BXP, Inc. (BXP) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to BXP Q2 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Helen Han, Vice President, Investor Relations.

Good morning, and welcome to BXP's Second Quarter 2026 Earnings Conference Call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In a supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you do not relieve a copy, these documents are available in the Investors 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 BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time in BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, our regional management teams will be available to address any questions. [Operator Instructions]. I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Helen, and good morning to all of you. BXP delivered a very strong second quarter, both operationally and financially. FFO per share exceeded both our guidance and consensus estimates by $0.08, and we raised the midpoint of our 2026 FFO per share guidance by $0.05. We also made meaningful progress against the business plan we articulated at last year's investor conference. Leasing results were strong, in-service portfolio occupancy increased significantly, additional asset sales progressed and our development pipeline was active with project deliveries, launches, leasing and capital raising. Our first business plan priority is to lease space and improve portfolio occupancy. We had a great quarter, completing nearly 1.8 million square feet of leasing 29% above our 10-year historical average for the second quarter. Year-to-date, we've leased over 3 million square feet and our in-service portfolio occupancy also rose materially and for the third quarter in a row. This outcome reflects strong execution by our leasing teams as well as a very healthy environment for leasing premier workplaces. AI continues to be enormously beneficial to BXP's leasing activity. Our current and prospective clients are generally experiencing increasing earnings in an AI-powered U.S. economy are more often expanding than contracting their space requirements and in many cases, are also upgrading their space. We are leasing space to AI companies in San Francisco, New York, Boston and Seattle, to companies displaced by growing AI firms and to our core financial, legal and business services clients that support the AI industry. While AI's long-term impacts remain difficult to predict, research shows that technology advances historically increased the share of office-based jobs, Additionally, AI will likely exert a greater impact on less adaptive back-office workers, and these roles make up a smaller share of employment in knowledge center gateway markets and in premier workplaces. Further, it is reasonable to believe non-office using remote jobs, which generally have more process and analytical content than interpersonal requirements will be more disrupted by AI. Lastly, companies winning in an AI-enabled economy will be more profitable and face more intense competition for talent, leading to less price-sensitive demand for easily commutable and desirable workplaces for their employees. For all these reasons, we believe premier workplaces located in gateway market knowledge centers are positioned at best to benefit from and at worst to be the most immune from AI impacts on the labor force. As proof, the premier workplace segment of the office market where BXP is a clear leader continues to materially outperform the broader office market. Premier workplaces represent roughly the top 14% of space and 8% of buildings in the four CBD markets where BXP has a major presence. Direct vacancy for premier workplaces in these four markets is 8% versus 13.5% for the broader office market, while asking rents for premier workplaces continue to command a premium of more than 60% of the non-premier buildings. With an 8% vacancy rate, positive net absorption and limited new construction on the horizon, premier workplaces and BXP's core markets are set up for material rent increases which has already commenced in many submarkets. Given these positive market forces, we are well on our way to accomplishing our 2 percentage point occupancy gain goal in 2026, reinforcing our confidence that our target of 4 percentage points of total occupancy improvement over '26 and '27 remains very much on track. Our second business plan goal is to raise capital and optimize our portfolio through asset sales. At our investor conference, we communicated an objective to generate in aggregate $1.9 billion in net sale proceeds by 2028 from the sale of land, residential and nonstrategic office assets. We continue to make progress in the second quarter and are well ahead of schedule. We have raised $370 million in total net sale proceeds so far this year and more than $1.2 billion since our investor conference. In addition, we have six assets under contract for sale with total net proceeds of approximately $240 million, $180 million of which is scheduled to close in 2026. Two of the assets currently under contract for sale are office buildings in Washington, D.C., which are scheduled to close this quarter. We are also in various stages of marketing several additional assets, including [ 7 ] Times Square in New York City. As of now, future net proceeds from dispositions possible in 2026 could aggregate up to an additional $500 million, bringing our total net proceeds from asset sales to $1.7 billion by year-end, and we continue to explore additional capital-raising opportunities. Supporting our disposition efforts, office transaction volume in the private markets remains reasonably healthy with financing available at scale, particularly in the CMBS market. In the second quarter, significant office sales were $12.6 billion, down 13% from the first quarter and essentially flat from the second quarter of 2025. Though there continue to be very few premier workplace