Dream Office Real Estate Investment Trust

TSX:D.UN

Earnings Call Transcript

[Operator]

Welcome to the Dream Office REIT Third Quarter 2023 Results Conference Call for Friday, November 10, 2023. [Operator Instructions] The conference is being recorded. During this call, management and dream office REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Office REIT's control, that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in Dream Office Suites filings with securities regulators, including its latest annual information form and MD&A. These filings are also available on Dream Offices REIT's website at www.dreamofficereit.ca. Your host for today will be Mr. Michael J. Cooper, Chairman and CEO of Dream Office REIT. Mr. Cooper, please proceed.

[Michael J. Cooper, executive]

Thank you very much. I'd like to welcome everybody to our third quarter conference call. Today, I'm here with JJ, the CFO; and Gord Wadley, the COO. I was going to make some opening comments before I turn it over to Jay and Gord. Over the last 18 months, we've seen some massive changes in interest rates and economic activity in the housing market and generally an economy, number one, number two, as a result of coliti-changes in the workforce, we see real changes in how office buildings have been used. So, it's really remarkable because overall, a lot of segments of the economy are doing quite well. But I would say that real estate generally in office buildings, specifically on the wrong side of the big trends. So, I mean, it's very frustrating, and it makes it difficult, but I think our business is doing very well, getting through this. Our view is that things are getting better. We don't know how long it will take. But the equilibrium level will be much more desirable for owners of buildings than what we have now. So, what we see in the last 90 days is about a 10% increase in the number of people downtown. And it's been an incredibly slow recovery. But we are seeing a solid recovery. We're seeing lots of interest in retail downtown. The use of the retail stores. We're seeing more people in the premises, and we're accessing lots of tours. And if you've been paying attention, we talk a lot about tours over the last couple of years because we've got lots of tours, but we haven't mentioned the got lots of leasing. And I think what we're seeing now is they have lots of tours, lots of leasing, and we have lots more tours and lot more leases. So effectively, I think we are seeing a lot of progress. It's very expensive. But the run rate of the leases that we're doing now. We're glad to have great tenants in the building. It's a lot better than vacancy. We burn off the cost relatively quickly and the building is in good shape. The expectation is that over the next 2 or 3 years, we will see decent rents and less costs. And that will be modelled on September 6 when we put out our numbers saying that over the next in September, I think we so the next 3 years, we're assuming the same cost of deals as we have now. And after that, we're looking at the main half way in to where we were half the way increase in occupancy to where we were and the company starts to look what we don't almost 3 years or not. But I think we're weathering is really unique time, quite well. And the other thing I would point out is I was leasing office space in 1992. There's a couple of things about that way fewer teen way fewer transactions, even more expensive on the one hand. But the other thing was the economy generally was in much worse shape. So we see a lot of businesses growing. It's a very positive sign for our business. So, I think the economy generally is much healthier than in 1992, even though the environment right now is where that we've seen in a lot of years. So, we're happy to answer questions later, but I'd like to turn the call over to Jay, and then Gord, Gord and then Jay, to go over to more detailed specific about our business, and we're happy to answer questions after that. Gord?

[Gordon Wadley, executive]

