Boston Properties Inc (BXP) Q2 2021 Earnings Call Transcript

Boston Properties Inc (NYSE: BXP) Q2 2021 earnings call dated Jul. 28, 2021.

Corporate Participants:

Sara Buda — Vice President, Investor Relations

Owen D. Thomas — Chief Executive Officer and Director

Douglas T. Linde — President & Director

Michael E. LaBelle — Executive Vice President, Treasurer and Chief Financial Officer

John F. Powers — Executive Vice President of New York Region

Jake Stroman — Senior Vice President, Co-Head of the Washington, DC Region

Analysts:

Alexander Goldfarb — Piper Sandler — Analyst

Steve Sakwa — Evercore ISI — Analyst

Jamie Feldman — Bank of America — Analyst

John Kim — BMO Capital Markets — Analyst

Nick Yulico — Scotiabank — Analyst

Manny Korchman — Citi — Analyst

Michael Bilerman — Citi — Analyst

Craig Mailman — KeyBanc Capital Markets — Analyst

Caitlin Burrows — Goldman Sachs — Analyst

Brent Dilts — UBS — Analyst

Vikram Malhotra — Morgan Stanley — Analyst

Daniel Ismail — Green Street — Analyst

Presentation:

Operator

Good morning and welcome to Boston Properties’ Second Quarter and 2021 Earnings Call. [Operator Instructions]. At this time, I would like to turn the conference over to Ms. Sara Buda, VP of Investor Relations for Boston Properties. Please go ahead.

Sara Buda — Vice President, Investor Relations

Great, thank you. Good morning everybody and welcome to Boston Properties’ Second Quarter 2021 Earnings Conference Call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, the company has reconciled on non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investor Relations section of our website at investors.bxp.com. A webcast of this call will be available for 12 months.

At this time, we’d like to inform you that certain statements made during this conference call which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although, Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday’s press release and from time to time in the company’s filings with the SEC. The Company does not undertake a duty to update any forward-looking statements. I’d like to welcome Owen Thomas, Chief Executive Officer, Doug Linde, President, and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President and our regional management teams will be available to address questions. And now I’d like to turn the call over to Owen Thomas for his formal remarks.

Owen D. Thomas — Chief Executive Officer and Director

Thank you, Sara and good morning everyone. I’m delighted to report that for the first time since the pandemic, I’m together with Doug, Mike, Sara and our Boston Team for this earnings call and all BXP employees returned to the office on July 6th. BXP is emerging from the pandemic with strength and momentum as evidenced by improving financial results and rapidly elevating leasing and investment activity. This morning, I will cover the economic recovery that is underway in the US, BXP’s momentum in terms of financial results and leasing, private equity capital market conditions, particularly for office real estate and BXP’s capital allocation activities focusing on four new investments we announced this quarter, including our official entry into several new market.

So, the US economy awash with fiscal and monetary stimulus is roaring back as we exit the pandemic. US GDP growth was 6.4% in the first quarter and predicted to be higher for the second quarter and for all of 2021. Over 850,000 jobs were created in June and aggregate unemployment decreased to 5.9%. Industries that use offices have been less impacted by the pandemic and the employment rate for their workers is lower. Despite the annual inflation rate rising to 5.4% in June, the 10-year US treasury rate has dropped to around 1.3% and the Federal Reserve’s rhetoric remains distinctly dovish given it believes the recent inflation is driven by transitory factors. High economic growth and low interest rates create the ideal environment for strong real estate investment performance. Now, BXP’s financial results for the second quarter reflect the impacts of this recovery and an increasingly favorable economic environment. Our FFO per share this quarter was $0.10 above market consensus and $0.12 above our own forecast, which Mike will detail shortly. We completed 1.2 million square feet of leasing, more than double the volume we achieved in the first quarter and only 10% below our long-term second quarter averages. Our clients are making long-term commitments. The leases signed in the second quarter had a weighted average term of 7.5 years, many are expanding, as was the case with 2 large media and tech clients in LA and building quality is increasingly important as evidenced by strong tour and leasing activity at the GM Building, Reston Town Center, Colorado Center and the view floors at Embarcadero Center. We believe this activity and performance supports our repeatedly stated position that tenants are committed to the office as their location of choice to collaborate, innovate, and train all critical for their long-term success and that concerns about the work from anywhere impact on the BXP footprint are overstated.

Moving to private equity market conditions, $15.7 billion of significant office assets were sold in the second quarter flat to last quarter of 77% from the second quarter a year ago and down approximately 44% from 2019 pre-pandemic levels, and it remains 23% of commercial real estate transaction activity. Cap rates are arguably declining for assets with limited lease rollover and anything life science related given lower interest rates. Notably, in Cambridge this last quarter a REIT agreed to purchase Charles Park vacant though with identified tenants for $815 million or $2200 a square foot. Also, One Memorial Drive in Cambridge, a fully leased 409,000 square feet office asset is under agreement to sell for $825 million or over $2000 a square foot, and a 3.8% initial cap rate.

Moving to BXP’s capital market activity, we had a very active and successful quarter with acquisitions. All of the investment strategies we have described to you over the last several quarters are represented in the 4 new investments we recently announced, which aggregate almost 2 million square feet. These strategies are growing life sciences, enter the Seattle market, acquire high quality assets that need redevelopment or refreshment at discounted valuations due to the pandemic and acquire office assets in partnership with private equity investors through a joint venture investment program we set up with GIC and CPP, two leading global real estate investors.

So let’s start with our official entry into the Seattle region with the acquisition of Safeco Plaza We have previously discussed the Seattle area as having a strong real estate market, as well as a logical expansion region for BXP’s gateway strategy. The Puget Sound region is the headquarters location for leading global employers like Amazon and Microsoft and has one of the largest clusters of computer science workers in the US. Seattle has experienced high levels of population and rent growth given its expanding technology and life science employment base and is much more affordable than other major technology markets given those State of Washington income taxes and lower real estate costs for both office space and housing. Rents, land values and building value lower in Seattle than any of our other core gateway markets. The broader Puget Sound market has the scale and growth potential to afford us opportunities to both acquire and develop in multiple districts of Seattle, Bellevue and other eastside markets. We have had a BXP executive Kelly Lovshin, who has joined the call this morning, based in Seattle for well over a year. We have an attractive pipeline of additional investment opportunities currently under review and we’ll build out a full service real estate execution team over time. Safeco Plaza comprises 800,000 square feet, has a LEED Platinum certification and is located in the center of the Seattle CBD with convenient access to rail, ferry and highway transit options. The building is currently 90% leased with 6 years of weighted average lease term at rents that are approximately 30% below market. Safeco Plaza offers generous ceiling heights 360-degree views and timeless architectural features and our strategy is to refresh the ground plane lobby and amenities and release the building at market rates in the coming years. Liberty Mutual which acquired Safeco is the anchor tenant leasing 68% of the build. BXP will own either 51% or 33.3% of the property, depending on whether one or two private equity investors join the partnership. We believe our basis in the acquisition, which is $465 million or $581 a square foot is very favorable relative to replacement cost and recent office trading activity in the Seattle market. We believe Safeco Plaza to be a very attractive investment opportunity with a future redevelopment play given the quality and location of the building our going in basis as well as the cash flow we receive from existing tenants during the refreshment process. We have a non-refundable deposit posted and intend to close the acquisition in early September.

We are also entering a new sub-market for BXP, Midtown South in New York City with the acquisition of 360 Park Avenue South. Midtown South has become New York’s strongest submarket in terms of rent growth and vacancy given it is the preferred location for many technology occupiers, New York City’s most rapidly growing business segment. 360 Park Avenue South comprises 450,000 square feet and is in a prime location at the corner of 26th street, one block from Madison Square Park. The transaction will close and the building will be vacated by a long-term corporate user later this year, which provides us the opportunity to plan in advance and subsequently execute a complete refreshment of the building. With generous ceiling heights and a unique elevator configuration allowing for 2 separate dedicated lobbies, we believe the building will appeal to both large and medium sized users seeking marketing and brand expression opportunities with their space. In terms of economics, we are paying $300 million for the building or $667 a square foot, which leaves us significant latitude relative to comparable sales to budget generous building enhancements. The acquisition structure is also creative and we think favorable for BXP. Consideration for the purchase will be the assumption of a $202 million mortgage on the property and the issuance of $98 million of OP units and BXP’s Operating Partnership. We are committed to complete the transaction on December 1st of this year and the number of OP units issued at closing will be determined by BXP stock price at that time but with a floor of $111 a share.