assets trading. There were a couple of transactions in the quarter with relevance to BXP's portfolio. One Marina Park Drive located in the Seaport District of Boston is under agreement to sell for approximately $435 million which represents pricing of nearly $900 a foot and an initial cap rate in the low 7% range. The asset comprises 495,000 square feet is 99% leased with above-market rents and is being sold by an adviser to the operating arm of a non-U.S. pension plan. Further, Tower 1 at West Maine located in downtown Bellevue, Washington is under agreement to sell for approximately $340 million, representing pricing of around $930 a square foot and a 6.75% initial cap rate. The 365,000 square-foot building is fully leased to Amazon on a long-term basis and was sold by a local developer to an adviser. BXP's third business plan goal is to grow FFO through new developments selectively with office given market conditions and more actively for multifamily with an equity partner. For office, we have and expect to allocate more capital to developments and acquisitions due to the materially higher yields available. This quarter, we delivered into service 290 Binney Street, a 570,000 square foot lab building fully leased to AstraZeneca located in the life-science nexus of East Cambridge. The project is a great example of BXP's development skills, creating value for shareholders where we establish development rights through executing a complex infrastructure enhancement, we fully leased the asset before commencement, we sold a 45% stake in the property at a profit to a financial partner and we delivered the project $20 million below budget and 2 months ahead of schedule. BXP's $488 million investment for its share of the project is yielding an 8.9% unleveraged cash return and a 10.3% GAAP return. BXP's largest development underway is 343 Madison Avenue, our premier workplace tower in New York City with direct access to Grand Central Terminal. This past quarter, we signed 148,000 square foot lease with McDermott Will & Schulte at the bottom of the high-rise bank of the building and [ Star ] expanded by 2 floors in the mid-rise bringing us to 50% leased. Further, we are in lease negotiations with a [ 2-4 ] client in the podium, which, if completed, would bring us to 56% leased. Lastly, we are exchanging proposals with another client requiring 5 floors at the base of the podium, which would bring the project to nearly 70% leased. So we have received single floor inquiries for the 7 floors remaining at the top of the building. We expect continued rent appreciation and will likely lease these floors closer to delivery given their ability to command market-leading rents. We have procured 94% of the construction cost on budget, leasing economics have been at or above forecast and our projections remain on track for a stabilized unleveraged cash return of 7.5% to 8% upon delivery in 2029. Yesterday, we closed a 60% loan-to-cost $1.2 billion construction loan for the project on attractive terms and have a letter of intent with an equity partner for an $80 million investment, representing a 10% interest in the project with a basis above our costs. We expect the equity investment to close this quarter, and our marketing efforts continue with the goal of ultimately monetizing a total of 30% to 50% of the project over time. The value of the development continues to rise as we lease space and get closer to delivery. This past quarter, we launched the development of our World Gate multifamily project, comprising 359 wood frame residential units located in Herndon, Virginia. The project's budgeted cost is $132 million, and we have secured a financial partner to supply 80% of the equity as well as the construction financing. BXP originally bought into the World Gate property, which comprised an empty office building and parking garage on 10 acres in 2023. The project was rezoned for residential. The for-sale component is under contract for sale to a homebuilder and the apartment development will entail demolishing the office building and utilizing the structured parking. BXP will earn a profit from the total monetization of our investment in World Gate and has reinvested our share of the proceeds from the contribution of the apartment land back into the development joint venture for a 20% interest. We have additional residential projects in Western Massachusetts and Santa Monica, California that we are intending to launch next year. This past quarter, we also signed a 320,000 square foot long-term lease with Boston Dynamics, which will create a state-of-the-art robotics and AI center at Reservoir Place a 360,000 square foot office building, BXP had taken out of service in Waltham. We will invest $87 million to retrofit the building and expect to earn an initial cash return of over 10% and including an inferred value for the existing improvements. The project is expected to be delivered into service in the second quarter next year. BXP's current development pipeline comprising seven office and residential projects underway totaling 3.5 million square feet and $3.2 billion of BXP investment will continue to deliver external growth over the longer term. So in conclusion, BXP is set up well for success. New construction for office has virtually halted already leading to higher occupancy and rent growth in most submarkets where BXP operates. Debt capital is readily available for premier workplaces at attractive credit spreads. The BXP continues to capture market share, driven by our stability, reliable client service and lighter competitive landscape across many markets. BXP remains comfortably on track with our business plan, which, if successful, will lead to increasing portfolio occupancy and FFO per share, deleveraging external growth from development and a more AI-enabled gateway CBD premier workplace concentrated portfolio in the years ahead. Over to Doug.