That's great. Thanks, Michael. I hope everyone's doing well. Just to pick up back on a lot of what Michael was saying, none of us in the industry are muted the headlines and I don't think there's been anything more polarizing than the impact of value, slower-than-anticipated return on the office and negative sentiment around office space and noncore, but predominantly B and C class assets. I would say Toronto has fared much better and we're quite optimistic year-to-date with about 614,000 square feet leased already. Just to give some perspective, we're on track to exceed last year's full year leasing velocity of 659,000 square feet. We've got another 240,000 square feet of deals that are conditional or under event negotiations, and we still have almost 2 months to go to close out the year. So, on a gross leasing perspective, we've been outpacing 2022, which for some context was our best year since 2019. Our recognition and ability to manage, coupled with our well-located assets has helped us secure some of the best covenant tenants for arguably some of the biggest deals in a very, very competitive submarket. We're pleased to announce that we've been able to secure infrastructure Ontario for their largest renewal of the year 438 University, Setco hedge fund administrators head-quarters at 20 Toronto, ICICI bank headquarters for the full building at 366 Bay Street, and were conditional on a renewal for one of our largest tenants in the portfolio. From an income perspective, we're seeing a very healthy spread of 17% on a net rent from 2 expiries. Walt for the large-scale deals completed year-to-date have a weighted average lease term of 7 years, which is almost 2.5 years higher than the market average. From a performance perspective, the Canadian office market over the last 3 years can best be described as dislocated. For example, when one performance metric sees improvements or an indication of stability, such as overall vacancy rates or absorption and other metrics such as the amount of new vacant space arriving on the market trends upward and alternatively, NERs and income metrics also fluctuate due in large part to costs. Couple this with growing interest rates and softening cap rates, there's undoubtedly been some challenges in the sector, not seen since the great financial crisis. Up until the end of Q3, this pattern remains as deal velocity like Michael said, absorptions and tours are all up significantly year-over-year. But to be clear, nurse continue to see material pressure with inducements, construction costs, commissions and overall cost increases to transact. As a result, we've seen average NERs compressed coming in at around $17. However, average net rents continue to remain strong and consistent underwriting anywhere from $30 to $35 a foot. Overall, and competitive vacancy this quarter stabilized across all classes in Toronto sits at about 17.5%. It's buoyed largely by a low vacancy in the Class A assets. Although the vacancy rates themselves did not see much movement quarter-over-quarter in the city, our managed and REIT properties saw positive absorption, and we're doing about 600 basis points better than market with a current and committed occupancy in Toronto of almost 89%. This is up almost 50 basis points quarter-over-quarter, and I want to point out that for the third straight quarter we've seen growth in our current and committed. This is supported by some key deals, including [ Chopin ] Adelaide plays for 12,000 square feet, as I mentioned before, ICICI Bank for about 40,000 feet, and we also did IO for about 200,000 square feet at 438 University. That's going to see them extended until 2030. A lot of commentary has been made about the 20-year high in sublet space, which currently makes up about 30% of the total vacant space in downtown Toronto. Specific to our business, those sublease space only makes up about 2% in our portfolio today. The cost to improve suites has grown dramatically over the last 3 years. I'll be honest with everybody gone on the days when you can simply induce with basic carpet, paint and ceiling tiles, Tenants are so much more sophisticated in their expectations for a suite. CEOs, have been replaced on tours by HR and facility managers, front and center as HVAC quality, tech, video hubs and smart building software as well as adaptable furniture systems and wellness rooms. All of these cost drivers have seen an RSP compressed on average by about 20%. This is all coinciding with materials and soft cost increases and some supply chain and procurement challenges to deliver. I am, however, very proud of our team to date as we often self-perform the work and have consistently delivered on time and on budget. This reputation has been a real catalyst, catalyst for us in helping us win deals and outperform the market. As a result, we've earned almost $400,000 in net fees and mitigated about $600,000 in third-party fees, which we end up pertaining. We've had some very, very cautious optimism with the additional 240,000 square feet of LOIs in traditional deals and very active negotiation, which we hope to report on in subsequent quarters. One key driver to our future success is retail. The past few quarters, we've been highlighting the negotiations and prospect of completing 4 marquee deals on our Bay Street collection. We'll proud to say we've completed all of them. We've welcomed Neos, [ Gaffney, cocktail, allow bar ] and now Chop Steakhouses newest concept at Adeline place. These are major retail deals with some by Canada's top restaurant tours, and 1 of a double total over 52,000 square feet. With the high cost of retail transactions and our strategy with retail finalized, we're optimistic leasing costs on a net basis will come down. This net new absorption with average rent close to $7 a square foot, an annualized NOI impact of an additional $4 million. These are all in our most desirable node thus finishing off and finally, supporting our thesis of bringing an elevated and all-new experience of boutique luxury to the core. This position us as well as for tenant flight to quality and really helping us drive value in the security offerings that often appeal to Canada's top covenants and most discerning tenants who cut the quality more so than phase rate. I'd say no one in the real estate market today is a means to the impact of rising interest rates and it's become more challenging lending environment today than 3 years ago. Since a historical low 40 basis points in the mid-20s, the 10-year Government of Canada bond yield and cost of debt has risen by more than 330 basis points. Lenders are actively reviewing their office loan exposure and are becoming more selective based on properties location and quality and really taking consideration and really putting it into addition the covenant of borrowers. They're evaluating tenant profiles and leases very carefully and loans are sized more conservatively. Getting back to my previous point on any compression, tenants to are much more sophisticated in their demand, and they're acutely aware of their own balance sheet and liquidity position. And many are trying to push traditional tenant costs to the landlord on transactions to induce and win their tenancy. This is having a real impact in this high interest rate environment, and we're seeing this all over the sector. Our downtown Toronto committed occupancy continues to be very resilient and our pipeline is strong, which will continue to support healthy cash flows at our buildings. Covenant-wise, we have large commitments with the federal, provincial and municipal government as well as Crown corps, coupled with a premium location, asset quality and leasing prospects for our retrofitted downtown assets. Fundamentally, we continue to improve and leverage our strong lender relationships to ensure that our balance sheet is well protected through what we believe will be a trough in the lending market. We're renewing our largest tenants and have done so with IO, ILAC, State Street, federal government and were conditional with our last big large tenant for a material blending. More to come on this next quarter when we can announce. Despite some of the macro challenges in the sector, I really couldn't be more pleased with how the whole team has navigated through some evolving challenges to the industry. Their efforts and dedication to not only our company but to our clients is what I'm most proud of. At the end of the day, it's just a combination of having irreplaceable assets, coupled with the quality, high character of the team of people that we have operating and leasing these buildings that really gives me the greatest confidence closing out 2023, and going into 2024 in spite of whatever headwinds or macro challenges will face. And I'm going to turn it over to my friend, Jay.