In other words, we would benefit by issuing fewer units if our share price continues to rise through the closing date but our downside is capped by a floor. Most importantly, the tax deferral inherent in our contribution structure distinguished our proposal such that it did not have to be the highest price to yield the seller the highest after tax value. One of our joint venture investment program partners will likely join this investment by funding all of the capital needed for the refreshment resulting in their owning up to a 50% interest in the project over time.

Next on acquisitions, we added to our life science business and entered the Montgomery County, Maryland life science market through the acquisition of a seven building 435,000 square feet office park located in close proximity to the Shady Grove Life Sciences Center, the premier cluster for life sciences in the Washington DC region. Montgomery County is the 4th largest life science market in the US and home or proximate to several large biomedical institutions such as NIH, FDA, John Hopkins University, and the University of Maryland. The 4 million square foot Shady Grove sub-market at the epicenter is currently 3% vacant with rising rents. We are paying a $116.5 million for the asset or $267 a square foot and intend to convert the entire park to lab and life science use over time. There are 7 buildings in total 3 of which are vacant and will be converted to lab immediately. The remaining 4 buildings are 63% leased and will be converted to lab use as leases expire and office tenants vacate over the next few years. The entire site is 31 acres and can accommodate additional ground-up development depending on demand. There is a strong backlog of space requirements in the market and we are already competing for a large build-to-suit in addition to other requirements. We have a non-refundable deposit posted and plan to close the acquisition in August. And lastly, in the second quarter, we completed another life science acquisition 153 and 211 Second Avenue in Waltham, Massachusetts. These two existing lab buildings comprising 154,000 square feet and a 100% leased to Sanofi are located immediately adjacent to our 200 West Street lab conversion property, which is almost complete and expected to deliver in the 4th quarter of this year. This was an off-market transaction completed at a price of $100 million or $650 a square foot, and a 6.4% initial cap rate. Sanofi’s lease is short term and below market. The site comprises 14 acres and has 120,000 square feet of additional development rights, which could be increased when combined with the excess development capacity of our adjacent 200 West Street site. Life sciences is a rapidly growing segment of our overall business. Today, life sciences at BXP is 3 million square feet, representing 6.4% of our total revenue. We have 920,000 square feet of lab redevelopment and development projects currently underway that are experiencing strong user demand and expected to deliver in the next 36 months. And we have approximately 5.5 million square feet of future conversion and development opportunities under our control in the Cambridge, Waltham, Lexington, South San Francisco and now Montgomery County markets. Within 5 years, assuming continued strong market conditions, we could more than double the amount of BXP’s revenue that is generated from the Life Science sector. Regarding dispositions, we have an agreement to sell our Spring Street office park in Lexington, Mass for $192 million or $575 a square foot. We expect the sale to close in September as part of an exchange with the two life science acquisitions mentioned previously. Year-to-date, we have completed or committed to dispositions aggregating $225 million in our share of gross proceeds and are considering additional asset sales in 2021.

And as a reminder on investment activities though we did not add to or deliver from our active development pipeline this quarter, we have 4.3 million square feet of development underway that is 71% pre-leased and projected to add approximately $190 million to our NOI and 3.7% to our annual NOI growth over the next 3 years.

On a final an important personnel note, John Powers who as you know, is the head of our New York region told us he would like to retire at the end of this year. We conducted a thorough external and internal search and are very excited to have Hilary Spann join BXP as an Executive Vice President. Hilary has many years of real estate management and investment experience as a senior officer of CPP and prior at JPMorgan Investment Management Having completed $12 billion in investments in New York City alone. Hilary will join BXP after Labor Day and commence her duties as New York Regional Manager at the beginning of 2022.

So in summary, we had a very active and successful second quarter with strong financial results and multiple new business wins in the leasing and investment market. BXP has a strong growth ramp driven by improving economic conditions and leasing activity, the recovery of our variable revenue streams, delivery of a well-leased development pipeline, completion now of 4 new acquisitions, a strong balance sheet and capital allocated from large scale private equity partners to pursue new investment opportunities as the pandemic recedes, a rapidly expanding life science portfolio in the nation’s hottest life science markets as well as low interest rates and decreasing capital costs.

Finally, I want to express my sincere appreciation for the BXP team which is back at the office, serving our clients, and winning new mandates with great care, expertise, and enthusiasm. Over to Doug.

Douglas T. Linde — President & Director

Thanks, Owen, good morning everybody. Obviously, we have a lot to talk about on the transactional side, I’m sure, there’ll be some questions on that, but I do want to spend a few minutes talking about the leasing markets and the activity that we’re seeing. There is certainly no question that we’re on the precipice of significant change in the atmosphere around in person work but more announcements come out every day, the fact remains there is still some uncertainty and there is some trepidation about COVID-19 the delta variant and whatever the next thing is going to be. So the transition period that we are now in as many organizations like ours encourage or require their employees to come back to work, it’s going to take some time. So they’re going to be some ramifications of that. Many of you participated in our Nareit meetings and my comments this morning about impacts on work from home, I think are going to be pretty consistent with what we talked about during that conference. The impacts on space needs are going to really vary depending upon the size of organizations which we would like to put in 3 categories.

So the first are the really large employers. And honestly, they are moving forward with plans for space, based on long-term growth plans hiring that’s occurred over the last 16 months, and thousands of open job requirements that they are trying to fill right now. Then, you have really small organizations that are very stable and they’ve all recognized that, very little is going to change regarding how they utilize a real estate, maybe some will work more from outside the office but everyone is going to continue to have a dedicated workspace in their facilities and they’re really not impacting the amount of space they have. And then, there’s a 3rd group, which is an important group and the 3rd group are mid sized organizations or younger companies that are experiencing growth but where it’s very unclear how their organizational culture is effectively going to be built. If people aren’t in physical contact and I think those companies are going to have to take some time to figure that out, will it work or won’t work, and we don’t believe that this is going to happen immediately. We think it’s going to take 6 to 12 months and it’s going to really depend quite frankly on, how they’re doing from a competitive perspective. How are their peers doing in their industries and does it matter that they’re not in contact with each other, all the time. When surveyed, most employers preferred to have their teams together as much as possible to enhance efficiency and collaboration and serendipitous idea generation etc. While many employees, declared their preferences for some or more remote work. Well, with the tight labor market, employers are acknowledging the reality. There will be an increase of work that takes place outside the office, and this will incrementally moderate some space growth in the short term, but these same companies may over time add collaborative spaces to accommodate their teams when they are all getting together and they may eventually decide that people need to be back more frequently. Unlike any other prior recession, there have been thousands and thousands of new positions created and there are lots and lots of job openings across the service sectors, the technology sector, the life science sector, the generators of office demand in our markets, and we believe many of these jobs are going to lead to space absorption over the coming years.

Employees are returning to their offices with very few reminders of COVID restrictions and they’re getting together formally in meeting rooms and collaboration areas and they’re taking the time to reconnect their breakfast and lunch and dinner in restaurants. In many of our CBD assets, we have access control, so we can sort of see what’s been going on in our competitive building sets. So comparing to February of 2020 in New York City, about 50% of the employees who had cards are now coming to the office at least once a week and that number is about 34% in Boston and 20% in San Francisco. So it’s very different from market to market. Our sequential parking income grew about 20% from the first quarter and while we’ve not seen monthly parking permits pick up tenants are driving in and paying for daily parking, we actually think that monthly parking permits will be a good indicator for the increase of office frequency in Boston and San Francisco. In Boston true transient parking is actually up and we’ve actually had to close portions of the Prudential Center garage around lunchtime every day during a couple of days in July due to lack of capacity, believe it or not. At Embarcadero Center, we’ve seen about a 20% pick up from the low point on monthly parking, but we’re still only at 60% of our historical high. So we have a long ways to go in parking.

We expect to see improvements during the rest of the year and at the end of the year we think we’re going to be at about 70% of where we were in 2019 on a full-year comparative basis. As you listen to the apartment company calls, you’re hearing about the dramatic increase in occupancy in urban areas, the employees are moving back into the cities into those same apartments, which by the way didn’t grow during the pandemic and so unlikely they’re planning on working at home in those apartments on a frequent basis and we’re seeing this in our portfolio as we move from 51% occupancy in January to 82% at the Hub House project that’s the Hub on Causeway project, from 10% to 41% at the Skyline in Oakland and from 79 to 93 at Reston Signature. Then our restaurant activity is up materially. And only is really being limited now by the challenges that the operators are having with labor, both in the front and the back of house. We have begun to move away from percentage rent assistance to our retail tenants and back to contractual fixed rent. Believe it or not in Reston, we actually had a tenant request a modification back to fixed rent because the percentage rent was creating a higher payment to us.

