Boston Properties Inc

NYSE:BXP

Earnings Call Analysis

Strong Third Quarter Performance

In the third quarter of 2024, BXP reported funds from operations (FFO) of $1.81 per share, beating the midpoint of guidance by $0.01, largely due to lower-than-expected general and administrative (G&A) expenses. The company completed over 1.1 million square feet of leasing, marking a 5% increase compared to the same period last year, and the year-to-date leasing volume is 25% higher than that of last year. This demonstrates BXP's resilience in navigating the evolving real estate market.

Positive Market Indicators

The market landscape appears increasingly favorable, aided by Federal Reserve rate cuts and improved economic indicators. After remaining flat throughout 2023, S&P 500 earnings are projected to grow by 9.9% in 2024, suggesting a robust corporate environment that may translate into increased leasing activity for BXP. The company noted that occupancy rates in premier workplaces, where it primarily operates, remain strong at 90.1%, while direct vacancy in this premium segment is 13.2%, significantly better than the overall market.

Leasing Strategy and Future Guidance

BXP's active pipeline of leases currently stands at 1.53 million square feet, with several transactions nearing completion. The company anticipates a strong finish to 2024, aiming for over 4.5 million square feet in total transactions by year-end. For 2025, while specific guidance will be provided in January, BXP underscored the importance of ongoing negotiations and factors like occupancy and leasing terms that will influence future performance.

Capital Markets Activity

BXP successfully issued $850 million in 10-year bonds at a 5.75% coupon in late August 2024, holding cash proceeds for bond repayment due in January 2025. The adjusted 2024 FFO guidance has been narrowed to a range of $7.09 to $7.11 per share, considering the impact of this bond issuance. The tightening credit spreads in secured debt markets indicate growing liquidity, with BXP poised to capitalize on favorable borrowing conditions for future acquisitions and developments.

Development Pipeline and Future Prospects

BXP's robust development pipeline includes over 2.7 million square feet across various ongoing projects, expected to contribute positively to FFO per share in the long term. Notably, the company is transitioning certain older properties to multi-family use, maximizing value from its land inventory. The anticipated development at Reston Corporate Center aims to build over 2 million square feet of residential space, showcasing BXP's adaptive strategy in response to market demands.

Sector Performance and Investor Sentiment

BXP benefits from being in the premier workplace segment, which exhibits greater resilience compared to weaker broader market conditions. Publicly traded office companies have seen a 30% return in the first three quarters of 2024, indicating market confidence. As BXP continues to post stable FFO and maintain dividends, it stands well-positioned to capitalize on both market recovery and its premium assets, potentially enhancing shareholder value moving forward.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to BXP's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker, Helen Han, Vice President, Investor Relations. Please go ahead.

[Helen Han, executive]

Good morning, and welcome to BXP's third quarter 2024 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 did not receive 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 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, Ray Ritchey, Senior Executive Vice President, and our regional management teams will be available to address any questions.

We ask that those of you participating in the Q&A portion of the call to please limit yourself to 1 and only 1 question. If you have an additional query or follow-up, please feel free to rejoin the queue.

I would now like to turn the call over to Owen Thomas for his formal remarks.

[Owen Thomas, executive]

Thank you, Helen, and good morning, everyone. Our performance in the third quarter demonstrated BXP's continued resilience and provided evidence of property and capital market recovery. Our FFO per share was $0.01 above our forecast and in line with market consensus for the third quarter.

We completed over 1.1 million square feet of leasing in the quarter, 5% greater than the third quarter of '23. And for the first 3 quarters of 2024, our leasing volume was 25% more than levels we achieved in the first 3 quarters of last year. Weighted average term for office leases signed this past quarter remained long at 7.2 years.

And we continue to receive awards for our industry-leading work in sustainability. In just the last quarter, Time Magazine and Statista named BXP one of the world's most sustainable companies, and NAREIT awarded BXP the Sustainable Design Impact Award for our 140 Kendrick Building A redevelopment project.

Now moving to the economic and operating environment. We believe the most important market forces for BXP, that being interest rates, corporate earnings, return to the office behavior, outperformance of premier workplaces, and valuation in the public and private markets are all currently working in our favor, serving as a tailwind for BXP's performance.