[Jay Jiang, executive]

Our third quarter FFO per unit was $0.35, which was flat year-over-year. Included in the FFO was approximately $0.01 of nonrecurring restaurant start-up costs in one of our joint ventures on Bay Street. Accounting rules require us to expense these costs upfront, but we will be able to recover it from our tenant over the term of the lease. We expect our fourth quarter FFO per unit to be relatively flat from Q3. We think the total portfolio in-place occupancy will be up about 75 basis points as committed leases take effect towards the end of the year. This is offset by timing of temporary free rent periods and higher interest expense. We expect our 2023 full year comparative properties NOI growth to remain in the low single-digit range. We will provide our 2024 forecast on our fourth quarter conference call in February. Our comparative properties NOI was up $1.2 million or 4.4% compared to the same quarter last year. It was largely the result of 5.4% of higher rental rates on re-leasing and 80 basis points of higher in-place occupancy in downtown Toronto. We have been monitoring the situation that we work at 357 Bay closely. As public release, they stated the intention to reject the leases of certain locations, which have been largely non-operational. The court filing showed that they authorize a rejection of 2 unexpired leases in Downtown Toronto, none of which are 357 Bay. Today, they remain operational in the building, and they are current under rent payments. We will continue to monitor the situation closely. Our net asset value per unit decreased from $34.71 in Q2 to $34.42 in Q3, primarily attributed to $17 million of fair value decreases across our portfolio. For properties at our value owner the direct half method, third quarter cap rates were 5.7%, which consisted of 35.3% applied for Downtown Toronto and 7.73% applied for other markets. Year-over-year, our cap rates increased 55 basis points in Downtown Toronto at 53 basis points in other markets. Our operational stats helped to release some of the upward pressure on the cap rates. Year-over-year, our weighted average in place and committed rents increased by approximately 7.5%, and we secured 614,000 square feet of leasing this year at 16% of higher rents than expiry. In addition to continuing to track observable leasing and market data, we intend to externally appraised approximately 25% of our portfolio each year. At the same time, our lenders also performed their internal analysis and may engage their independent appraisers to value our assets prior to mortgage re-financings. This year, we have successfully completed our refinancing program. In aggregate, we were able to up finance $250 million of mortgages for $278 million at a weighted average term of 4.6 years and interest rate at 6.3%. We think this is a reflection of our portfolio quality and the strong relationships we have with our lenders. Our carrying value for the income-producing portfolio is approximately $460 per square foot versus implant trading price of about $250 per square foot. In addition, we have 3.3 million square feet of residential density done our share with a carrying value of about $80 per square foot. Currently, we are seeing replacement costs for new office buildings at over $1,100 per square foot. So, it is very difficult to build new supply. But at the same time, we continue to see strong population and job growth in Toronto. So that bodes well for the location and the quality of our buildings. We think we have well-located real estate in a very high-growth city, so that when offset sentiment and the market improves, unitholders are well positioned for attractive returns. Our Q3 leverage ratio increased 50 basis points from last quarter to 48.8%. We are actively looking to lower debt in our business by bringing in partners for our development sites, which will also help improve liquidity and reduce risk. At 2200 Eglinton, we have a deal in place with Centocor to jointly develop the first 1,000 condos. We anticipate sales to launch in early 2024. And if that goes well, we have a blueprint to monetize future phases not long after. At 212 King, we jointly own a land assembly of 3 small heritage buildings with our partner in the very well-located area. We achieved owning this year to create $875,000 square feet of incremental residential density and $190,000 of non-residential density can potentially facilitate higher end hotel and retail offerings. We have already engaged CBRE to market the site and we'll provide an update if we have more information on our next call. At 250 Dundas, we think the recent removal of federal and provincial tax on purpose-built rental housing will have a material positive impact on development returns. We think this project will be attractive to institutional investors, and we will look for opportunities to sell down our interest and bring in external capital. In addition to the already owned developments, we are working on other ways to reduce risk, improve the highest investments of certain assets or opportunistically sell assets to improve our balance sheet. With that, I'll turn it back to Michael.