Sublet space continues to be a major topics during many of our conversations with investors. Last quarter I described, the dynamics of opportunistic sublet space and discussed our belief that many of the visceral announcements made by tenants that we’re putting space on the market would reverse as organizations begin to plan their in-person work strategy again. This quarter at 535 Mission, a tech company without subletting any space withdrew 40% of their 100,000 square feet availability. In Manhattan CBRE is reporting that there has been a drop of about 5.9 million square feet out of a total of 19.3 million square feet that was put on post COVID and about 67% of that was backfilled by the prime tenant. Yes, there is a lot of sublet space on the market, but a large portion is going to be reoccupied, some is not actionable because of short terms. It has unworkable existing conditions or quite frankly users just don’t like the comfort of the lessors profile and some of it’s getting leased like the three floors that were completed at 680 Folsom in San Francisco that macys.com had on a sublet market. The headwinds from sub-let space exists, but they are going to dissipate as companies begin to come back to work.

Now as I pivot my remarks to the Boston Properties office and life science portfolio specifically, I’m going to describe the level of activity that I think is counter to the headlines of weak market conditions across the office sector in the United States. The BXP portfolio includes a number of iconic high quality, well maintained, and continually upgraded assets. When there is market weakness, our assets outperform. We spent a lot of time discussing our portfolio vacancy last quarter in our forward expectations. We experienced quicker than expected revenue commencement on signed leases and saw basically flat vacancy relative to the prior quarter. We were down 10 basis points on a 45 million square feet portfolio and this included taking back 66,000 square feet of non-revenue space that I talked about last quarter at the Hub on Causeway from the cinema that had never opened. We now have new signed leases for 640,000 square feet of space that have yet to commence and are not included in our occupied in-service portfolio.

So on a relative basis, here’s my view of the markets and I’m raking it based upon activity in the portfolio, active lease negotiations, tours, RFPs from best to least. Boston Waltham, we don’t have any available space in Cambridge, so we have no activity there. San Francisco CBD, Northern Virginia, Midtown Manhattan, Peninsula Silicon Valley, West LA, Princeton and finally DC CBD, all of the transactions. I’m going to talk about are post COVID negotiations, meaning they all began in the latter half of ’20 or into 2021, so just to change things up this quarter let’s start with LA. Last quarter, I acknowledge our disappointment that we were unable to keep 200,000 square foot tenant at the Santa Monica Business Park. Less than 30 days later, we had a signed lease for 140,000 square feet of that space to a growing tech company. During May, we completed a 350,000 square feet long-term extension and expansion at Colorado Center with a media company. In total, this 490,000 square feet, had a weighted average expiring rent that was effectively equal to the starting rent of that space and 200,000 square feet of the expiring rents were at above market holdovers. This follows our immediate release of the 70,000 square feet vacancy that we had from a defaulting tenant in the first quarter. We have a number of smaller deals in negotiation in Santa Monica Business Park and we’re responding to requests from tenants that would prefer to go direct on some of the sublet availability at Colorado Center.

In Boston, during the second quarter in the CBD we signed 6 leases totaling 55,000 square feet and the average rent starting represented a growth roll off of about 20%. In each case, the tenant was either renewing or expanding. We have 7 additional leases in the works totaling 70,000 square feet. Obviously, most of them are small since we don’t have much in the way of availability in our Boston portfolio. In the suburban Boston portfolio, we completed 60,000 square feet, the average weighted cash rent on those leases was up 17%. Life science organizations are dominating activity in this market. We commenced construction on 880 Winter Street that’s the lab life science renovation that we’re doing in Waltham and have signed an LOI for 60,000 square feet. We started the building on July 5 and are exchanging proposals with over 180,000 square feet of tenants for the 220,000 square feet building, and it will be delivering in August of next year. We’ve been responding to new inquiries just about every week on that space. Asking rents in the market for lab space are in the high ’60s to mid ’70s triple net, which are well above our underwriting when we planned this project about 15 months ago.

Many of you have been asking about inflation and construction costs. When we do our construction budgeting, we always include an escalation expectation. So those numbers are baked into those numbers in our supplemental, it varies depending upon the labor market conditions, subcontractor availability and material costs. We’ve bid in our on budget for both 880 Winter Street and 180 CityPoint, so we figured out what the escalation would be and we hit it. Currently, we’re carrying about a 4% to 6% escalation for base building jobs that we would bid in 12 months. Now, turning back to leasing. In Waltham, we are negotiating leases for another 70,000 square feet of space with life science companies at Bay Colony that is adjacent to 880 Winter Street and our Reservoir Place building. Our new acquisitions at 211 and 153 Second which Owen described have a lease expiration in the late ’22 and the current rents on the space are dramatically below market. The expirations will land right in the sweet spot of the current demand in the Boston and the Waltham and the Lexington sub-markets. There is some pure office demand in the market and with more and more buildings being converted to life science, we actually expect the office markets going to tighten dramatically over the next few years. In New York, we continue to have significantly more tours than we had in comparable periods in 2019 and the second quarter is actually up significantly on a sequential basis from the first. We completed 10 office leases totaling 90,000 square feet including another full floor expansion at 399. In total, gross rents on leases signed this quarter were about 20% lower than the in-place rents. We are negotiating over 400,000 square feet of additional leases, including almost 250,000 square feet at Dock 72. The majority of the New York City leases will be for terms in excess of 10 years and we include 2 more expanding tenants at 399 Park Avenue. Activity at the street near the buildings is also picking up. We signed up a new fitness provider at 601 Lex, a new fast casual restaurant at 399 and we’re negotiating a lease for all of the available restaurant space at Times Square Tower. And we plan an opening the Hue culinary collective at 601 Lexington in September.

In Reston, our building continue to have extensive activity. This quarter, we completed over 170,000 square feet of leasing of which more than 100,000 square feet was on vacant space. In addition, we have active negotiations on another 72,000 square feet including almost 60,000 square feet of currently vacant space. Reston Next is moving towards completion with the first tenant expected to take occupancy by the end of 2021. We have another 85,000 square feet of office renewals in negotiation in Springfield, Virginia. Retail leasing is roaring back in Reston Town Center. We have negotiated 35000 square feet of restaurant transactions and have almost 100,000 square feet of cinema, fitness, and soft good transactions in the Town Center. Pedestrian activity in Reston Town Center is as active as any location in our portfolio. Office rents are basically flat to slightly down on the re-let since the expiring cash rents have been contractually increasing by 2.5% to 3% for the last 10 years.

In San Francisco CBD, we completed 5 transactions totaling 54,000 square feet with an average roll-up of 8%. Why is it so low this quarter? While the square footage was impacted by a full floor transaction, it starts in the mid ’90s where the tenant elected to forego any TI’s for a lower rent. If you exclude that transaction, the mark-to-market would have been 17%. In addition, we have 8 active lease negotiations involving 143,000 square feet with an average rent starting of over $100 a square foot — that is over $100 a square foot in this reportedly terrible market in San Francisco. The bulk of these spaces are in the higher floors at Embarcadero Center and they all have views. Pedestrian activity at the street plane, particularly in the CBD of San Francisco has improved over the last quarter, but it’s still well behind Boston, Reston, and New York. And this has affected tenants’ appetite for making space decisions. However, medium-sized technology users have begun to look for space. Sublease absorption has picked up in the city with about a million square feet of withdrawals or completed transactions. And as I said earlier, macys.com did 104,000 square feet at 680 Folsom our building.

In Mountain View, we continue to see a constant flow of medical device and alternative energy and automotive and other R&D users looking for space. We completed a full-building lease with an energy company with a healthy 60% mark up in rent and we have another 21,000 square feet lease in negotiation. There is some large tech tenants in the market today looking for expansion space and one recently executed leases for about 700,000 square feet of availability that was in Santa Clara. We are certainly pursuing those tenants for platform 16 and we have begun internal discussions about the appropriate time for the speculative restart of this building.

So to summarize, our leasing activity in the second quarter accelerated. Our portfolio is in great shape in LA. We continue to see strong economic transactions in the CBD of Boston, our suburban Boston portfolio and the CBD of San Francisco. We have significant activity in Reston and are covering our vacancy. New York tour activity is strong, we’re doing deals but economic terms are weaker. We are expanding our life science investments across the company and in Greater Boston and South San Francisco our new construction is seeing strong demand at escalating rents. Mike.