Good morning, everybody. Owen did a really great job of articulating our theory on why AI is so critically important to the demand picture. Equally important, perhaps as a public company, the rhetoric and the conjecture around the impact of new AI technology on the future of office using jobs has gotten much more balanced than constructive. What has changed from where we were in February of this year. In each of our markets, our portfolio has seen a pickup in demand. In our best markets, that demand is coming from clients that are expanding across a wide spectrum of industries, ring by market, technology, AI, defense and cybersecurity asset management, financial services and professional services. In our other markets, the demand is due to decisions around operating space or changes in geographic preference as our clients look to maximize the desirability of their space for their associates, it's all encouraging for the premier office product. BXP had great top line revenue results this quarter, and I want to focus my time on the improvements in our occupancy, which drove much of that outperformance. In June, when we were with you at NAREIT, we told you that we believe that our leasing progress was ahead of schedule relative to our anticipated occupancy pickup. We ended 2025 at 86.7% occupied, we finished the second -- the first quarter at 87.4%, and as of 6/30, 26 were 88.4% occupied. So we've gained 170, up 200 basis points that we originally expected for 2026. We had guided to an average occupancy during the year of 88.2%, and we're ahead of plan. While the individual transactions may be very granular, the simple explanation is that we lease space more quickly than we expected. Most importantly, we continue to lease vacant and near-term expiring space. In the first quarter, BXP's total leasing volume was 1.14 million square feet, and we executed leases on 700,000 square feet of vacant space. In the second quarter, we completed 1.76 million square feet and covered an additional 380,000 square feet of vacant space and renewed or backfilled 600,000 square feet of '26 and '27 expirations. 190,000 square feet of our activity this quarter was at 343 Madison and as Owen mentioned, 322,000 square feet was with Boston Dynamics at Reservoir Place. All vacant space, but those are not in-service properties. We start the third quarter with a signed but not occupied portfolio of about 1.3 million square feet with 1.1 million expected to commence in 2026. The remaining calendar year '26 known expirations are down to 300,000 square feet. So this means we're going to pick up 800,000 square feet of occupancy or another 170 basis points and close to the year closer to 90% than 89%. Our 2027 expirations currently stand at 1.77 million square feet. We have known vacates of about $1 million and have good clarity on about 550,000 square feet of either renewals or replacement tenants for those expirations. We also have 250,000 square feet of signed leases that we expect to commence in '27. Our pipeline of leases either executed or in negotiation after the second quarter, stands at 1.3 million with about 350,000 square feet of that involving vacant space. In addition, our active discussions is approaching 1.7 million square feet, and that could impact another 450,000 square feet of current vacancy. In total, this in-process activity is about the same level it was last quarter, and it reinforces our confidence in our year-end '27 occupancy expectation of 91%. Our leasing spreads this quarter were up significantly in Boston and New York and down in D.C. and on the West Coast. A couple of insights on the data. In Boston, this quarter, all of the activity emanated from our CBD portfolio. In New York, about 25% of the square footage was in Princeton. Our Midtown Manhattan properties were up 14%. In San Francisco, 40% of the square footage in the statistics this quarter was in Mountain View, where the new leases reset at rents of about $45 triple net. And in Seattle, 7% of the square footage came from a low-cost expansion with a technology company at Madison Center, i.e., very little in the way of [ TI ]. This quarter, we executed 21 leases over 20,000 square feet in the in-service portfolio, 48% of the square footage was renewals, extensions or expansions and 52% was with new clients. Existing client expansions encompass 275,000 square feet of that activity, and we had about 50,000 square feet of current clients contract. In the BXP portfolio, Midtown Manhattan, the Back Bay of Boston and Western Virginia continue to have the tightest supply and, therefore, the most landlord favorable market conditions. While San Francisco and Manhattan are dominating the landscape when it comes to technology, aka AI demand, it doesn't mean we're not seeing it elsewhere. We completed about 170,000 square feet of leasing in our Back Bay portfolio. We're also starting to see our first wave of renewals at the 888 Boylston Street, where the embedded market rent growth is somewhere between 20% and 25%. First of those deals happened this quarter. The highlights of this quarter in the Boston region was this 322,000 square foot lease with Boston Dynamics, which illustrates our point on and around AI leading to increased demand. This facility will house Boston Dynamics advanced robotics and AI center. Along with the least, they announced expected hiring of over 1,000 new employees. In our Urban Edge portfolio, we continue to see lackluster demand around the lab space market. While the life-science capital markets are very active with a series of Boston area IPOs and several big pharma acquisitions of Boston Bread Biotech, capital raising around the start-up sector continues to be slow. It's the series BCD companies that eventually move out of incubators into proprietary space that's still missing in the market. We continue to make progress at our core asset, our largest availability in the Urban Edge, where we are in lease with a 50,000 square foot client, another life-science company that's building 100% office space in our facility. In New York, at 360 Park Avenue South, we are at least the last floor again from an expanding AI tech company, which will bring the building to 100% occupied. This quarter, we completed an extension and expansion with [ Rugo ], a client that develops AI tools, specifically or financial institutions that also announced job expansions. Across Madison Park at [ 200 Fifth ], we're in lease for the remaining available space and when complete, will be 100% leased there as well. These two assets had almost 750,000 square feet of available space at the end of the first quarter of 2025. Our activity north of 42nd Street in Midtown this quarter also included expansions from financial advisers, asset management firms, firms that totaled 100,000 square feet. We also did 10 transactions in Princeton totaling over 100,000 square feet. In San Francisco, the most significant momentum in our portfolio continues to be at 680 Folsom and 50 Hawthorne. During the quarter, we executed a 63,000 square foot lease and we are in discussions now with an applied AI company for a 35,000 square foot floor and we're talking with an existing AI client about expanding into the final available floor at 680 Folsom. We've also had success with smaller technology companies expanding at 535 and at Embarcadero Center. We recently completed two transactions are in discussions with three more. We are approaching our first significant initial lease-up expirations at Salesforce Tower in '27. Here, we believe current market rents are 30% to 40% higher than the expired rents in the building and still would be a significant discount to new construction economics. It's really hard to find holes in the San Francisco demand picture when you've had 3 million square feet of positive absorption over the last 2 quarters. However, the one soft spot continues to be incremental demand growth from traditional financial services, professional services and legal firms. That's sort of where the action is the least exciting. In Mountain View, we've completed 190,000 square foot of leases, vacant space made up of 50% this activity and we're in discussions with new clients for another 70,000 square feet of vacancy in the park. And in Seattle, we completed over 100,000 square feet of leasing on vacant space this quarter. This included a 44,000 square foot expansion by strike following on our demand theme another floor with an AI company that expects to grow its head count four times in 2026. And finally, activity in D.C. this quarter was concentrated in [ Reston ], where we leased over 125,000 square feet of 27 expiring leases to defense contractors, cyber security firms and a financial firm. In the district, we're in negotiations to lease 100% of the space that McDermott will be vacating to 500 North Capital in late 2028 when we deliver 725 12th. With the expected sale of two office assets, we are shrinking our district portfolio prior to adding our newly leased developments. In an interim, the DC team continues to field inbound requests from law firms that want us to identify sites and develop new projects like what we've achieved at 725 12th and 2100 M. In fact, working with an institutional owner to organize a JV, 1/3 of these projects and hope to have a lease commitment before the end of 2026. In summary, our assets are seeing strong demand growth. We are leasing space more quickly. And as Mike will describe, it's impacting our bottom line.