[Michael J. Cooper, executive]

I don't even a word that Board used about dislocation. There's a lot changing in the office market. We've had a lot of tours recently. We had a session where we had 45 lenders do it to most of our buildings in hour. And they were really impressed with the building. They've approached us to work on either renewals or putting out new money. We've had tours with other tenants with other lenders separate from that. And the buildings look great, and people really like them, and I think they have a long valuable life, and we're just going through a very difficult time for the sector, but we're excited about the future of what we own. So, with that, we're happy to answer any questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Mark Rothschild of Canaccord Genuity.

[Mark Rothschild, analyst]

Maybe for Gord, just in regards to the occupancy. It sounds like the committed occupancy is materially higher than the current in place, which is already higher than the market. Should I infer from your word that you're saying that in place should get to closer to 90% in the next 2 years around 2024? Or I just don't want to miss just now what you're saying?

[Gordon Wadley, executive]

Yes. Good question, Mark. It's in line with what we're seeing. We're going to see probably committed occupancy at or around 90%. We're thinking by 2025. But earnings committed is a bit of a lagging indicator because those are committed occupancies where we have deals where we're either building the space for them now. We have full commitments with them. We're just doing the work, and it takes a little bit of time to then to occupy. So we think by 2025, that number is going to trend up to your point.

[Jay Jiang, executive]

Just to clarify, so next quarter, we're going to be able to close quite a bit of the gap, I think, around 60% and typically to take possession towards the end of the year. Fixed drink periods are longer, and we're continuously replacing tenants with churn. So, there's higher rent growth on the new leases. But we feel pretty good about our committed occupancy, but the downtime in between our tenants prepared our space is typically about 6 months to a year.

[Mark Rothschild, analyst]

And presumably, just making sure I fully get that, there's no material lease expiries that would offset that over the next 1.5 years that you're aware of at this point. And obviously, retention has been a little lower of late than historically. So do you think that by '25, it will be closer to, if not at 90%.

[Jay Jiang, executive]

Yes, Mark. So, they're in the table in our MD&A that shows the leases expiring and the amounts have been secured already. I think at the quarter end, we were at 37%. We are working on a number of leases that will bring that average up in Q4. In terms of major expiries, there is one larger one towards the end of next year. We're working on the potential extension for that space, but you should see a higher number by the time that we begin the year.

[Mark Rothschild, analyst]

And once I have you, you spoke about a couple of different areas where you can generate liquidity or reduce leverage to selling other assets. To what extent are any of these near-term actual items that we should expect maybe in the next 3 to 6 months, something like this happening? Or are these just potential longer-term ideas?

[Michael J. Cooper, executive]

We're just going through our budgets now. And this is a difficult time because we're still working with the plan is for next year. In the near term, we don't have anything we're looking on right now that's actionable, 3 to 6 months, we definitely could. We're just setting up what it is we want to look at bringing capital in. So we're looking to bring capital into parkers and some of our developments. We mentioned that 1/4 of the Edwardson site we bought a partner in port. And we're looking at 250 Dundas, and we're also looking to see whether it makes sense to sell any assets, whether it's out West or in Toronto. But, we're just telling you what we plan on doing. We don't have any specifics.