Michael E. LaBelle — Executive Vice President, Treasurer and Chief Financial Officer

Thank you, Doug. I’m going to start my comments by describing our earnings results which as Owen mentioned significantly beat our expectations. We reported FFO for the quarter of $1.72 per share, which is $0.12 per share, better than the midpoint of our guidance. About $0.06 of our outperformance came from earlier than anticipated leasing and better parking, retail, and hotel performance, which I would consider core revenue outperformance. The other $0.06 is from unbudgeted termination income and expense deferrals that we expect to incur in the 3rd quarter. Our office portfolio beat our expectations by approximately $0.02 per share from accelerated leasing. We had several larger leases commence earlier than we expected, including our 350,000 square feet renewal and expansion with a large media tenant in LA, a 65,000 square feet health care from in suburban Boston and 3 technology tenants in Reston totaling over 100,000 square feet. All of these leases were in our full year assumptions that were completed faster than we anticipated.

Leasing in our residential portfolio also improved this quarter exceeding our revenue projections by a penny. The improvement was across the board with our stabilized residential buildings exceeding our occupancy assumptions by 100 basis points to 200 basis points and the recently delivered projects at the Hub House in Boston and Skyline in Oakland seeing even stronger absorption. While market rents continue to be below pre-pandemic levels, concessions are starting to dissipate. Our parking, hotel, and retail income exceeded our expectations by $0.03 per share. As Doug detailed, these components of our income stream has started to improve, which should continue as activity levels grow in our cities. The other 2 areas where we exceeded expectations were in termination income and lower operating expenses. Our termination income totaled $6.1 million, which was $0.03 above our budget. It came from 2 sources, first at 399 Park Avenue. The building is full and we have more demand than available space. This quarter, we were able to accommodate one of our expanding financial services tenants by recapturing 50,000 square feet from another tenant. The transaction resulted in $2 million of termination income in the quarter. And second, we received about $4 million in unexpected settlement income from tenants who defaulted on their leases last year. We categorize this as termination income. While we anticipate a modest amount of termination income every quarter, we do not assume receiving any additional settlement income this year. Finally, in our operating expense line, our maintenance expenses came in $0.03 per share lower than we anticipated. We’ve deferred these costs and expect that will be incurred in the 3rd quarter. One other item I’d like to point out is that we reported second quarter same property NOI growth of 8.9% on a GAAP basis and 7.5% on a cash basis over the second quarter 2020. The strong increase honestly is primarily due to the charges for accrued rent and accounts receivable we took in 2020 related to tenants impacted by the pandemic. If you net out last year’s charges, our GAAP same-property NOI dropped by 1% year-over-year due to lower occupancy. However our cash same property NOI grew by 3.8% year-over-year as free rent periods expired and we’ve converted those to cash rents in 2021. This quarter’s leasing statistics also require explanation.

The total company in New York City leasing in particularly were negatively impacted by two retail leases in New York City. Excluding retail, the mark-to-market on our New York City office leases was positive 6% on a gross basis and positive 8% on a net basis. And office leases in the total portfolio demonstrated strong rental increases of 14% growth and 21% net.

Now, I’d like to turn to our expectations for the rest of 2021. For the 3rd quarter, we provided guidance of $1.68 to $1.70 per share, $0.03 above consensus estimates at the midpoint. At the midpoint, our 3rd quarter guidance is $0.03 per share lower than our second quarter FFO. Again, this is due to the outsized termination income and expense deferrals from the second quarter, net of those 2 items, our 3rd quarter guidance is $0.02 per share to $0.04 per share higher than the second quarter.

In the office portfolio, our occupancy exceeded expectations in the second quarter due to early lease commencements. For the rest of 2021, we anticipate occupancy will be relatively steady. As Doug mentioned, we have 640,000 square feet of signed leases that have not yet commenced occupancy. We expect 450,000 square feet of these leases to occupy before year-end. In addition, we have another approximate 600,000 square feet of both renewal and new leases in the works for 2021 occupancy. This activity, combined with already signed leases are expected to cover the 1.1 million square feet of lease expirations that remain in 2021. With stable occupancy, the current run rate for the in-service portfolio is a good proxy for the rest of 2021. We are expecting consistent quarterly improvement from our other income sources, primarily from our parking and the continued lease up of our recently delivered residential properties. Our assumptions result in $0.02 of projected incremental NOI growth in the 3rd quarter from these sources. We also expect growth from the acquisitions that Owen described. Acquisition activity net of disposition will add approximately a penny to our 3rd quarter NOI and $0.02 to the 4th quarter.

So in summary, after adjusting for $0.06 of high terminate higher termination income and deferred expenses from the second quarter, we project our in-service portfolio for the 3rd quarter to be higher by $0.02 at the midpoint and our net acquisition and disposition activity to contribute a penny. While we are not delivering any developments into service in the 3rd quarter, we anticipate incremental growth from developments in the 4th quarter that will accelerate in 2022. We anticipate that we will start to recognize revenue as the first tenants commence occupancy at our $270 million Hub on Causeway office tower in Boston in the 4th quarter and by mid ’22 we expect this project that is currently 95% leased to be generating a stabilized NOI. We also expect to deliver our $50 million life science lab conversion at 200 West Street that is 100% leased in December of this year. That will be at its full run rate in 2022. Our development deliveries will accelerate and be more meaningful to our earnings growth in 2022 in addition to the deliveries in Q4 of this year, next year we have $1.7 billion of developments slated for delivery and initial occupancy and they’re 85% leased in the aggregate.

Overall, we’re thrilled with our results this quarter as the markets continue to recover. Our leasing activity is exceeding our expectations, our variable income streams are improving, our development pipeline is on track to add future growth and we’re taking advantage of opportunities to acquire some unique assets at favorable prices that we expect will generate additional future earnings growth and value creation.

Operator, that completes our formal remarks. Can you please open the line for question?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb — Piper Sandler — Analyst

Hey, good morning up there. The first question is, Mike, as you guys think about your earnings growth and dividend growth, you have the new $2 billion JV which obviously provides a lot of capital, it lessens the need for dispositions or external — raising external equity. So with the potential for more dispositions this year is the BXP view that earnings growth and dividend growth will come first, meaning that dispositions will be limited in such a way that it really wont impair FFO growth and that way all the development in life science stuff and all the good stuff that we see will flow through into earnings next year, the year after, etc.

Michael E. LaBelle — Executive Vice President, Treasurer and Chief Financial Officer

Yeah, Alex our goal is to continue to grow our earnings over time, no doubt about it. And we’ve got a very significant development pipeline and acquisition pipeline that we’re working through to add to that growth over time that should result in additional dividend growth over time. So dispositions are our way to recycle capital and we select assets based upon what we think their growth potential is and we reinvest that capital into assets that we think are going to generate higher returns over time.

Owen D. Thomas — Chief Executive Officer and Director

Yeah, the only other thing I would add is, we’ve been selling 200 million to 300 million of non-core assets for about 5 to 7 years, and we’re running out. We have fewer of them in terms of the non-core assets.

Alexander Goldfarb — Piper Sandler — Analyst

Okay. That doesn’t sound like such a bad thing, sounds like you’ve cleaned the cupboard well. The next question is the rebound in the ancillary income, meaning the parking, the hotel and the retail. I think last quarter you guys spoke about 130 million or so of sort of missing income that was impacted by the COVID shutdowns, how much of this was back in the second quarter and then what are your thoughts for timing of full restoration.

Michael E. LaBelle — Executive Vice President, Treasurer and Chief Financial Officer

So it was actually revenue of 130 million that we were talking about in those areas. We do have some of it back, obviously the hotel which used to generate about $15 million of NOI is still losing money. So that has not, it’s improved slightly, but it hasn’t improved significantly at all. And the other areas on an NOI basis we are somewhere around $60 million to $65 million short of where we were before on the retail and the parking. With the end of the year, we’re going to be at about 70% of our parking revenue. So that’s a meaningful number for 2022 as people really start ramping up our monthly parking again.

Alexander Goldfarb — Piper Sandler — Analyst

Okay, great. Thank you.

Operator

Your next question comes from the line of Steve Sakwa with Evercore ISI.

Steve Sakwa — Evercore ISI — Analyst

Thanks, I appreciate all the detail. And Mike, you sort of talked about occupancy kind of trending flat the back half of the year. I realize it’s early to really give guidance or think about ’22, but when you just sort of talk to your tenants when you think about next years expirations and you kind of look at your pipeline, I guess I’m trying to just sort of think through, when you think the occupancy really starts to ramp in the portfolio and how long do you think it takes you to get back to what you would consider to be normal occupancy.

Douglas T. Linde — President & Director

So Steve, this is Doug. I’d answer the question in the following manner. We have relatively modest amounts of rollover in 2022 and we are covering vacancy today. The increase in our development activities that will happen in early ’22 or late ’21 are effectively buildings that are 100% leased. So if you look at our portfolio occupancy in the first few quarters of 2021, it will be picking up. I’m not smart enough to tell you when we’re — when we get to 92% or 93%, but that’s — I’d say that’s the path we’re on, today we are very high 88, I think we are at 88.6 this quarter. So I would hope that by the end of next year, we’re going to be in the ’90s again and we may be significantly higher than that depending upon the recovery in the market. And honestly, how well we do with our life science development because right now we are — we are developing stuff that we believe will deliver 100%.