Great. Thanks, Doug. Good morning, everybody. Today, I'm going to cover our financing activities as well as our strong results for the second quarter earnings and an update of our full year 2026 earnings guidance. As Owen mentioned, we closed a $1.2 billion 5-year construction loan to fund approximately 60% of the development cost of our 343 Madison project. The loan was competitively bid, and we experienced strong demand from our largest banking partners. The demand allowed us to achieve very attractive pricing and terms relative to recent deals in the office construction loan market and it demonstrates the engagement of institutional lenders to finance premier quality office projects with our strong sponsorship. The pricing is floating at SOFR plus 250 basis points with a reduction to 225 basis points upon the achievement of project milestones. And the interest expense will be capitalized into the project cost, so it will not be included in our interest expense until completion in 2029. This is an important milestone for 343 Madison and it provides us with an additional capital source and financial flexibility. We are also focused on the upcoming refinancing of $1 billion unsecured bond that carries a GAAP interest rate of 3.5% and expires this October. While rates markets have been volatile, the bond market has been very active with credit spreads near all-time types. Our 10-year credit spreads are trading in the low 100s, and if we were to issue a new bond today, it would likely price around 6% based on the current 10-year treasury rate. With the success of our asset sales program and the financing of 343 Madison, we may elect to use available cash to reduce the size of this financing by up to $300 million to minimize dilution. We also continue to evaluate all the refinancing alternatives available as we seek to optimize our debt capital structure and mitigate the impact of the elevated interest rate environment. Now I would like to turn to our second quarter earnings results. We had a very strong quarter and reported FFO of $1.78 per share that exceeded the midpoint of our guidance and consensus by $0.08 per share. Importantly, nearly all of our outperformance came from better results in portfolio NOI. Our revenues exceeded our expectations by $0.04 per share comprised of $0.03 per share of higher rental revenues and $0.01 per share of higher service income. Robust leasing activity drove higher rental revenue and occupancy this quarter. The leasing demand is broad-based across the portfolio and very granular in nature. The revenue lift reflects earlier-than-anticipated occupancy, and I do not expect it to compound into future projections. As Doug described, our leasing activity has beaten our expectations with occupancy climbing by 100 basis points to 88.4% this quarter. We've increased our expectations for average occupancy for the year by 65 basis points to 88.9% and we now expect to end 2026 at closer to 90% [indiscernible]. All very positive results from the healthy leasing activity and client demand we are seeing in our markets. We also generated $0.04 per share of outperformance from lower operating expenses in the portfolio. About half of this is from lower repairs and maintenance expense that I anticipate will be deferred to later in 2026 and is embedded in our expense guidance for the back half of the year. The rest came from lower utilities expense related to lighter energy consumption in the Northeast, where we are working hard to fine-tune our buildings to lower consumption and cost every day. We also had lower real estate taxes from the receipt of real estate tax abatements this quarter. We continue to aggressively appeal our real estate tax assessments throughout our portfolio and are seeing positive results in certain locations. Looking at the full year 2026, we are raising our guidance for FFO by $0.05 per share at the midpoint by bringing up the bottom end by $0.09 to $6.99 per share and the top end of our range by $0.01 to $7.05 per share. Strong leasing performance across our portfolio is giving us increased confidence in our growth outlook. In our same-property portfolio, we are increasing our assumption for our share of NOI growth over 2025 and by 30 basis points to between 1.8% and 2.6%. The increase mirrors the accelerated occupancy growth that Doug detailed. And in our development portfolio, we are increasing our assumptions for NOI by $0.03 per share based on faster lease-up and lower expenses. At 360 Park, as Doug mentioned, we signed 50,000 square feet in the quarter, and we're now in negotiations to lease the last available floor. On the expense side, we started capitalizing expenses at Reservoir Place where we commenced redevelopment this quarter with the signing of our lease with Boston Dynamics. We've been extremely successful in executing our asset sales program, which is raising capital to fund our developments and reduce debt. As Owen described, we are ahead of the expectations we laid out last year at our Investor Day, not in the total volume of asset sales, but in our timing. The accelerated sales timing has a slightly more dilutive impact than the prior guidance that we provided, including the impact of lower net interest expense from deploying the sales proceeds to reduce debt, we expect a foregone NOI from our sales to reduce FFO by approximately $0.02 per share when compared to our prior assumptions. Lastly, we raised our assumption for fee income revenue by $0.01 per share from higher construction management fee income and leasing commissions earned from our joint venture portfolio. So to summarize, we've increased our guidance for 2026 FFO by $0.05 per share at the midpoint to our new range of $6.99 to $7.05 per share. The change come from increases in our assumption for growth in our share of portfolio NOI by $0.06, lower net interest expense of $0.03 and higher fee income of $0.01, these are partially offset by a reduction of NOI from asset sales of $0.05. Overall, we had a great quarter and all phases of our business strategy are clicking. We raised both our FFO and occupancy guidance driven by consistently strong leasing volumes and excellent progress on leasing our vacant and near-term expiring space. Our occupancy has now increased for 3 consecutive quarters. and we're executing on our planned asset sales program to both reduce leverage and redeploy capital into higher-yielding new developments. Operator, that completes our formal remarks. Can you open the lines up for questions?