[Operator]

The next question comes from Lorne Kalmar of Desjardin.

[Lorne Kalmar, analyst]

Michael, you mentioned conversion rates on tours are going up. Do you happen to have any numbers even rough, just to give us an idea of what conversions look like versus maybe the past 12 or 18 months?

[Jay Jiang, executive]

Yes, we've seen it go up to question, Lorne. We've seen it go up a little bit. We're converting about 25% of the tours right now. But the velocity of the tours has picked up dramatically since, probably Q2, we've seen dramatic upticks in our downtown portfolio. And what's given us a bit of optimism as we started to see some work tours in tertiary markets like Calgary and the Toronto suburbs, [ Mississauga ] as well.

[Lorne Kalmar, analyst]

And I guess what would sort of be a normalized conversion rate on tours?

[Jay Jiang, executive]

Usually, if they're touring and at such scale, you should probably be in around the 33% range.

[Lorne Kalmar, analyst]

So you guys aren't too far behind that. That's nice to hear. And then I won't spend too much time on the We-Work thing, but just wondering if you had had any inbounds on 357 days on any potential tenants to back.

[Michael J. Cooper, executive]

So firstly, everybody asks us about We-Work. Like, we have access to something. We happily go through like 400 to 600 Page 5 to find out anything. So as long as people want to ask us questions, we're able to answer the same information that's available to you. We-Work has been very consistent that this call was important to them. They've been paying us, and they've got a fair amount of people in the building. It looks like they're getting more people in it. So we're pretty comfortable with the building. The tenants in are paying a fair amount of rent, and it's a very desirable building. But I don't think we're not getting inbound from anybody saying they want to lease the other was on the contract with somebody else. But we are hearing from other people that they'd love to manage the operations if we need them to.

[Lorne Kalmar, analyst]

Fair enough. And then maybe just on the 212 King, what do you think would be a realistic price per square foot on that given a little bit of a cooling on some of the demand for land and development density.

[Jay Jiang, executive]

We don't know. I mean what's happening is 212 King, is probably among the very best sites in the city because it's right at the border of a financial quarter and Kimmin-West. So that's the good news. What we're seeing on the development side is smaller projects are in favor over larger projects. That's about 1.1 million square feet. And I know the people that are looking at it are trying to figure out how do they manage risk on such large projects. So there could be 2 groups, one the department on does [ color ] the same building, but we're waiting to see. We don't have a lot of insight for you.

[Lorne Kalmar, analyst]

Fair enough.

[Jay Jiang, executive]

So we take that back, Lorne. We're seeing some of the old things done now at relatively good sites, definitely in the top quartile, between $160 and $135 a foot. So, there is deals happening. Just saying that the mega sites are harder to do now or maybe a couple of years ago, people want to do the biggest site possible. Now manner looking at 300,000 or 400,000 square foot site as more attractive than 1 million square foot site.

[Operator]

The next question comes from Sairam Srinivas of Cormark Securities.

[Sairam Srinivas, analyst]

But just going back to 2024 leases, can you give us some color on the commutations you're having with your tenants in terms of the renewals? And what are we seeing in terms of your back-to-office plans and their space utilization needs?

[Jay Jiang, executive]

So 2024, we're actively speaking with all the expiries. To Jay's point, we're hoping next quarter, we'll be able to talk about a large renewal. We've been working with some tenants. For the most part, we've seen, it's probably a 50-50 ratio of tenants that are growing and tenants that are downsizing. So with this one large tenant we're dealing with now that we're conditional on, they're actually growing a little more than 1/3 of their footprint. And they really like the flight to quality. So they're moving from other locations into this one, which is good. And then we've got a lot of a lot of other groups probably in the same vein that are downsizing a little bit. So if you're a 10,000 square foot tenant, we're seeing some downside in about 7,500 square feet. These are more so for professional services firms. We're seeing a lot more like private law firms, fund managers, things like that in our portfolio. We're seeing them downsize a little bit. But we feel pretty good because they're taking long commitment they're doing 5, some 10-year leases. But back to your question, it's about 50-50 downsizing and growth. And then how they're building their space. We're seeing a combination of almost an equal combination of host perimeter offices and then some voting concept space.