Michael E. LaBelle — Executive Vice President, Treasurer and Chief Financial Officer

I think the other thing I would just add is look rollover is modest, is 6% in ’22 and 5% in ’23, a big chunk of it is in Boston, which is our strongest market. So we think we’re going to do well there and we’re going to have roll-ups there. We also have some in San Francisco in the CBD where, again, I think we’re going to see roll ups and as Doug described we’re already working on a lot of early renewals for ’22 expirations that we think will exhibit roll-ups. There is very little in LA, there is very little in DC, and New York City has about 500,000 square feet in 2022.

Steve Sakwa — Evercore ISI — Analyst

Okay, thanks. And then maybe secondly, I don’t know if this is for Owen or Doug, just maybe a little bit more commentary on the Seattle entrants. The Safeco, sounds like it’s got a little bit of vacancy for you to lease up, but I’m just curious sort of what other opportunities you might be pursuing and I assume you’re looking on both sides of the lake and I assume it would have some kind of development focus. But, and maybe just expand a little bit Seattle comments.

Owen D. Thomas — Chief Executive Officer and Director

Steve, I’ll start and Doug may want to jump in. As I mentioned in my remarks, we have a very active pipeline of investments that we’ve been reviewing for probably 6 to 9 months. Kelly Lovshin who is on the call moved to Seattle in February of 2020 and with her help on the ground, it’s been a very active pipeline. I think its robust because it’s one both acquisitions and development; and 2, as you’re suggesting it’s in multiple geographies. So we’ve been looking in the CBD of Seattle where Safeco is, we’ve been looking at South Lake Union, we’ve been looking at Bellevue area and to the east of there. So we think there is a robust pipeline and I think we will have success in growing out our region in Seattle in the near and medium term.

And regarding Safeco, look we are not looking to buy, stabilized beautiful assets that are achieving a stabilized return of 3.5% to 5% okay, that’s not what we’re doing. We’re looking to fine assets where we can create value through our operating prowess and if you look at Safeco Plaza it’s an 800,000 square feet building that was built in the late ’60s, it’s got great bones, it’s got great ceiling heights. It’s got great views and it’s fine from an architectural perspective in the interior but it’s not fabulous and our goal is to do what we did at 100 Federal Street with that asset, which was make that building something that it wasn’t, which was a building that tenants want it to go to, as opposed to just another nice building in the CBD that was sort of moving one way or the other with the market and we are actually — we got to figure out exactly what it is we think we can do and economically how to do that. And honestly I would say that while there is a little bit of vacancy in the building, we’re not in a rush to lease the space in the building tomorrow because we want to make sure we understand what the building could become and sell what it will be not what it is. And so we’re going to — we’re going to be thoughtful and constructive with how we do that and obviously it’s a weaker market today than we believe it will be in 12 months and 18 months and we hope when we’re at a point where we’ve done the work the building is going to have a very different reputation and a very different positioning in the building and we’re going to use the Boston Properties skill set to do that.

Steve Sakwa — Evercore ISI — Analyst

Great, that’s it for me. Thanks.

Operator

Your next question comes from the line of Jamie Feldman with Bank of America.

Jamie Feldman — Bank of America — Analyst

Thank you and good morning. Clearly you’ve become more active on the value-add investment side here. Can you just talk about how the competitive landscape is changing and what we’re likely to see in terms of people willing to make more bets on vacancy and office across your markets.

Owen D. Thomas — Chief Executive Officer and Director

Yeah. I think as we described the last few quarters, we felt there will be an opportunity to pursue high quality, but unstabilized real estate at pandemic discounts and we think we’re seeing that in the market. I think the capital for office real estate for anything that leased with a long weighted average lease term or certainly anything life science is robust, highly competitive, I could argue cap rates are going down and as Doug just said, that’s just not, we don’t see that value creation for our shareholders. What we want to do are things like Safeco that are not stabilized, great bones and we think the competitive landscape for those kinds of assets is less than it is for the leased assets. And I think if our thesis holds true, which we obviously think it is, which is people are going to return to the office, I think the capital will follow what we’re doing and I think those transactions will get more competitive, but Jamie, I wouldn’t leave you with the impression that there are not other bidders for these assets, but as you see from our success this last quarter, we have been able to buy quite a few things and I think that is an indicator that pricing is somewhat different for that sector of our market.

Jamie Feldman — Bank of America — Analyst

And then how you underwrite or how did you underwrite whether it’s stabilized yields or IRs. And what are you and your partners looking for at this point.

Owen D. Thomas — Chief Executive Officer and Director

Yeah, well, look we mark the market rents to market. If we think there is a change in market rents based on what’s occurring we underwrite that I think we’re conservative in the lease-up, I think those assumptions actually drive the bus more than anything. And we feel like we’re being appropriately conservative. But over time what we’re trying to achieve is approximately a 6% NOI yield over time. That’s not an IRR right that’s. So, that’s when we get done we’re yielding in the low 6s with growth obviously because there are typically escalations in rents. And if you put some leverage on that and you assume some cap rate differential between what your yield is in what you could sell it at it gives you a healthy IRR.

Jamie Feldman — Bank of America — Analyst

Okay, thank you. And then just a followup, the comment you made earlier, Doug, I think you were talking about, either the Bay area or not be specifically about maybe larger tech looking for space. Can you just talk like big picture across all the markets about what we should expect to see from big tech, clearly they drove the market ahead of the pandemic. I’m just wondering what we might see coming out of it.

Douglas T. Linde — President & Director

I think honestly, you’re going to see very much what you saw in the 2016 to 2020 era, which is big tech is looking for really thoughtful talented people and they believe that the markets that they are currently and have some of those people, and then there are places where they think they can expand. And so, I mean there is a rumor that Facebook’s looking for a couple of hundred thousand square feet in the Boston marketplace. We can tell you that there is a rumor that there is that Google and that Amazon are looking for additional space in the Silicon Valley. We see the requirements of what’s happening right now in Bellevue and the amount of space that is under construction that we believe Amazon is going to be growing into it. They don’t announce when they do a lease, but that’s the perception. So, I think you’re going to see more of the same and these companies have enormous appetite for space and for talent and whether not antitrust impacts them from — if it’s one company or 2 companies are 5 companies, which obviously is a consideration, I do think that the growth is still going to be there.

Jamie Feldman — Bank of America — Analyst

Okay. You didn’t mention New York. Any thoughts there.

Douglas T. Linde — President & Director

Look, Facebook has put a fork in the ground in their campus, which they’ve done very quietly on the far left side, John Powers on the phone, you can comment about other technology demand. We’ve announced that — the market knows that we’re interested in doing 360 Park Avenue, 2 weeks ago and obviously we announced last night. We’ve seen a significant amount of large tech demand for that building. So I don’t think the New York is at all being left behind. In fact, I think it’s similar to what’s been going on. Remember that in 2020 Google and Facebook took and Amazon took some very large pieces of space, people forget Amazon took the entire Lord and Taylor former WeWork headquarters building which was almost 800,000 square feet right. Google took a million square feet down at 500 Washington Street and in Facebook I think has amassed over 1.5 million square feet in the Hudson Yards. So that just happen. So I don’t think we feel any differently about New York City, John do you have any other thoughts.

John F. Powers — Executive Vice President of New York Region

I can just tell you that at the end of June., there were thousand open jobs posted most of those in tech in New York. So, we’re seeing a lot of expansion here.

Jamie Feldman — Bank of America — Analyst

All right, great, thanks for your thoughts.

Operator

Your next question comes from the line of John Kim with BMO Capital Markets.

John Kim — BMO Capital Markets — Analyst

Thank you. On Safeco Plaza, according to media reports, the building has already undergone a fair amount of capex over the last 15 years, about $100 million, what do you expect in terms of capital spend to reposition the asset going forward. And can you remind us of your views on Liberty Mutual and whether not, you expect them to renew when their lease expires in 2028.

Douglas T. Linde — President & Director

So we’re not going to comment on what the tenant wants to do, Liberty Mutual purchased Safeco Insurance. Safeco Insurance has spaced on the sublet market that would be an indication that they are not utilizing all their space. So that’s probably an opportunity to have a conversation. With regards to what was spent on the building, almost all of the capital that’s been spent on the building has been on the bones of the building, not been on the aesthetics and not been on place making and that is, that’s going to be our primary focus. In addition to making sure there is no deferred capital. And we don’t — I don’t have a budget I can give you when we know what we’re going to do and we and we present it to the Seattle office market, we will presented to you.