[Operator Instructions] And I show our first question comes from the line of Nicholas Yulico from Scotiabank.

So first question, clearly, you have the occupancy benefit picking up in the portfolio, which will help for 2027 earnings impact. Can you just talk a little bit more, maybe, Mike, about how the asset sales are going to work in terms of the impact on 2027 versus debt repayments since I know some of the income-producing asset sales are more back half weighted, like [ 7 ] Time Square, potentially even next year. Is there like dilution we should be thinking about for 2027? And then also, in terms of the capital, just an update on whether there might be excess sale proceeds to use for stock buybacks?

So look, on the asset sales side, as I mentioned, we're ahead of plan, and Owen mentioned that as well. So the dilution in '26 is a little bit higher than we had originally stated when -- at our Investor Day in the beginning of the year, I think we said the dilution would be $0.06 to $0.09, and now if we get everything done that we expect it will be closer to $0.11. And a good chunk. The majority of our asset sales will be completed, we will evaluate going forward incremental sales as well. Our goal remains to bring down our leverage into the lower 7x range, which gives us capacity for future investment activities. And those future investment activities could include new developments, could include stock buybacks, and we will evaluate all of those things. With respect to 2027, I mean, we're really not giving guidance on 2027 right now. The total asset sales that we project are still $1.9 billion by 2028. And as Owen described, we'll have $1.7 billion done potentially by the end of this year, which means that next year will be lighter.