[Sairam Srinivas, analyst]

So does this also mean that from your side in terms of these negotiations, you've been having to do a bit more of CapEx up so compared to like what you would have earlier done I guess?

[Jay Jiang, executive]

Yes. You're asking about the CapEx and the leasing cost, which is interesting because now the markets moved so quickly that we're evaluating our strategy. The PI for years has definitely gone up. We think that keeping the buildings full is a good idea. The tenants to your last question, they want a great place for their employees. More people are coming in, but the office environment has changed like more meeting rooms, more open-phase concepts. So a lot of the money has been going into opening up a lot of the space, which we do think creates more value in the brighter environment in the buildings. We're contemplating, for example, in the PI, you could be getting in cash or free rent, giving out free rent has a much lower opportunity cost. So we'll explore ideas to work with the tenants, work with their business plans, but at the same time, alleviate our capital pressures as well.

[Gordon Wadley, executive]

And one interesting thing that we're seeing in an observation, when you're seeing tenants and there's so much fluidity in terms of growing and shrinking in size, there's a new cost but not a landlord not a lot of live lords are talking about, but I think it hits everybody, and that's how you're shuffling the tenants in the building. If the tenant is getting bigger, you sometimes have to make accommodations with other tenants to move them or relocate them. There's always costs associated with that and then how you measure those costs is how you measure your NERs and ultimately go in there, too. So I think that's a different cost pressure that a lot of landlords are feeling, and I haven't heard too many people talk about it, but it's a real cost of a transaction. Today, more so than I assume in 20 years.

[Sairam Srinivas, analyst]

That's amazing color. And when you talk about tenants actually going out from your current portfolio, where are you seeing in go snare they just moving to higher quality class A product out there? Or are they moving out entirely out of too?

[Jay Jiang, executive]

We haven't seen lost tenants, it's usually because they've gone into sublet space, and net-net quality will be the same. But the sublet space, as everybody knows on the call, is dramatically more affordable. So we're seeing some people absorb some of the sublet space because it's got more flex concern in terms of years and then also in costs. But we haven't seen many people leave the quarter early the suburbs or vice versa see its pre-do amount of people come from the summer to the quarter.

[Operator]

The next question comes from Sam Damiani of TD Securities.

[Sam Damiani, analyst]

Maybe just to start off, we were talking about dispositions and the leverage ticked up in the quarter. How are you thinking about your target leverage over the next number of years with the dispositions you've got in mind and how that might impact the REIT's ability to sustain the current dividend?

[Jay Jiang, executive]

Yes. First, I'll talk about the leverage and things. That's a good question. We're going to look for opportunities to deliver, we don't have the precise data yet because we're working through the ideas of bringing partners on the joint ventures. But if we were able to execute on any of the 3 projects that will have a positive impact on our leverage and also without sacrificing a lot of yield because that is more for development density. We don't have a target unless we can predict what we can do, but our goal is definitely to take the leverage down over the course of the next year. I think by February, when we get the 2024 forecast, we'll be able to give a clean number, but leverage and liquidity are definitely top of line.

[Sam Damiani, analyst]

And I guess your current thoughts on how the distribution sort of gets affected by all these ideas?

[Michael J. Cooper, executive]

We're looking at the whole business. I mean I think the market says that we're yielding too much. We're committed to the dividend. It's a Board decision. We'll look at everything. But right now, it doesn't feel like the stock market is working very well with a valuation of $250 a foot. So we'll look at it with the Board. But I think what Jay and I refer to both individually is we're doing a deep dive on all the assets different ways to go forward to service value. And we're not going to meet. We just had our Board meeting of today, but a lot of the Board meeting was talking about the things we're looking at for December. So we'll have a lot more information for year-end.

[Sam Damiani, analyst]

And then I guess it has been talked about a bit already, but there is a lot of leases rolling next year. I guess one large one at the end of the year, which hopefully, next quarter, we get some good news. But that aside from that one, are you guys feeling pretty good about the 2024 lease roll?

[Jay Jiang, executive]

Yes, I would say so. We're still working through some deals. They're taking a little bit longer to get done. But the one thing I'll say about our team is they're engaged with absolutely everybody directly and with their broker. So there won't be any surprises on our end.