John Kim — BMO Capital Markets — Analyst

Okay. And on the co-investment program, are you looking at single asset transactions only or is the fund willing to look at portfolio acquisitions and also is there a possibility for BXP to contribute assets that fund.

Owen D. Thomas — Chief Executive Officer and Director

We would definitely look at our portfolio acquisition. As you know, we tend to aggregate our company and our portfolio one asset by a time, either through acquisitions or development but that would certainly portfolio acquisitions would be included and no we have not had discussions about joint venturing our existing assets. I want to clarify a word that you used that, I don’t think is necessarily an accurate statement about what we’re doing. It’s not a fund, it’s a co-investment program. So every asset stands on its own one or both or neither joint venture partner might elect to invest in a particular asset and they’re not aggregated into a “fund.” So I just want to clarify that because I think it’s important for you to understand.

John Kim — BMO Capital Markets — Analyst

Great, thank you.

Operator

Your next question comes from the line of Nick Yulico with Scotiabank.

Nick Yulico — Scotiabank — Analyst

Thanks, good morning everyone. Doug. I appreciate you gave some color on leases signed in the quarter. Is it possible to just get the mark to market on those lease signings in the quarter. And I guess as well, how we should think about what that number could look like for the back half of the year based on lease signings so far, I mean obviously, the second quarter number was 14%. But how does that number kind of shake out for lease signings in the quarter and how it could look for the rest of the year for commencements.

Douglas T. Linde — President & Director

Well, so timing is everything. And the reason I provide you with the information I do is because it is an indication of what is going on with the spaces that we leased today, which unfortunately may not hit our supplemental statistics from a revenue perspective for 2 quarters 3 quarters or 6 quarters. So I’m just trying to sort of give you a flavor of what is going on, on a relative basis right. So it’s very hard to sort of predict what’s going to happen because I don’t know which spaces we’re going to lease, and what the rent was versus what the rent might be on those spaces until it happens. So again, on average, everything I said was as basically down in New York City of 20%. That doesn’t mean the market is down by 20%. It may mean that those leases might have had a negative mark-to-market in 2019 because rent went way up in a particular building and the market just never got to where the increases were but so things were down in New York and they were flat in Los Angeles. Again on the portfolio of space we leased based upon what was being paid and what will be paid on a cash basis, and then the other places in Boston and in San Francisco, we were up about 20% and Mountain View we were up 60% in and in Reston we were down, call it 5% to 7%, but again a lot of the space in Reston was vacant. So there wasn’t down, it’s actually a 100% increase, because that space have been vacant for more than 12 months right. So. So that’s the reason that we give you what we give you in terms of the data, so you can have a sense of what’s going on, on a current basis.

Nick Yulico — Scotiabank — Analyst

Great, thanks. Very helpful, just second question on the Midtown South purchase, maybe you can give us a feel for, rough numbers about, how are you thinking about the additional redevelopment costs and potential rent you’re targeting there.

Douglas T. Linde — President & Director

So let me just make a few comments, and I’ll let John Powers give a more verbose answer. As Owen said, we bought the building for a very attractive basis and we are going to be in this building for well under $1,000 a square feet. I’ll let John talk about where rents are. Again, we are in the early stages of figuring out exactly what it is we want to do to this building and I’m expecting John will say it’s going to depend on who shows up because depending upon who shows up they may want different things for the building. John?

John F. Powers — Executive Vice President of New York Region

The building is very attractive for us because it’s been delivered vacant at the end of the year. So we don’t even have a carry cost for this year, we’re paying for it as Owen said at the end of the year and it’s very difficult to get a building in that market with good bones and this is pretty good floor plates and also get it back all vacant at the same time. So we’re, we’re in the visioning stage now of this and putting it together. We had a session yesterday and went very well. We think we’re going to do some very interesting and different things in the lobby space there. And we think there’ll be a lot of interest from different types of tenants. It’s very difficult to get identity if you’re 100,000 foot tenant or 150,000 or 200,000 foot tenant. Certainly, that’s the case in many of our buildings, which are much larger. So this I think will be a very good branding opportunity as Owen said in his comments for some tenants. Rent, it really depends upon the size of the lease-up and we’re budgeting some downtime obviously, next year and we may convert quicker. We don’t know how the leasing is going to go on this, but I would say if you think something with [Phonetic] a 9 that would be consistent with our underwriting and we may do better than that and we hope will. Thank you.

Nick Yulico — Scotiabank — Analyst

Great, thank you, John. Doug.

Operator

Your next question comes from the line of Manny Korchman with Citi.

Manny Korchman — Citi — Analyst

Hey, everyone. Good morning. Just thinking a life science as a broader space, you guys are increasing your exposure there as are many other owners and developers. How should we think about sort of differentiating what you’re building and an overall supply versus what we’re hearing the headlines of seemingly everyone chasing life science.

Owen D. Thomas — Chief Executive Officer and Director

Yeah. So I think the most important differentiation Manny is that we already control most of the conversion and land that we’re going to develop. I mentioned in my remarks, we already have 5.5 million square feet under control. So we don’t have to go out and buy anything and all of those projects are in the nation’s hottest life science markets, they are in Cambridge, they are in Waltham, they are in South San Francisco, there now in Montgomery County, Maryland. So again, we don’t have to go create the raw material to build our business, we already control it. Now that being said, fortunately this last quarter we did find some things that we thought were interesting we bought of smaller existing lab building adjacent to a project that we already had in Waltham, which we thought was a terrific attractively priced tuck-in opportunity, and then our DC team got very comfortable with the Montgomery County market and found a very interesting transaction to open up basically a new life science market for Boston Properties. And we are in the process of closing the deal, and we’re already in discussions with a number of users for that site. So we have high hopes. So anyway, I think that’s the big difference is, you hear a lot of people getting in the life science or growing in life science, we’re going to do it by just executing on what we already control.

Michael Bilerman — Citi — Analyst

Hey, Owen, it’s Michael Bilerman I was wondering if I can followup in your opening comments, you mentioned the concerns about work from anywhere impact on the BXP footprint are overstated. And I want to know if you can distinguish sort of BXP relative to the whole office market because obviously you made that comment that it doesn’t impact the BXP footprint but I have to assume there’s going to be some impact overall on office. Are you able to sort of tease out sort of your outperformance relative to the broader office market and why you believe it’s sort of greatly overstated.

Owen D. Thomas — Chief Executive Officer and Director

Yeah, Michael, I think, let me answer that in two different or I’ll answer just two different questions, look, I think we have said and we don’t, we believe there will be some impact on the office market due to work from anywhere, but we just think it’s overstated. If you look at the recovery of the office companies relative to other property companies and overall industry, it’s much lower. Clearly, the market is concerned, it’s not just about Boston Properties, it’s about the whole sector and you know what this return to office profile looks like for office company so we acknowledge, that’s the case. In terms of BXPs differentiation, I would say 2 things are very important. One, we like our Gateway footprint. I think we would acknowledge that in the short term cities in the southeast, southwest they’re opening more rapidly and perhaps in the short term, they might have better performance, but we believe over the long term our Gateway markets that are increasingly driven by tech and life science demand and have some barriers to entry are long-term the best place to be and then the second thing that both Doug and I talked about in our remarks is a flight to quality, if you look at that tour activity in high-quality buildings, our tour activity in New York is much higher in terms of the number of tours this year to date than it was in 2019. If you look at assets like the GM Building, there is a lot of not only tour activity but leases getting signed and as Doug said in his remarks, when you’re in a soft market, people want to upgrade their buildings and they want to go to quality. I also think a lot of the future in terms of work from home is, I do believe corporate leadership wants to have their employees return to the office. And one of the ways, they’re going to do that is to have great offices, they’re going to want to be in great locations and they’re going to want to have a great space and place and that’s what we try to do.

Michael Bilerman — Citi — Analyst

And the other question I had was you talked a lot about sort of the employee year versus the employee difference where clearly a lot of the surveys show that employees want significant flexibility, but obviously when you look at the employers are CEO surveys you get slightly different answers. With the Delta variant arriving and sort of increased masking up in some of the gateway markets, again, do you think that the churn with your tenants on the employer side just maybe shifting a little bit sort of acknowledging, we’re going to be with this for a while. Right, unless the vaccination rate increases meaningfully is going to be hard to get rid of COVID and all the protections and things that are happening, that all sort of got relaxed a little bit when we had this euphoria that we were done with COVID do you think it changes or slows anything down should sort of the frustration with going into the office on the employee side, where sort of both of these things sort of meet ahead. I’m just curious how you think about that on a current basis given what’s happening.