And I show our next question comes from the line of Steve Sakwa from Evercore ISI.

Given the leasing success that you're having in the, I guess, the faster ramp that you're seeing in occupancy how are you sort of thinking about the ultimate stabilized occupancy rate of the portfolio. Has that sort of changed in your mind? And has the timing of that stabilization kind of been pulled forward given what you're seeing in the leasing market today?

So Steve, this is Doug. What I would say is, right now, we're sort of sticking to our 91% at the end of 2027. If things were to continue in the sort of same trajectory, I think we would be more aggressive than that, but we're not ready to do that. And as I look out at our sort of lease expirations and then the available space that we have in the portfolio, sort of that's left, there's a concentration of vacancy in two main areas. The first is at Embarcadero Center in San Francisco. And that's the place where I think we have the most short-term opportunity to exceed our projections, which would probably occur in late '27, early '28. And then the second place would be our sort of what I refer to as our portfolio of available space in our tertiary markets in both the Urban Edge of Boston, aka, the suburbs, and our Colorado Center portfolio in Santa Monica. Those are sort of the other two areas. And so I think that the value of that space is obviously less than a CBD property in Midtown, Manhattan, the back bay of Boston or San Francisco. My guess is that we sort of max out at somewhere between 94% and 95%, right? That's as good as it's going to get. And so I think that by the end of we're at 91% or maybe a little bit better, but we're not ready to say that yet. And then in 2028, that's sort of when we get closer to other number I just described. And so that's kind of where we max out as a portfolio. We will always have some marginal availability given the fact that we do 10-year leases, and we have some, what I refer to as larger clients. And if they choose to relocate or we can't accommodate their growth, then we'll have some downtime. So I don't think we get much above 94%, 95%.

And our next question comes from the line of Jana Galan from Bank of America Securities.

In the prepared remarks, you touched on some price discovery, but can you walk us through what your kind of seeing in the transaction market with fundamentals clearly improving, but maybe higher interest rates impacting pricing on land, residential and office?

Yes. I think the -- as I mentioned in my remarks, transaction volumes for office are certainly off the bottom, and they've grown significantly over the last year or so, but they're still well below what they were prior to COVID. So we're kind of in recovery mode. Second, I would say most of the -- a big percentage of the buying is more, I would say, family office and opportunistic capital that is seeking discounts to replacement cost kind of transactions. That's not 100% true, but that's the majority of the transactions. And that's logical, when you have an asset class in the capital markets that's recovering, generally, the opportunistic capital starts it and they are successful and then other capital follows. So I think that's where we are. The deals that I mentioned this quarter, I think, do kind of mirror where the deals were last quarter. They're kind of at 7-ish type cap rates with the possibility of stabilizing at a slightly higher number. And I don't think these assets -- I mean, I picked out the best ones that we're selling, and I still don't think they're "true premier workplaces".

And I share your next question comes from the line of John Kim from BMO Capital Markets.

Owen, I think you mentioned at Reservoir Place you're expecting a cash return of over 10%. And I was wondering if that was on the incremental CapEx? Or does that include your historical cost of the assets? And then going forward, what is your hurdle rates on developments, I guess, on like the build-to-suit developments similar to 725 12th Street?

Yes. So the 10% that I mentioned includes an inferred value for the building that was taken out of service. So the cash yield on the incremental capital would be materially higher. So -- and then on what is our target yield, it depends a little bit on the market and the pre-leasing and the risk and all those things, as you would expect. But in general, we're getting 8-plus percent yields on our developments. I mentioned our activity at 343 Madison, we remain very much on track, I think, to accomplish that 7.5% to 8% and our deals in Washington [ pencil ] over 8%. So that's what we're seeking to achieve. And that is accretive to where the stock is trading vis-a-vis cap rates.

And our next question comes from the line of Anthony Paolone from JPMorgan.

You mentioned, Doug, I think the opportunity you saw at Embarcadero Center in the near term. But if you think out over the next couple of years and if the momentum in Northern California generally just persists, like what do you think BXP's biggest opportunities are there? What do you think you likely do with that portfolio?

Yes. So I'm going to let Rod answer that question because he has a couple of pretty interesting opportunities, one of which is physically ours and others that we're working on that he can talk about.

