elevated level in the next few quarters.
In terms of use of capital, we clearly think about a buyback, and we think about in the context of the following: one, how much of a difference would it make to our earnings; two, what would the rating agency impact be depending on size; three, what’s the course of the pandemic and what are our needs for capital going to be in the coming quarters; and fourth, what capital do we want to allocate to new investment opportunities.
As I mentioned, we’re seeing more of that this past quarter, and my expectation is, that will elevate further. We have brought in joint venture partners to help us fund new investment opportunities, which will help. But given that balance of all those factors, to-date, we have elected not to use our capital to repurchase.
Your next question comes from the line of Manny Korchman with Citi.
It’s Michael Bilerman here with Manny. Owen, you gave a second half of ‘21 sort of outlook for return to the office, I guess, which is -- appears, I think, probably more realistic at this point given where the densities are. But how do you sort of see things evolving between now and then? And what are the sort of key indicators that you’re looking for to get to that point? And do you feel like that’s an outside date that perhaps would come earlier or do you view that as something that maybe could bleed into 2022?
Yes. Michael, the one thing that we’re following to try to assess when the recovery could occur is what’s the course of the virus? What’s the daily infection rate? Are we beating this thing? I think that’s the most important factor. And so as we think about the 2021, our assumption is that a vaccine will get approved, and it will be -- it will work for many people. And so then that vaccine has to be -- new doses have to be manufactured. It has to be distributed. There may be people that won’t take the vaccine. It may not work for everyone. But it’s going to take a while for that to work through the system. And then, look, I think we all need to follow the health safety guidelines more carefully as a country. I think that’s why we’re seeing the virus blooming in parts of the country because the basic health safety protocols are not being followed. And I’m hopeful that more and more people will do that and that will help as well.
So it’s a hard thing to assess. Our best guess or judgment at this point is that it is in the middle of next year. But to answer your question, could it happen faster? Yes, we certainly hope it does. Could it get delayed? I think it could. But our best case in thinking about the future or most likely case would be sometime in the middle of the year.
Your organization as well as a lot of other sort of office companies obviously are coming back to their offices a lot faster and a lot more denser than other corporations. And Doug shared some of the examples of some of the leasing that’s been done over the course of this pandemic, showing that there is certain tenants that are willing to take up the space. But what are you -- in your discussions with other leaders, what are they looking for in terms of elements to make it much more of an opt-out rather than an opt-in? And what can you do as a landlord to help your tenants? And I think about a lot of the shopping center landlords that have the restaurant tenant clearly not doing as much business, and they realize they got to be partners with them to help them stay in business. And so what can you do? Or is there any programs that you’re trying with the tenants that are more willing to come back?
Yes. Let me start, and I’ll turn it over to Doug for any additional color. So there’s a couple of things I would mention. First of all, we try to have -- and believe we have an industry-leading health security plan that we put together with outside medical experts. We posted on our website, we’ve met with hundreds of our customers. We don’t want the coming to the office building to be the obstacle for someone or a company to come back into the office. And we don’t -- do not think it is. Clearly, at the census levels that Doug and I described in our remarks, I don’t think the office is the obstacle for people coming back to work. I continue -- and then the other thing that we are doing as a company is trying to set an example. We’re all in our offices. We’re using public -- well, not all, but many of us are in our offices, we’re using public transportation, knock on wood, we’re not getting sick. We’re trying to set an example. But I do think as business leaders look at this situation and look at this decision today, it kind of goes back to the -- my answer to your last question, which is what’s the course of the virus? How safe is it? How -- what are the infection rates in my locality? And can I ask my employees to go back to work, given that there may be some health security issues at some point in the chain of the commute?
And Michael, obviously, the difference between retail and office is that our customers are not suffering the gross decline in revenues from their businesses because they’re not "altogether" at the same time, right? They’re clearly not as productive. They’re clearly not as effective. They’re clearly not growing in many cases, but they’re not suffering like a restaurant or a soft goods retailer who is dependent upon physical traffic to basically make a revenue.
The issues that leaders, I believe, are facing are, there are still issues associated with schools. And unfortunately, that’s not something Boston Properties or any private company can solve. And until it’s very clear that the school systems across the country, private and public, are able to function in a "in-person manner," there’s going to be a hesitancy of business leaders to "demand" that their people come back to work. That’s just -- it’s just not going to happen.
Getting back to sort of your first question about what could happen that would be better? If the drugs are really effective, I believe that they will get a higher utilization rate in terms of people actually being vaccinated if there’s a very, very high effective rate. If the drugs aren’t that effective, I think there’s going to be a slower take-up of those vaccinations.