The Federal Reserve cut the Fed funds rate 50 basis points at its most recent September meeting and has signaled for 2 more 25 basis point cuts in '24 and additional reductions in 2025. The most recently released inflation and GDP growth economic data has signaled the economy is possibly stronger than previously believed and put into question the magnitude and timing of additional Fed funds rate cuts.

No matter how this debate resolves itself. The facts are short-term interest rates are coming down, which is very positive for real estate valuations, as well as corporate earnings growth, another important driver for BXP's performance given its correlation to leasing activity.

After remaining flat for all of 2023, S&P 500 earnings, as a proxy for corporate health, are expected to grow 9.9% in 2024. As mentioned before, companies with earnings growth are much more likely to invest, hire and procure space as demonstrated in BXP's growing leasing volumes this year.

We do not see evidence of a looming recession in the decision-making of our clients. While it is true that long-term interest rates driven more by market forces than Fed behavior have recently been rising, many corporations, particularly smaller ones, use floating rate and shorter-term financing, which are becoming less expensive.

Return-to-office behaviors are clearly improving across the cities where we operate. It has been highly publicized that Amazon is requiring all workers, including support staff, to return to the office 5 days a week starting December 1. Given Amazon's scale and industry presence, this decision could be a harbinger for the future policies of other technology companies. Dell, Salesforce, Starbucks and other companies have recently announced more stringent in-office work requirements for their employees.

KPMG completed a survey this past summer of 1,300 CEOs regarding in-person work policies. 84% of the CEOs believe there will be a full return-to-office work at their companies within 3 years, up from 64% of those surveyed just 1 year ago. The reason cited for the increase were concerns about diminished collaboration, innovation and productivity, inadequate supervision and training for younger employees, and the cost of maintaining vacant offices.

BXP competes primarily in the premier workplace segment of the office sector, which continues to demonstrate material outperformance. Premier workplaces are defined in CBR's research as the highest-quality 6.5% of buildings, representing 13% of total space, in our 5 CBD markets. Direct vacancy for premier workplaces is 13.2% versus 18.7% for the broader market, Likewise, net absorption for premier workplaces has been a positive 6.5 million square feet over the last 3 years versus a negative 16.7 million square feet for the broader market. Asking rents for premier workplaces are 50% higher than the broader market, a consistent gap from prior quarters.

This outperformance is evident in BXP's portfolio where approximately 90% of our NOI comes from assets located in CBDs that are predominantly premier workplaces. These CBD assets are 90.1% occupied and 92.1% leased as of the end of the third quarter.

Lastly, from a timing perspective, valuation changes in the public real estate industry, which are determined by daily trading, lead valuation changes in the private market, which are largely appraisal based. In the first 3 quarters of 2024, publicly traded office companies generated a return of 30%. While in the private market, as measured by the NCREIF Index, which is the best proxy for unleveraged private market values, office returns were a negative 7% over the same period.

In other words, public markets are trading higher based on expectations of a recovery in the office sector, while the private market appraisal-based marks are still dropping in an attempt to catch up to current market conditions. As a result, BXP has the opportunity to make increasingly accretive private market investments both in acquisitions and in selective developments that underwrite to yield premiums versus pre-pandemic levels.

Regarding the real estate private equity capital markets, office sales volume in the third quarter provided evidence of a pickup in activity. Specifically, volume for significant U.S. office sales was $8.2 billion, 15% greater than the second quarter of '24, and 32% above the third quarter of last year. Lower short-term interest rates, increased leasing activity for certain assets and locations, and better access to debt financing were the drivers.

An important change in the environment has been the increasing availability of debt financing at scale for office assets in the CMBS market with relatively attractive pricing. Very recent examples of CMBS execution include a $3.5 billion, 57% loan-to-value, 5-year refinancing for Rockefeller Center at a fixed rate of 6.2%; and a $750 million, 43% loan-to-value, 5-year refinancing of 277 Park Avenue at a fixed rate of 7%.

Office sales this past quarter for assets with comparability to BXP's portfolio include 730/750 Main Street, a fully leased 219,000 square foot multi-use building in the Kendall Center District of Cambridge sold for $362 million or $1,650 a square foot and a 5.7% initial cap rate. A leasehold interest was conveyed from the land owner to a private life science real estate owner and developer.