[Sam Damiani, analyst]

We've been a lot of discussion on the increased cost of leasing, which in past cycles has been purely a function of the vacancy in the market. But this time around, it seems more like tenants are demanding a different thing from their office space. Just wondering what your thoughts are on how that evolves as somewhat time of the future would lease markets once again tighten up.The second, is that cost of it is sitting up the interior space is going to stick? Or are the other way more cost is going to drop to more favourable levels?

[Michael J. Cooper, executive]

Yes. I think, Sam, we spoke about the September and spoken about it earlier, we feel that we're not in the equalled we think that we're spending more per square foot now than we will be over the long term. But the value of a tenant today is pretty good. So, if agents paying you like $55 gross waiting 12 months is hard [indiscernible] so it used for go at $55 on spend so much, that $55 is $5.50 a square foot. You're not going to make it up. So we go with the market on the TIs. I think a lot of TIs are driven out a case it had gone up since COVID started, and there's clearly a lot more negotiating power for the tenants. I think the comment that was picked up in the Global Mail about a bunch of buildings that were obviously. What I was really focused on was I think we'll see more and more buildings being torn down the apartments being built the city. It is focused on this. I don't think they want to make you in a personal call on how any building can be torn down and the office can be replaced. But I think what we're going to see is the supply of office basically coming down. We're not seeing a lot of new buildings being built. We're seeing more people coming back to work. And we're seeing companies. A lot of companies are growing. So I think that the market is likely to get better based on things not changing let alone if we start to see interest rates coming down an economy that's not flatlining, but actually growing. So yes, there's no doubt that the focus that we're doing is to make sure that we keep our buildings as full as possible through this trough. And as we come out of it, we would expect that we would revert, and the numbers we use are very simple halfway tweeted where we were in 2019 and where we are now, it seems to be as good an estimate as anything.

[Operator]

The next question comes from Matt Kornack of National Bank Financial.

[Matt Kornack, analyst]

Just continuing along that line of discussion. 74 Victoria Street and 137 Young Street has a pretty short weighted average lease term. How do you think about leasing in the context of your view that, again, some of these buildings probably the highest invest to add some residential to them. Would you renew tenants in place of that building and put some flexibility in terms of your ability to redevelop at some point in the future?

[Jay Jiang, executive]

Yes. That's a great question, Matt. And that was to add that that I answered on the earlier question, the lease is up towards the end of next year in November. Gord and the team are actively in discussions with a couple of tenants. Longer term, it has good resulting potential heritage on the ground floor and it's doing very well. And we actually bought 6 Adelaide a number a year back to protect our development rights. What we're really doing is really contemplating the capital we need to put into that building and seeing what the value is, but there is a couple of prospects and different uses. It's well located, and we're seeing good demand, specifically on the education side. And also, it's a good building for government tenant as well. It was a passport office and other agencies within the building. At the same time, we think there's opportunity to extend the lease for a bit. So there's a lot of options and we patent on the table, and we're just working through all the plans to come out with the best scenario for us.

[Michael J. Cooper, executive]

Yes, Matt, one thing that you think about that building is as both residential and commercial density. So I was referring earlier about the ability to not have to replace office space, that [ belly ] doesn't require it. So one of the things we're working on now is going to take longer in the next month is looking at the various choices with that building and determining what's the highest return. But there are lots of choices. [indiscernible] interesting genes and some of the people are talking to now.

[Matt Kornack, analyst]

And then just a quick accounting one because I think 366 Bay comes in next quarter. Is there going to be any straightline contribution in Q4? Or will it be just the first 3 quarters of 2024 and then we'll convert to cash rent upon them really taking

[Michael J. Cooper, executive]

Is that a question to me?

[Matt Kornack, analyst]

No... [indiscernible]

[Jay Jiang, executive]

That's going to plan. I think that is actually on until latter half of next year, not this year. And so dependent that we signed in the building, we're working with them on creating a really dutiful office environment for them, will be done in the latter half of next year. And our poles always to just report revenue and income when they take economic occupancy. So once the building comes out applied, the income will come in. It will also not hit the comparative property NOI numbers, but it will be in to NOI.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Cooper for any closing remarks.

[Michael J. Cooper, executive]

Thank you very much. I'd like to thank everybody for listening and asking questions on the call. Jay, Gord and I are always available if you have any follow-ups, and we look forward to speaking to you at the year-end quarter conference call in February. Thank you very much.