So depending upon the efficacy of these things, you could see a surprise one way or the other relative to how quickly people want to be vaccinated and when those people are vaccinated, how much more comfortable they feel getting back out and about, again, with social distancing and with masks, right, as precautions, but where they feel much more comfortable being active members of society.
Your next question comes from the line of Alexander Goldfarb with Piper Sandler.
So just a few questions. First, Doug, you mentioned the leasing activity, whatever you’re putting in the water at the GM building, I’d say, maybe keep putting it in there. But was most struck by your average lease term of 7-year deals, speaking to brokers in -- especially in New York, just hearing a lot of short-term deals, tenants just doing short-term extensions, but it sounds like your deals this quarter and what you’re talking about are more long-term deals. So can you just give us more color if this was just sort of nuance and the cadence of leasing? Or if there’s something particular in the tenants that you’re discussing with where they feel more comfortable doing long-term deals versus short-term wait-and-sees?
I think that the profile of our customers are companies that have a long-term view that their office space is very important to them and that the pandemic is a short-term phenomenon that is not going to impact their long-term space utilization trends, and so they’re making long-term decisions. And fortunately, there are a lot of those customers across our marketplaces that we have relationships with. And as I described with Ameriprise and Columbia Threadneedle, I mean, we -- there’s a company that didn’t have to come to us, and we literally manufactured space for them, and they were thrilled to be in our building. So part of it’s the type of the customer and part of it is our operating prowess. This is what we do. And we try and do these things all the time through good markets and bad markets. We take what the market is giving us relative to rental rates and concessions, and we do deals.
Okay. And then the second question is out in California. You mentioned San Francisco is now allowing people back in the office. It sounds like LA is still closed. Some of your -- some of the other companies out there have talked about the issue with rent collection, with the eviction moratoriums where tenants feel like it’s sort of voluntary to pay rent. But maybe you could just give an update on what’s going on with sublease in San Francisco? And then just general office trends, if, in fact, people are still working from home in large part, how that’s going to shake out? And where you -- and what you think the longer-term impact is from some of these eviction moratoriums that seem to get extended each time a deadline approaches?
Yes. So again, I think Owen described and Mike described that our collections for our office tenants were almost 99% this quarter -- or this month and that continues. We have not had any pickup in sort of conversations or concerns relative to our collections with our office tenants. And so we’re not having eviction problems with our tenants on the commercial side.
With regard to sub-let space in San Francisco, so if you go back to 2001, sub-let space as a percentage of the total inventory, I think, was in the mid-40s. And then in ‘09 during the Great Recession, it was sort of in the 20% range. And this time, it’s closer to the mid-40s. So I think it’s probably going to feel more like the dotcom than it is the Great Recession relative to the amount of sub-let space that’s available. I think the difference is that the health of the companies right now are very strong. And so it’s a question of when they’re going to be prepared to start making business decisions again when they have some degree of comfort about when they can get their people back to work And when they can start hiring people in a significant way when they’re going to want to have them altogether. And that’s the $64,000 question in San Francisco, which is a technology-dependent market.
I mean those companies are, relatively speaking, doing really, really well. And so we are optimistic that when we get through the pandemic-related issues, there’s going to be a pickup in activity in San Francisco.
Your next question comes from the line of Steve Sakwa with Evercore ISI.
I guess, first, I wanted to just touch on the life science, Doug, you guys have spent a lot of time highlighting a number of either new parcels you’ve picked up, conversions. Just maybe kind of big picture, give us a sense for kind of where life sciences today, where do you think it’s going in Boston, in particular. I know that there’s a lot of space either under construction or to be built, you may be part of that pipeline. But, what concerns do you have about the increasing supply in life science?
So, I think today, we’re -- Mike, we’re about 6%?
Yes. 6% of the Company is leased to life science companies.
And so look, I think, the reason that everyone is, I think, focusing on life science at the moment is because there’s demand, right? It’s about the demand that in -- particularly in certain key markets, Cambridge, Waltham, Lexington and Boston now being probably the pinnacle of that in the country. And so, we have an enormous number of early and late-stage companies that are moving forward with their business models and that are looking for space. And so, it’s that desire for the tenants to want space that is creating the opportunity to build those buildings. And everything we are doing is we’re saying, okay, we’re going to take our office buildings and we’re going to design the kind of office building we want to design. And then, we’re going to make sure that that building also has the infrastructure from a HVAC and from a loading and from a chemical storage and neutralization perspective that will allow for easy life science utilization at the same time.