There's -- I mean, the market, as you've heard, is very strong in Northern California we're taking advantage of this increased demand with the AI sector, for sure. I mean if you're looking at the pipeline of tenants in the market right now are pushing 9 million square feet, which is just unheard of. We haven't seen that number. So going forward, absolutely. I mean, it's a market where people are starting to talk about building new buildings. I know that seems strange with still some vacancy. But the reason is that there is just a limit on the premier workplaces. If you're looking for -- if you're tenant in the market right now and you're looking for 50,000 to 100,000 feet, top-tier space. You're not going to have many cases you might have. You can certainly count them on one hand, maybe not even all the hands. So it's prompting people to talk about building new buildings. And what Doug just mentioned, we've actually -- we're very pleased to announce that we've been awarded through a competitive assignment development consultant role on a site in downtown that we have familiarity with from the past cycle. And so we're going to have a role in that. And I think it's a great site, and we'll have an opportunity to invest in it in the future if we feel that the market supports it and demand supports it. So it's positive, and we're obviously looking at all other opportunities.

And then Rod just mentioned Fourth and Harrison and sort of what we have going on there, too.

Yes. So at [ 4th ] and Harrison, I mean, that's a plus or minus 800,000 square foot potentially phased projects that we were ready to start right when COVID hit. And this is a great asset that sits proximate to where a lot of the AI companies in Mission Bay are located. And we're teeing up potentially getting ready if -- again, demand holds up to be able to do something there. And we wouldn't build it spec. But we're absolutely talking to users and we'll see if something comes to that.

So I think, Tony, to sort of summarize, we are involved in a couple of really interesting opportunities in the CBD of San Francisco, not the Peninsula where if market rents get to the point where your construction makes economic sense, we actually have places where we can create new premier product for our clients.

And our next question comes from the line of Michael Goldsmith from UBS.

To this point, the recovery story has been occupancy led, but the message this quarter felt a little bit more rent growth oriented. So is that correct? Or maybe can you just talk about the pricing power you're seeing? Is it increasing? And is that for all markets or just the strongest ones?

Sure. So for us, the occupancy story is more meaningful than the improvement in the overall sort of what I'd refer to as mark-to-market, largely because you get [ 100¢ = $1.00 ] on the occupancy and you only get a marginal amount on the increase when you're doing a mark-to-market. But why don't I let Hilary talk about sort of the her views on pricing power in Manhattan, and Bryan talked about our perspective on sort of where pricing is in the Back Bay submarket of Boston, which is where the majority of our rental rate increases will come from over the next few years.

The pricing power in Manhattan remains quite favorable to landlords, and it is expanding geographically. So while it's been very, very strong in the best submarkets of Midtown, it continues to expand outward to other submarkets in Midtown and to Midtown South. As Doug and Owen mentioned, we are -- and Mike, we have now spoken for every single floor at 360 Park Avenue South. And we're seeing landlords across the Midtown South submarket post ever higher rents as they're leasing up remaining vacancy. In Midtown proper, we are getting inbound interest at our highest quality buildings and at 343 at rents that are consistently sort of 10% to 15% above where they were last year and at our buildings and in the lower stack of our buildings where rents are slightly more affordable we're still seeing 20% increases year-over-year, and that is fundamentally because there's a lack of available space in the market. So great strength from the landlord perspective in New York City.

Yes. From Boston, it's the story that Doug and Owen have outlined, which is if you look at our rent roll snapshot, Boston, we're 97% -- 98% leased, Cambridge, 98% leased, Cambridge Lab, 100% leased. And then you combine that with call it, competitive set, the people that we really -- or the buildings that we really compete against and there's a wide difference between, let's say, general vacancy of [ Class A ] and then our competitive set, and it can be as much as 9 points, 11% versus 2% in the Back Bay as an example. And for us, price detection is going to be really in the renewal process versus we don't have any lease vacant space to go to market with per se. So we're in the process of really doing our absolute best at educating the marketplace, the brokerage communities and our clients about what's taking place and really focus on factual comps, et cetera, but we do anticipate that there is pricing power there.

And I share our next question comes from the line of Seth Berge from Citi.

Nick Joseph here with Seth. Maybe if continue on the mark-to-market conversation. What do you estimate it for your West Coast portfolio? Obviously, we've seen a recovery in leasing there. But how do you think about where the portfolio sits today versus where market rents are?