Owen D. Thomas — Chief Executive Officer and Director

Yeah, we haven’t seen much evidence of that, our footprint as you know, it tends to be in a more highly vaccinated parts of the country. So I think that’s the first important point. I completely agree with the dynamic that you described of it, what is the employer preference and what is the employee preference. And I think that’s a lot of the dynamic that’s working itself out in determining office policies at this time. Look, the delta variant could slow the recovery, but I don’t think it’s a matter, I think the recovery is going to happen. So it’s not an if question, it’s a win question.

Michael Bilerman — Citi — Analyst

Thanks for the color.

Operator

Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.

Craig Mailman — KeyBanc Capital Markets — Analyst

Hey guys, just. Mike, I know you gave us the impact from the acquisitions in 3Q and 4Q. But can you guys just provide some gap going in cap rates that we could think about initially for the different assets so I know you can kind of back into it, but the timing piece as we head into ’22 figure might be is there going to run rate.

Owen D. Thomas — Chief Executive Officer and Director

I’d rather not give you explicit cap rates because these aren’t closed and we have confidentiality agreements in such. I would just — I just would give you the following. So because I think this will be helpful. So 360 Park Avenue, as John Powers said will be vacant in 2022, so I think the cap rate is obvious there and the and as Owen said the Shady Grove development we intend to basically vacate all of those buildings as quickly as we possibly can. And so there is very little incremental income there. Safeco is a well leased building at very below market rents when we close, we’ll be able to provide more detail on that, I mean I think we provided some detail on the 2nd Avenue [Speech Overlap] 6.4 and that’s if you back into that and you listen to what I said about where market rents are you can get to where we think that’s going to be in 2002 when we released the building.

Craig Mailman — KeyBanc Capital Markets — Analyst

Okay, that’s helpful and then just a clarification on 360 Park Ave South. Did you guys buy the fee or the leasehold.

Owen D. Thomas — Chief Executive Officer and Director

We bought the fee interest. We are buying the fee interest.

Craig Mailman — KeyBanc Capital Markets — Analyst

And then just one last one. I’ve been asked a couple of times, and I’m just kind of curious myself. Is there any potential to redevelop the Cambridge Marriott into life science or office over time, or is there something there that would stop you from doing that. If it made economic sense.

Owen D. Thomas — Chief Executive Officer and Director

So the answer is, there is nothing legally preventing us from having a conversation with the hotel operator about their contract and there is nothing that is legally prevent us from going to the Cambridge City Council and ask for a change in use there. So clearly, we have been successful and other doing other things like that in the city of Cambridge and again one of the things that people, sort of, I don’t think they ignore if they just don’t appreciate it. We’re going to build, almost a million square feet of new lab or office space in Kendall Square that is currently being leased at rents of between $110 and $140 a square foot triple-net. We have to build an underground parking structure for the existing space and we have to give us some below grade ground to the local utility company, but that’s going to happen sooner rather than later, so we have plenty of opportunity to grow our Cambridge portfolio.

Craig Mailman — KeyBanc Capital Markets — Analyst

Okay, great, thanks.

Operator

Your next question comes from the line of Caitlin Burrows with Goldman Sachs.

Caitlin Burrows — Goldman Sachs — Analyst

Hi, good morning, earlier you mentioned that the list of non-core disposition candidates were shrinking. So I was just wondering, as you go through these acquisitions and developments, how you generally plan on funding them. I know this quarter, you did mention the use of some OP units and one of the cases. So would you identify other dispositions, issue equity only do it when your cash position allows or something else.

Michael E. LaBelle — Executive Vice President, Treasurer and Chief Financial Officer

I’ll start to answer that. And you guys can jump in if you want. Look, we’ve got a very, very strong balance sheet and we’ve got a significant amount of pre-leased developments that the money has already been spent and the income is coming in in the next couple of years, so that balance sheet is only going to strengthen as that income comes in and brings our leverage down from a place where we’re comfortable now but bring it down to provide even more capacity. So we will continue to fund through some modest asset sales. Some additional debt capital and utilizing private equity to help on any kind of acquisition type of an activity we, typically want to do the developments on our own unless somebody else owns the land and that’s the only way that we can access that and we’re comfortable with that strategy in the foreseeable future. That doesn’t mean we would never bring in additional public equity into the company that’s really dependent on 2 things, one, the investment opportunities and profile that we think we’re going to have over the next couple of years and then obviously what our share prices and whether we think that’s an attractive cost of capital for us. So we look at all of those things when we think about funding future investments.

Douglas T. Linde — President & Director

So just to sort of put a finer line on this is Doug. Everything that we have done to date we are funding with our existing capital capacity in addition to all of the developments that are currently underway, and are very comfortable with our overall leverage our use of capital in terms of where the dollars are going and how those dollars are coming in to the extent that we need additional capital to fund that I mean everything that we’ve announced to date has been funded.

Caitlin Burrows — Goldman Sachs — Analyst

Okay. And then maybe just on the development pipeline, you guys went through a lot of the leasing that was done in the quarter, but it didn’t look like the development pipeline in particular recognize that active leasing. So just wondering if you could go through the activity that you’re seeing for those projects and expectations going forward.

Douglas T. Linde — President & Director

Sure. So the only holes in our development pipeline to date are the Brooklyn Navy Yard, which is no longer part of development, which I described, and then our Reston Gateway project which is, and I’ll let Jake and Pete [Phonetic], who are our regional team from Washington, DC, talk about the leasing efforts there and sort of where we are.

Jake Stroman — Senior Vice President, Co-Head of the Washington, DC Region

Sure, this is Jake Stroman in the DC region. So on the Reston Next project we have about 150,000 square feet left to lease in the 1.1 million square feet building. We’ve actually had some great activity, lots of broker tours that have come through that building. We have trading proposals with a full floor tenant right now and we’re also going to engage [Phonetic] accessory program on an additional 30,000 square feet. So, which has been very successful in the Reston market to-date. So really good activity hoping to convert a few of those opportunities to leases here soon.

Douglas T. Linde — President & Director

And then Caitlin on the stuff in Boston, I thought I describe that. So at 880 Winter Street, which is part of our pipeline now. As I said, we have a 16,000 square feet letter of intent already signed and we have 180,000 square feet of active proposals, some of which are actionable right now and we’re just arguing about economics and then we actually, we are in discussions with some tenants at 180 CityPoint, these are not discussions that have gotten to the point where we have a letter of intent that we’ve said is close to being executable that building also is later. So the sequencing is 880 is delivering and ready for people to be working in it in August of 2022 and then about a year later 180 CityPoint is available and that’s why I said, if you think about that, we also have these 2 new buildings that we acquired on 2nd Avenue with a lease expiration in the 4th quarter of 2022 to right in the sweet spot of where all this activity is. I think if you listen to the market commentary on demand for life science, particularly in the Greater Boston Market, there is way more demand than there are existing opportunity to lease space, lots of people are talking about building this supply, most of that supply are larger projects that won’t be completed until 2024 to 2026. So the sweet spot of the market from our perspective over the next couple of years has a significant amount of demand and very little competitive supply.

Caitlin Burrows — Goldman Sachs — Analyst

Got it, thanks.

Operator

Your next question comes from the line of Brent Dilts with UBS.

Brent Dilts — UBS — Analyst

Great, thanks, good morning. On page 16 of the supplement, where you breakout second generation leasing info. it’s pretty clear the retail portfolio in New York, still a bit of a challenge but I think in your prepared remarks you referred to some current negotiations in that portfolio. So could you just talk about your outlook for a recovery there.

Douglas T. Linde — President & Director

Yeah, so the. I want to be very clear. So the reason that the numbers are as poor as they are in the retail portfolio in New York is because we took some space back or we released some space on an as is basis in 2019 okay not in 2020 at the General Motors building on Madison Avenue and the rents were dramatically lower than what the in-place rents were, that’s the reason for the change and that’s effectively what happened. So we are now leasing vacant space and the vacant spaces obviously all going to be incremental, the rents are market rents, they are depending upon where the spaces are, they are commensurate with what you would, what you would hear from our retail team. I don’t want to negotiate rents on this call, but the spaces that we’re negotiating a fitness center in the basement of an office building or a high quality restaurant in Times Square are very, very different because of the nature of the spaces and the marketplaces. But it’s, we are acting at the market. Okay, great. And then you have a decent amount of retail up for renewal in Boston in 3Q. Any color on how negotiations are for that space or if you’ve got plans to redevelop etc. So our biggest hole in Boston is at Lord and Taylor and we have a lots of active dialog going on on that space, which we haven’t seen revenue on for over a year. I think almost 16 months, which we now have back. The exploration that you’re pointing to in Boston is actually not an exploration. It’s a lease that is in litigation with the other anchor, they are now paying on a contractual basis and I don’t expect that lease will be terminated in the 3rd quarter, whether we are able to work something out with them on a long-term basis unclear, but they’re not going anywhere in the short term.