And then, depending upon what the tenant wants, we’ll build a life science installation or we’ll build an office installation, and we’ll figure that out on the go. And generally, as we’ve I think seen we’re quite confident and capable of doing this. And it’s really a question of tenant demand that’s going to drive which way the product mix goes. There is clearly a lot of companies that are looking at doing these types of conversions. Whether they’ll all be successful, you’re bet is as good as mine. The locations are becoming a little bit more dispersed. The echo centers of Cambridge is, I think, in most people’s minds built out. Although we are actually, knock on wood, trying to get a significant amount of new permits through the city that will allow us to expand our portfolio in Kendall Square. So, people are looking far out. They’re looking at Watertown, they’re looking at Summerville, they’re looking in south of the city of Boston, and then, they’re looking Walton Lexington. And the Walton Lexington, I think, is probably where we’re focusing most of our attention. A, we control land out there; B, we know the brokers who are representing these tenants and where these tenants likely want to be, and they want to be in those western suburbs, it’s also more affordable. And there’s a significant amount of demand that’s out there, which is what we’re trying to serve.
One of the additional comments from the Boston region that we’re finding is that we clearly have the competitive advantage with our basis, not only in land or in the buildings that we’re converting. And the strategy of taking these incremental pieces of buildings that we already own has really played out. And what we’re hearing over and over again from these companies is predictability is so incredibly important to them. And that gets back to Doug’s comment on operating prowess and then our ability to not only get the permits in these existing assets, but deliver in a very predictable basis. It’s been said over and over again recently that this is so important to them. So, it plays well for our strategy in Boston.
Okay. And just as a quick follow-up, is there any sort of update on your joint venture with Alexandria in South San Francisco?
I think, I made two comments. So, first is, we have a tenant and we signed a letter of intent with an office tenant for the 601 Gateway Building to take about 70,000 square feet of space. And, our plans are, the first thing I think we’re -- the venture is going to do is they’re going to vacate 651 Gateway and make that building into a lab building. It’s currently an office building. So, I think, that’s the first thing. And then, there’s a building that is under design for -- I think, it’s 180,000 square feet, which is the next building, but we’ll probably be in a position to deliver 651 as a lab building before we get that other building underway.
Okay. And then, maybe a question for Mike. Just I wanted to circle back, when you talked about revenue recognition, I think, you said it was 581,000 square feet starting in 1Q ‘21. And I know you have leases expiring next year. But, what is the average sort of -- or average rent on that roughly 600,000 feet that kicks in, in 1Q ‘21?
Well, the reason I gave you kind of where it’s located is to provide some insight into what that is, without giving you the exact rents. But, I mean, 170,000 square feet is at 399 and 40,000 square feet is at the GM Building. So, those are rents that are -- those are high rent buildings, right? So, those are close to $100 or certainly over $100 for the GM Building.
And then, the other two big slugs of that is suburban Boston, where the average rent in suburban Boston is probably mid-40s, high-40s, and that’s the 125,000 square feet. And then, the Reston, rents are right around $50 a square foot, where, again, we signed a big lease with Microsoft for 400,000 square feet last quarter, and it goes in, in phases. So, a portion of it went in, in the second quarter, 165,000 square feet of it is going in, in the first quarter of ‘21. And then, I think, it’s another 50,000 or 60,000 square feet that goes in later in 2021. And that’s all kind of in addition to the other renewal we did with them this quarter, which was about 160,000 square feet; and then, two incremental expansions, which was 45,000 square feet in one of the Freedom Square buildings, and then they basically took all of one of the Discovery Square building.
So, the lease we mentioned in our press release was 186,000 square feet, and that was basically them extending long term and then taking the last additional floor they didn’t have in Discovery Square. So that’s been quite successful. So, those expansions which went into place this quarter, again, the rents in Reston are right around $50 a square foot. So, that was intended to give you some insight into the impact from those deals.
All right. And then, as the Athena 150,000-foot that’s not part of the 581, that would be in addition too?
Yes. That’s not part of the 581. The expectation is, hopefully, we’ll be able to get that deal signed. It is not signed yet. It is under discussion. But, we think they want to stay in the building. They’re going to contract by probably 150,000 square feet. And then, they’re going to continue to take 150,000 square feet on kind of a medium-term basis with no kind of out-of-pocket cost for us. So, it’s beneficial to us. So, I’d say the rent is a little bit below what we would otherwise get for that building, but there’s no cost and it’s medium term, and we’re keeping occupancy. So, it’s beneficial to us. And I think that they should start paying rent at the beginning of 2021. And right now, again, we are not recognizing any revenue for any of that space.