So what I would say is that it's kind of a building specific answer, and I'll just sort of give you a perspective in our -- I'll use San Francisco as sort of the poster trial because it's the majority of our West Coast exposure. So starting with the least good and then getting to the best. So down in Mountain View, where this quarter, we had a pretty significant markdown largely because we were getting somewhere in the neighborhood of $6 per square foot per month and now we're getting somewhere closer to $4 to $5 a square per month, which are still very high rents, but they're not the same place they were. And the reason we were getting those other rents was that we had gotten significant increases over a 4- or 5-year period and then obviously, the market sort of had a big change. So that's where the largest sort of decline is. At Embarcadero Center, it's sort of a neutral place. So in buildings like Embarcadero Center 4 or anything that's sort of above, call it, the 15th to 20th floor of 1, 2 or 3 there's an embedded market opportunity for growth. At the lower portions of 1, 2 and 3, where we have leases rolling over, that's where I would say we have to be more competitive because of the availability and the modest amount of incremental demand there is from what I refer to as traditional office tenants. And so there's probably a slight markdown. At 680 Folsom at 535 Mission, and then at Salesforce Tower, we are going to start to see material increases in our markups. Most of the leasing that we've done in those buildings has been at relatively lower rents. And as we go forward, those rents have gotten higher. We are now at a point, for example, at 680 Folsom, where our asking rents are higher than the rents that will expire when the macys.com lease expires in 2029. And as I said, Salesforce Tower on average, my guess is our embedded growth is 30% to 40%, and we're going to have somewhere in the neighborhood of, call it, 200,000 to 250,000 square feet of expirations in that building in '27 and '28. And so there's a real opportunity for embedded growth. The other two West Coast markets, which are -- for us are Seattle and West L.A., I would say we're modestly lower in Seattle, and then the West L.A. continues to struggle from a recovery perspective. It's the least of our markets from a demand growth perspective. And so there, net-net, we're seeing still an embedded loss in that market. But again, for us, that's 1% or 2% of our portfolio as is Seattle. So it's not material in terms of what happens in the next couple of years.

And I show our next question comes from the line of Blaine Heck from Wells Fargo.

With respect to 343 Madison, can you just elaborate on the appetite you've seen from potential equity partners, the timing we should expect on those sales of interest and any color you can provide on how you and those potential partners are thinking of value versus expected cost on the entirety of the 30% to 50% interest you guys plan on monetizing?

So as I mentioned in my remarks, we have a letter of intent with an investor to purchase a 10% interest in the project, and we expect that to close this quarter. And we continue to talk to additional investors about selling additional interest in the property, bringing us up to around that 30% to 50% level. We are selling down interest in this property, which we consider to be one of the best office developments in the United States, we're seeking our terms, both in terms of pricing and the way the governance works. So in thinking about pricing, our yield as the original developer of the property is just to use high-level simple numbers is around 8%. And when we deliver this property, we think its value will probably be in the 5.5% to 6% range. So as we monetize interest along the way, we'll be moving gradually from that 8% yield down to that 5.5% to 6% yield. And that's the way we're thinking about it and talking about it with prospective investors.

And I show our next question comes from the line of Caitlin Burrows from Goldman Sachs.

Earlier in the prepared remarks, you guys mentioned that 48% of leasing in 2Q was renewals, extensions and expansions. I was wondering if you could talk more about the renewal activity, maybe what retention has been over the past few, say, 3 years? And if it's fair to expect that it increases going forward?

So Caitlin, this is sort of, I guess, more of an artistic answer than you probably would like, but hopefully, it's directionally correct. So there's a timing issue associated with this as well. So as we get closer to a lease expiration, our retention rate comes down largely because we've already done a lot of the larger transactions earlier. So as an example, Hilary's team right now is working on forward transactions that are 2028 expirations or later. And my guess is if all of those deals will likely get done. And so when I -- when we talk about our renewals in the next quarter or 2, there may be some very lumpy number that sort of say that our retention is higher than it typically is. When we think about our sort of near-term expiration, so call it, the next 24 to 18 months and then because it goes down generally, the study that we've done is that, generally, we're somewhere between 45% and 50%. That's sort of what happens. And largely, that's because in many cases, we're not able to accommodate growth because we're so fully leased and so we, unfortunately, have some tenants that are leaving. Right now, as I look forward into our 2027 expirations, we don't have much in the way of large users leaving. So I feel better about sort of that number for what we have in front of us. So as an example, as I said, we have 1.77 million of 2027 expirations. So right now, we're pretty actively involved in about 550,000 square feet. So I wouldn't be surprised if we get above that 50% level for this portfolio. But on a general basis, we're somewhere between 45% and 50% as we get closer to the actual year of exporting.