Owen D. Thomas — Chief Executive Officer and Director

Basically, how we handled some of those leases where we had a retail tenant defaulted, we terminated the leases and then we in our roll out we assumed that it expires in the next quarter because they’re sitting in it and most of these tenants, we only have a couple of left but they’re paying rent and it’s just a matter of time before we’re able to kind of negotiate what the new deal will be. So the expirations in the 3rd quarter and Boston are those in situations. So Doug described we don’t expect them to create vacancy.

Brent Dilts — UBS — Analyst

Okay thanks for clarifying that. And then just one last quick one on Seattle. I know you’ve already talked about it a decent amount. But do you have a target for where you want to get that market too as a percent of the portfolio over time.

Douglas T. Linde — President & Director

I’ll address that, we set strategy top down. We like our Gateway footprint, we think Seattle should be part of it. But the answer to your question is driven more by bottom-up opportunity so we clearly want to be in Seattle, we’re being aggressive there. We want it to grow, but it will be dependent on the volume and the timing of the attractive investments that we see.

Brent Dilts — UBS — Analyst

Yeah, okay, it makes sense. Thanks guys.

Operator

Your next question comes from the line of Vikram Malhotra with Morgan Stanley.

Vikram Malhotra — Morgan Stanley — Analyst

Thanks for taking the question. Just to clarify on that retail leave that GM Building, you mentioned the 33,000 square feet excluded. Can you just remind us what that was and what drove that negative — the big negative mark down.

Michael E. LaBelle — Executive Vice President, Treasurer and Chief Financial Officer

There was a space that General Motors had a big negative markdown down and then there was also a space that 601 Lexington Avenue, and I’m not going to tell you what the rents are. Like I said, I’m not going to negotiate rents for tenants on the phone.

Vikram Malhotra — Morgan Stanley — Analyst

So just so those spaces were relieved and that’s what drove the markdown.

Michael E. LaBelle — Executive Vice President, Treasurer and Chief Financial Officer

Yes, and one of them was. And just as in FYI, I mean this is technical, one of them was actually paying 0 because they had defaulted on their lease. But we are using their there what was contractual rent to define what the change in mark-to-market is even though they hadn’t paid rents in 6 prior to the date that they terminated.

Vikram Malhotra — Morgan Stanley — Analyst

Okay, that’s helpful. Just given the talk we’ve had so far on employees wanting flexibility, employees may be wanting slightly different things. I’m wondering if you could touch on 2 things, one, just sort of what you’re seeing at your co-working platform and where do you expect that to trend maybe in terms of just offerings and additional buildings. And then second, just on lease terms itself, are you seeing any variations in discussions on lease length or flexible options for termination or expansion that would be helpful. Thank you.

Douglas T. Linde — President & Director

Sure. So let me just define what our platform is. So we have in Boston Flex by BXP in 3 CBD office buildings. And then one suburban asset and the character of leasing there has actually been that it’s picked up significantly over the past quarter, we’ve done, I’d say you know, 6 or 7 deals which have leased all of the space at our suburban location and the vast majority of our space at the Prudential Center location and we’re in activity at the Hub on Causeway and the nature of all those tenants are companies that I don’t know what their long-term growth is they didn’t have office space prior to the pandemic, they want to get back quickly and they just need space because they want their people together and they’re saying, we want to, we’re going to take this for 6 to 9 months and then we’re going to figure out how much we need and then we’ll decide if we want to do additional flex space with you or we want a long-term commitment. Again our spaces are generally 4,000 square feet to 60,000 square feet max and we have a few that are a little bit smaller. But that’s the character of the spaces.

Owen D. Thomas — Chief Executive Officer and Director

And I think Vikram we don’t have plans right now to grow that business. I mean that could change over time depending on the economic performance, but we are not planning to expand at this time.

Vikram Malhotra — Morgan Stanley — Analyst

Okay, great. And then just, sorry, just to clarify the leas terms overall, you’re not seeing any change in the components. Whether it’s term or just out options or expansion options or anything like that.

Douglas T. Linde — President & Director

In the perfect world, the tenant would like to have an ability to get out at least whenever they can we, obviously we don’t provide that kind of flexibility. As I think Owen said in his remarks, our average leases that were signed this quarter was 7.5 years. Typically we’ve been telling people that we have an average lease length of 8 years so it’s [Phonetic] minimally less, but again, the leases that are in active negotiation right now are all on average 10 years or more, all the activity that I described, including the life science stuff, and I would tell you that tenants as I said would like to have more ability to be flexible their space and buy their way out of leases and occasionally we are giving some of that flexibility after longer periods of time, you signed a 10-year lease and you can terminate after the 7th year, something like that, but there really hasn’t been a any shift in the profile of the amount of time that the companies that are looking at our kind of spaces are expecting and all of our build-to-suit stuff is still 10, 15 or 20 year.

Vikram Malhotra — Morgan Stanley — Analyst

Okay, great. And then just, last one, I know the you’ve talked obviously a lot about Seattle and it makes sense strategically, just thinking about other markets one of your West Coast has expanded into Austin recently and I guess you never say never but if we look at the next sort of 2 to 3 years, is it a possibility that you look at any of the kind of key Sunbelt markets as more tech tenants expand there.

Douglas T. Linde — President & Director

Look we believe in our Gateway strategy, we think Seattle was the logical expansion as a gateway market and there is plenty to do in the 6 markets we’re in now. Vikram you and others are focused on Seattle, I could argue we actually went into 3 new markets this quarter one was Park Avenue South, Midtown South market and it’s a new submarket for Boston Properties. The New York market is 3 times the size plus of Seattle, it’s got — its multiple cities in and of itself, we just went to a new one and then our DC team went into the Montgomery County life science market which we hadn’t been in before that’s managed out of DC Region. So I think those 2 deals are evidence of all of the robust opportunities we have to expand our footprint in our existing regions.

Vikram Malhotra — Morgan Stanley — Analyst

Great, thank you so much.

Operator

Your next question comes from the line of Daniel Ismail with Green Street.

Daniel Ismail — Green Street — Analyst

Great. Maybe going back to the development pipeline, Doug, I believe you discussed the speculative restarts of platform 16. Are there any similar discussions across the pipeline — across the non-life science pipeline such as 3 Hudson or anything else.

Douglas T. Linde — President & Director

I would say, the only other project that is in our land portfolio at this time that we’re looking is the block D residential development in Reston Next. I think that could be a start, you can see later this year early next year. [Speech Overlap].

Owen D. Thomas — Chief Executive Officer and Director

To your question specifically, we’re going to need to really large tenant commitment to start 3 Hudson Boulevard or to start 343 Madison Avenue, which by the way wanting to be in a position to start for a couple of years or any of the other land holdings that we have in our more urban locations.

Daniel Ismail — Green Street — Analyst

Got it and then you just discussed throughout the call today about the quality of your portfolio and the outperformance that it’s generating and I’m curious within the leasing activity this quarter or in the pipeline are you seeing any tenants trading up from Class B space to Class A.

Douglas T. Linde — President & Director

I would say that we’re not seeing people trading up from true Class B space because true Class B space is significantly less expensive than Class A, but we are getting tenants who are in what I would refer to as A minus minus buildings that are looking at our assets. In other words, modern inventory of office space that has really not been either amenitized, where the landlords don’t even understand what it means to create great place and great space where they haven’t made the changes to the infrastructure of the buildings but where the building is well-located, and so those tenants are there because of that and they sort of saying, wait a minute, given everything that’s going on and the importance as Owen described of having great places for their employees to want to come back to, and the health security issues that we’ve talked about ad nauseam for the last couple of quarters and how we’re dealing with those things, there is a flight to those kinds of environments that I believe is occurring. And so, to answer one of the questions that was asked previously, I do believe that there will be buildings that were built, call it in the modern era. So in the ’70s, ’80s, ’90s, 2000s that have not been well maintained or well thought of with landlords who really aren’t thinking about the long-term viability of the buildings that will be left behind in our core cities as you know people move to better buildings and better landlords and better activities for their customer.

Daniel Ismail — Green Street — Analyst

Got it. Thank you.

Operator

And there are no further questions at this time, I will now turn the call back over to the speakers for any closing remarks.

Owen D. Thomas — Chief Executive Officer and Director

Okay. Thank you, operator. We don’t have any more formal remarks. And I just want to thank everybody on the call for their time and their interest in BXP. Thank you.

Operator

[Operator Instructions]