Your next question comes from the line of Jamie Feldman with Bank of America.
Great. Thank you. Owen, you had commented on the distribution at a 5% yield. Can you guys just discuss the safety of that 5%? And as we kind of work our way through the pandemic, risk that it goes lower or even opportunity that it goes higher?
So, are you touching on the dividend, Jamie?
Yes, dividend coverage.
So, the dividend coverage, right, has gone to 110% the last couple of quarters because we’ve had these rent deferrals that we’ve done that has affected our cash NOI. Our parking and our hotel are obviously way off. And then, this quarter, we had a little bit of occupancy degradation on top of that.
And as Owen described, we think that this is going to continue until these parts of the business start to improve, and then our development starts to come in line. And what we’re doing is, we’re selling some assets that have gains in them, and we’re able to be comfortable that we’re maintaining our regular dividend without having to do a special dividend. And we’re kind of opportunistically doing this. So, if you include the gains on sales, we’ve got plenty of cash flow to cover our dividend. There’s no kind of concerns with that. We have no concerns at this point with our dividend. And as you look further out and you look at the development pipeline coming in and the income that that is going to create and the cash flow that that is going to create, our view is that in future years, we’re going to be back to increasing our dividend. So, that’s -- there’s no kind of view here, at this point, that we’re going to reduce it.
Okay. And then, it was helpful to hear, I think, you said 15% increase in parking quarter-over-quarter. Are there any other line items that you can talk about sequentially that kind of give a picture of where things are heading, or anything got worse or anything got better?
So, I would just say, Jamie -- this is Doug that -- so look, the hotel and the parking are unlikely to improve materially relative to where they were in 2019 in the first half of 2021. That’s our view. And, again, the parking revenue is driven by two things. Monthly parkers who are office tenants who are coming to work a significant portion of the week, and transient retail in Boston and in Cambridge and in Washington D.C., for people who are enjoying the urban nature of those cities. And, our view is that the first half of 2021 is going to be a lot closer to how it feels today than it felt in 2019. Again, we talked about the health issues, and we talked about that’s really what’s leading our economic viewpoint. And so, while you may see sequential increases, we’re down by -- from such a low bar, it’s not going to be a material difference. And again, the hotel was closed in the second quarter and it was closed in the third quarter, and it’s going to basically be breakeven from an operating basis in the fourth quarter of 2020 and probably the first quarter of 2021, again, because there is just no business travel.
So, people should anticipate and it should not be a surprise to anybody that those line items continue to be materially impacted by what’s going on from a COVID perspective. But, when they come back, they’re going to come back really strong, and the question is when.
Okay. And then, finally, we get the question a lot of just if people were to reduce their office space, what kind of impact is that to their total operating costs. Could you just provide some color maybe from the conversations you have had with tenants about how much of a cost savings it really could be to their bottom line?
We have never had those conversations directly with a tenant. I mean, we see from all of the tenants that are public companies, how much their rent is as a portion of their gross revenues or their gross margins, and it’s not very material with the financial institutions and the asset managers, I mean, they’re -- it’s immaterial, probably under 5%. With some of the professional services firms, they have two costs. They have payroll and they have real estate. And my guess is that payroll is vastly larger than their real estate on a relative basis. But, it’s a lot easier to quote unquote, reduce your headcount or your occupancy cost than it is to reduce your payroll, right? It’s just the emotion associated with that.
So, I don’t think that very many companies are thinking about utilization of space as a way to, quote unquote, materially change their margins, unless they’re in trouble, because the recession has dramatically reduced their overall revenues. And then, everything is on the table, and it really doesn’t matter how much one is of the other. They’re just looking at shed costs wherever possible.
Your next question comes from the line of Vikram Malhotra with Morgan Stanley.
Just maybe first building on one of the life sciences questions. This is obviously, as you highlighted, a lot of interest, a lot of demand. On the private equity side, there have been recaps or potential sales, REITs and other sectors have obviously been very active. I’m just sort of wondering where the footprint is today in Cambridge, how you’re thinking about -- you’ve talked about conversions and development. How are you thinking about potential acquisitions in light of the comment you made about your pipeline building and/or potentially growing the life science piece of business in other markets?
Yes. So, Vikram, I’ll start, and Doug and Mike might want to jump in. So, as -- in terms of our current footprint, as you heard, about 6% of our revenue comes from life science tenants today. We have about 2 million square feet of redevelopment opportunities in our existing portfolio, some of which is already underway. And then, we have now about 4.5 million square feet of new development opportunities. All of this is under control, some of it through option. And as Bryan mentioned, it’s all on what I’d call -- the basis was established prior to all of this life science fervor that’s in the marketplace. So, that’s a huge benefit to us.
So, we feel that we can materially grow our life science presence as a company, executing well on the opportunities that we already control. And Boston -- and those opportunities are primarily in Boston and San Francisco, which represents the majority of all of the lab and life science space in the country anyway.
That being said, we’re not blind to new opportunities, and there are a number of them out there, and we are looking at them. And there’s certainly a possibility that we could add to our portfolio, maybe even in a market where we are currently operating, but do not have a life science presence, and we’re considering things like that. But again, I would make the point, our life science business is going to grow, based on the assets that we can currently control.
And then, I’m just hoping to get more color. You mentioned from a value perspective, higher quality buildings are trading at pre-COVID levels, whether it’s more work or lower quality, there’s a big bid-ask. Just wondering kind of what you’re hearing in terms of who those potential buyers are for that second category. And, is there any sense you have of what the -- actually what the bid-ask is? Just maybe give us a sense of where values for certain types of properties could go over the next moths?
Yes. So, first of all, the assets that are trading, if you looked at that list that I went through, there are two -- they are either one in -- one of two categories. They’re either life science or life science related, or they have a long weighted average lease term. In other words, there is no leasing risk in the property. So, buildings that have leasing risk, a 5%, 10%, 15% turnover per year, or have some existing vacancy, buyers are going to assume lower market rents in most -- in many of our markets, and probably slower lease-up, given the volume of leasing activity is less. So, owners of those assets, and when you do that underwriting, that results in a discount to the value than it was pre-COVID when assumptions about market rent and the velocity of leasing were higher. And I do think a lot of owners, when they’re faced with that decision or -- they are going to say, well, I don’t want to sell it now. I believe in the full recovery of the office market, and the interest rates are very low, I’m just going to refinance and hold on. So, we just don’t see that many trades.
And I think, Vikram, to answer your question, I don’t think there’s that many deals you can actually look at to price it. And second, in terms of the value drop, I think, it’s highly dependent on the characteristics of the building, a building that’s got just -- that’s fully leased, that’s got typical rollover, 5% or 10% a year. That one is probably not going to go down that much. But something that is 30% vacant today or faces higher rollover rates, that will go down more. So, I think, the answer to your question is based on the specific characteristics of the building.
Your next question comes from the line of Blaine Heck with Wells Fargo.
Thanks. Good morning. Just looking forward to 2021 on the office side, I think, Mike touched on this. But, it looks like San Francisco and Boston make up the majority of your expirations, about 56% of next year’s expirations between the two of them. Doug, you mentioned that you still have significant upside in those particular markets. So, I’m wondering if you could talk about where you thinkthe mark-to-market is in those markets as it stands today. And how much should that help in your ability to report positive spreads next year?
So, it depends again on the particular building. In general, in San Francisco, if we were in the fourth quarter of 2019, I would tell you that average rents were -- across our portfolio, were in excess of $100 gross. Okay? So, if the $61 a square foot gross number represents the 114,000 square feet of space that we already have pre-exercise relative to renewals, there’s still -- there’s a significant embedded growth there.
Our properties down in Mountain View that are expiring are probably expiring somewhere in the range of $36 to $40 triple net. And in the fourth quarter of 2019, rents were probably somewhere in the neighborhood of $60 triple net. And interestingly, I’d say, of all of the markets in our -- in the quote unquote, California part of our portfolio, the market that’s held up the best has been Silicon Valley, because there’s a lot of engineering work and a lot of maker work, and those companies are still doing their thing, and there’s still VC money that’s funding those companies. So, that market has seen much, much less sublet space come on the market.
In the Greater Boston marketplace, we -- again, it depends on the buildings. All the conversions we’re doing have enormous embedded increases because we’re going from somewhere in the mid to high-20s on a net basis to somewhere at a minimum in the low 50s on a net basis. And then, in our CBD portfolio, the current rents pre-COVID were somewhere between $75 and $85 a square foot on average across our portfolio. And my guess is, our expiring rents were somewhere in the 60s a square foot.
So just to give you -- those sort of gives you a sense of sort of where things are.
Okay. That’s helpful. Just to be clear, you’re quoting those Q4 ‘19 rents just because you haven’t seen enough on the transaction side to give current rents?
Yes. So, I’m allowing you to say. I think, rents are going to go down by 5%, 10%, 15%, whatever you think they are, and you can do the math however you want to do it.
Fair enough. Okay. And then first of all, congratulations on the VW lease, Reston Next and great to see that project get up to 85%. So, I think that’s certainly the main thing to focus on here. But, a few questions around that. I think, Doug, you mentioned that Fannie Mae decrease their space requirement to around 700,000 square feet, which is down from their original agreement for 850,000 square feet. Can you just confirm that the giveback was -- the reduction in requirement would solely to accommodate VW’s lease or was it something else? And given that this is their second time decreasing the space requirement, do we think there’s any chance they’re looking to downsize anymore? Lastly, how does VW’s rent compared to what you agreed on with Fannie Mae?
Well, Ray or Peter, do you want to take that question?
I’ll take a shot at it, Doug. This is Ray Ritchey -- go ahead, Peter. You go ahead.
No. Well, I was just going to say that Fannie delivered a car properties built them a very large complex downtown, which is actually their headquarters that delivered a number of years ago. And their operating history in that property led them to revisit the actual space needs and the way they were operating in the space. That was the reason for the initial reduction. And Ray, you probably want to add to that?
Yes. In order to make the Volkswagen deal -- Volkswagen was interested in our complex before, but we didn’t have enough space. And so, when Fannie voluntarily gave back three floors, it gave us an opening to go back to VW and make an offer. And what prevailed there was not so much the economics, but just the quality of the location, its visibility, access to metro and amenities. And in order to do the deals, we had to negotiate with Fannie taking back two more floors, which they really didn’t want to do, but they wanted to be good partners with us, so we ended up concluding the deal with Fannie. And in terms of rent, we’re just not going to comment on what one rent looks in comparison to another. But, I would just say, it’s very much consistent with our pro forma.
So, I just want to want to make one general comment here, because I think people sort of -- they don’t appreciate it. So, what we accomplished in Reston and what we accomplished, for example, with Columbia, at Atlantic Wharf, these are hard manufactured deals. And we took these tenants from going to other places where they were -- in the case of Fannie Mae -- excuse me, VW, I believe, there was a signed letter of intent and a lease that was in negotiation. And we were able to get the space and say, by the way, we can deliver the space, trust us, it’s going to be complicated, but we can get to there. And similarly, with the Ameriprise Columbia Group. I mean, this is what we do all the time to maintain occupancy in our portfolio. And I think it’s what differentiates us from many of the people who are in our "competitive marketplaces," and it’s where the value creation is.
So, when you think about the office market and you think about what’s going on in a macro perspective with concessions and with where rents might be, just have the underlying perspective that we can do things in tough markets that other people might not want to do or can’t do and maintain our occupancy in our portfolio in a way that really puts us in a very good standing relative to our underlying revenues and our underlying FFO and our underlying AFFO and our cash flow.
Doug, if I could just add to that? This is Ray again. In Reston, on the Microsoft deal, we did a new deal with Microsoft for 400,000 square feet, which we’re incredibly grateful to do. But, in doing so, we had to relocate another 250,000 square feet of existing tenants to other buildings. And so, when you have a critical mass, like in Reston Town Center or in Cambridge Center or in Embarcadero Center, that scale and size of our portfolio really allows us to be creative on deal structure and to accommodate both, tenants growth and contractions without losing the tenant outside our portfolio of buildings. So, really one of the strengths of the concentration of efforts in certain geographic areas.
Certainly a great outcome. I just wanted to get some color around the moving pieces. And I appreciate the commentary from all of you. Thanks.
Thank you.
Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.
This is Ardie Kamran on for Craig. I appreciate the color on the transaction market and kind of the difference between kind of the stabilized assets versus those with lease-up risk Just wondering, given that you guys are kind of going to be more active on the acquisition front, or a good portion of those assets in the pipeline in that value-add category where we see a widening bid-ask spread. And kind of how are you guys thinking about underwriting those assets, given obviously the uncertainty surrounding rent levels and maybe CapEx needs in the medium term? Thank you.
Yes. No, I -- this is Owen, again. So, absolutely, I -- our new investment pipeline is going to focus on value-added opportunities. As Doug was describing, that’s our strength, our ability to execute, to attract tenants, to secure tenants, to build buildings on time and on budget to re-imagine existing buildings, those are the types of things that we want to get involved in. And I think, over time, and we saw it this past quarter, I do think more opportunities like that will present themselves.
And, we are going to have to adjust our underwriting. Again, it depends on the market. As Doug was describing earlier, I think, some of our markets have been perhaps relatively unaffected from a rental rate standpoint, given their strength and others have been more affected. But, we will have to adjust our underwriting, both in terms of rents, concessions and lease-up velocity to be mindful of the current environment.
Great, thanks. And just one quick one. Can you guys talk about if there’s any increase in sublease space, if that’s picking up at all, within the portfolio?
There is absolutely more sublet space in October of 2020 than there was in March of 2020 in our portfolio. Is it meaningful? I don’t think it’s meaningful, but there are certainly -- I can -- I know of a handful of our tenants that have said, hey, if we could get someone to take our space, we’ll get off of our space. I mean, the biggest example of that is CV Star in our portfolio in Manhattan where they have a lot of term left on their lease. Again, it’s not because there is a financial problem with that tenant. They’re just -- they’re trying to be opportunistic. And to the extent that they’re able to find somebody for that space, I don’t know what they’ll do with their people, but we’ll deal with it. But, there are those types of examples throughout the portfolio, but not in significant numbers.
Your next question comes from the line of Omotayo Okusanya with Mizuho Securities.
Good morning, everyone. Could you just share your latest thoughts around [indiscernible] kind of on the eve of the elections?
Bob, are you on?
I’m here. I think that it’s very close right now, but I don’t think it will pass.
And is that based on you just kind of think [indiscernible] would be a little different on doing election day or...
Just based on the polling we’ve been seeing.
Just based on -- okay. That’s helpful. And then, just to confirm around life sciences, based on your comments that you guys are more interested in just kind of building your portfolio rather than actively buying it. So, is it fair to say some of the portfolios out there that are potentially up for sale, you’re not actively looking at them?
No. We are looking, absolutely. I think, the point is -- and we have, we’re in the market. We’re a life science player. We’re going to look at new acquisitions. And we will make those acquisitions if we think they make sense. But, the point I’m trying to stress is, we don’t need to do that to grow the life science component of Boston Properties materially, based on the development opportunities and redevelopment opportunities that we currently control.
Got you. So, would you say something about the characteristics of the Brookfield portfolio? I mean a lot of it is in Boston and Cambridge. Is that something that would attract you, or is it just the nature of the location doesn’t really attract you?
Yes. Look, we don’t want to comment on specific investments that we’re looking at or pursuing, but I think it’s our job to understand everything that’s in the market. And if we think we can create a value-creation opportunity for shareholders to chase it. So, clearly, that’s something that’s on our radar screen.
Okay. And one…
By the way, we follow the market carefully. I mentioned, I believe, five specific asset sales in my remarks, and four of them were on buildings that were almost immediately adjacent or very proximate to buildings that we have. So, we’re always in the market in the Class A office and life science space in our core markets.
Got you. And if we just indulge one more. Development, the delays in the quarter, could you just tell that -- and I hope I didn’t missed this before, but what exactly caused some of the delays? Is it just having had a time getting leases signed, or what’s causing some of the delays in the development pipeline?
So, I mean, we really haven’t delayed. I mean, 159 East 53rd Street, we have pushed that asset back and it’s really related to the build-out, it has nothing to do with what we’ve done. We’ve completed our obligation a year ago, and we’ve been getting cash rent from that tenant for over a year. And, it’s sitting in prepaid rent on our balance sheet. And as soon as we can deliver this thing, it’s actually going to come in. So, that one, again, we’re kind of reliant upon the build-out timeframe on that. And then, we pushed 200 West Street stabilization out a little bit. But, Doug described, got a letter of intent signed for the entire building. And that’s when the tenant is going to complete their build-out. And we hope to have that be signed shortly. And 20 CityPoint, we also have an LOI for that entire building. And that tenant’s build-out is going to be completed in Q3 of 2021. So, we’re basically just adjusting based on leasing activity that’s going on in the pipeline.
Your next question comes from the line of Frank Lee with BMO.
I just want to touch on the rent write-offs taken so far. Do you have a sense of how much percent of the uncollected rents do they account for? And were there any reserves taken on your co-working tenants?
In terms of uncollected rents, I’m not sure what the exact percentage is on the existing AR. We do have deferred rents that we described in the quarter, which are rents where we are accruing for those tenants, and that was $18 million. So, those are, I guess, rents where we wrote off $6 million of AR, and we still have $18 million that came in this quarter that were deferring. So, I think that will give you a sense. We did have one co-working tenant that we wrote off this quarter, but it was a smaller exposure that we have. So, we do still have a couple of co-working tenants in the portfolio that continue to pay us on a current basis, and that we have not taken write-offs for.
Okay, great. And then, Doug, you mentioned the GM Building has been the most active in your portfolio. Can you provide some additional color what’s driving this?
John Powers, do you want to take that one?
Yes. Well, I think, it’s a great building. And the type of tenants that are in the building are financial tenants mostly, or family offices, et cetera. I think, there we have some vacancy in the building. That’s one of the reasons, of course, that they’re looking, but this is a very attractive building, and we’ve had a good flow.
We’re also putting an amenity center in the building that has been very, very well received by the tenants sort of looking and also those tenants that have done leases with us.
Your next question comes from the line of Daniel Ismail with Green Street.
Great. As you’re looking at redeveloping in Waltham or at your land bank and other markets, has the entitlement process changed this year, gotten easier or any harder, given the worsening situations in most these cities and states?
Bryan, do you want to take that one?
We’ve really seen no change at the local level in terms of these towns. In fact, in some cases, it’s been more expeditious, believe it or not just being able to get people more on Zoom calls. Where we have seen some great improvement is our work with the state. And a great example of that that we’re going to be coming out with the best on is our improvement at the intersection at CityPoint. Our team was able to get that intersection work done. And in four months, it’s up and running, which probably would have taken a year to a year and a half, previously. So, it’s been an opportunity to partnership with the -- not only the city of Waltham, but the state of Massachusetts to get that work done quicker. So, that’s where we have seen improvement.
And then, relatedly, any update on the MTA sites and in Manhattan?
John?
Well, we continue to work on the site with the MTA and city planning, and we’re about to enter into the ULURP process, our application -- meaning our application will be accepted. I think that will happen sometime in the first quarter. We are moving forward as the agent for MTA for the demolition of the site, and we’re starting that. We’ve awarded that contract, and the early demolition work is starting. So it’s going to take about a year to take the building down.
We have not -- go ahead.
No. Please, go ahead.
Yes. So, we are still negotiating the ground lease agreement with the MTA. We are now currently acting as the agent on the development site for the demolition.
Great. I appreciate the color. And then, maybe going back to remote working, I appreciate all the real world examples you guys have provided on the call thus far. But, is it fair to say that you have not noticed any meaningful differences between regions and industries for the demand for office space, specifically as it relates to remote working?
It’s an impossible question to answer, Danny, because there’s relatively speaking, different impacts on the ability for companies to do business, based upon the geographic locations. So, I mean, I don’t think it’s a surprise that the activity level in Boston, the activity level in Northern Virginia and the activity level in New York are greatly -- more significant than the activity level we’re seeing in Los Angeles and San Francisco. And Los Angeles and San Francisco have been the governments that have been most restrictive about going back to work and where many companies in the technology space that quote unquote, can work from home, are located. So, those organizations have been at the forefront of not being allowed to come back to work. And so, I think it’s impacted their ability to sort of understand and know from a leasing activity perspective and from a space utilization perspective, what the world is going to feel like when they’re able to start to do things in a more consistent basis.
And again, so we would anticipate that if we’re getting out of the COVID restrictions in the middle of 2021 in a significant way that we will start to see those organizations bringing their people back to work and then making decisions as to how it’s going to -- how it actually impacted their productivity and their collaboration and their ability to get their business goals accomplished. And if they couldn’t do those things, we think they will need to take more space to be able to fit those people to the extent that they decide that there’s a portion of their population that can work partially from home. And they can, as Owen said, share their physical platforms amongst each other as opposed to having dedicated platforms to an individual, then they won’t need more space. But, I just think it’s impossible to answer the question because everyone is in a different place relative to the -- where the governments are allowing them to go from a health security perspective, and as we’ve seen, even where the restrictions have been lifted, the social issues associated with particularly educational systems have put companies that are really positioned relative to quote unquote demanding the people come back to work.
One of the things that we’re talking about, we’re passing along to leadership to Doug and Owen as we’ve had incredibly deep conversations with our clients in Boston, mainly because we’re having this access to them that we’ve never had before as they talk about their space and they’re more focused on it than ever. And one of the CEOs put it really well to us, he said, I’m really concerned about uphill work. And what he meant by it was downhill work is your email work, your compulsory stuff that you do as a day-to-day basis. But, uphill work being strategy, projects, heavy lifting about creating value is the biggest concern. And I thought it was a great metaphor because that is the theme we’re hearing over and over from our clients. And the fact that we’re having these deep conversations on it, I think, shows the importance of office space. But, we’ve been passing this along the leadership. And while it’s still anecdotal, it’s pretty strong message about the need for future value creation, and the portion of that that workspace is going to play in that.
I will now turn the call back over to the speakers for any closing remarks.
Thank you, operator. I think that concludes our remarks, concludes all the questions. Thank you for your interest in Boston Properties.
This concludes today’s Boston Properties conference call. Thank you again for attending. And have a good day.