In Santa Monica, 2220 Colorado Avenue, a fully leased 25,000 square foot office building sold for $185 million or $819 a square foot and a 7.1% initial cap rate. A pension adviser was the seller, and a fund manager, the buyer. 799 Broadway, a 177,000 square foot new office building located in Midtown South, is under contract to sell for $255 million or $1,400 a square foot and a 5.3% initial cap rate. The building is 71% leased and the yield is estimated to be approximately 7% upon stabilization. A private REIT sold the building to a European family office.

Moving to BXP's capital allocation activities. We remain active in pursuing acquisitions from both real estate owners and lenders. Our pipeline of potential opportunities is growing, including building and [ node ] acquisitions, sites with near-term pre-leasing potential, and new residential developments. No agreements are imminent, but we are encouraged by the activity.

We are in active negotiations for the disposition of 3 non-income-producing sites, which, if successful, should close in 2025 and generate over $70 million of proceeds. For our development pipeline, we delivered into service 180 CityPoint, a 329,000 square foot lab building, which is 43% leased, located in our CityPoint Park in Waltham. Though initial leasing completed exceeded our underwriting, the market softened before the asset was fully leased.

The opening of Skymark, our 508-unit luxury residential tower development at Reston Town Center, continues to go well, having leased 35% of the units at the base of the building, and we believe we are on track to achieve our underwriting in terms of rents and schedule. We have been able to accelerate the completion of 300 Binney Street, a fully leased 236,000 square foot lab redevelopment in Kendall Center in Cambridge, and will deliver the project to our client and into service in the fourth quarter.

We continue to push forward with several residential projects, primarily on land we control that are being entitled and designed and for which we intend to partially fund with joint venture equity capital.

Lastly, we broke ground on the Grand Central Madison Concourse access phase of 343 Madison Avenue, located 2 blocks south of JPMorgan's new headquarters building, and 1 block north of One Vanderbilt. 343 Madison competes with the Park Avenue submarket of New York City, which, given its access to Grand Central Terminal's one-stop commute, is under 8% vacant with no block of direct space over 100,000 square feet available and is arguably the strongest office submarket in the United States.

343 Madison, which BXP has been working on for over 10 years, is the only fully entitled, ready-to-commence workplace development located in the core of Midtown. And we are having constructive conversations with a handful of potential anchor clients. When complete, the building will comprise 942,000 square feet and includes state-of-the-art sustainability features as well as direct escalator access into Grand Central Terminal. We hope to launch this approximately $2 billion project next year, where, as a reminder, BXP owns a 55% interest.

BXP continues to execute a significant development pipeline with 9 office lab, retail and residential projects underway as of the end of the third quarter, which we expect will contribute to BXP's external FFO per share growth over time. These projects aggregate approximately 2.7 million square feet and $2.1 billion of BXP investment with $1 billion remaining to be funded.

So in conclusion, BXP continues to leverage its key strengths, which are our commitment to premier workplaces and our clients as many competitors disinvest from the office sector. A strong balance sheet with ready access to capital in the public and private debt and equity markets. And one of the highest quality portfolios of premier workplaces in the U.S. assembled over several decades of intentional development, acquisitions and dispositions.

BXP continues to display resilience with a growing leasing pipeline as well as stability in FFO per share and dividend level, and we are well positioned to continue to gain market share in both assets and clients while benefiting from a constructive environment of lower interest rates, higher corporate earnings growth, more workers returning to their offices, continued outperformance of the premier workplace sector, and a very competitive cost of capital.

Over to Doug.

[Douglas Linde, executive]

Good morning, everybody. So Owen noted that our leasing in '24 through the end of the third quarter is 25% higher than '23. And during this period, we have completed 3.3 million square feet of signed leases. Post Q3, our active pipeline of leases under documentation sits at 1.53 million square feet, as compared to 1.39 million square feet post the second quarter. We've done about 315,000 square feet of that pool since October 1, executed leases. If we execute most of the remaining leases during the fourth quarter, we will end the year at over 4.5 million square feet of transactions. Our January '24 guidance assumes 3.5 million square feet.

Exclusive of our leases and documentation, we also have an additional transactions under discussion totaling just over 1.5 million square feet in the pipeline that will seed our 2025 activity. About 50% of that involves currently vacant space.

As of September 30, we have 1.04 million square feet of signed leases on vacant space that has not yet commenced. There is now a 210 basis point difference between our occupied space and our leased space. No doubt the analyst community is looking keenly towards 2025 and 2026 occupancy. We will provide our occupancy guidance for '25 on our next call. However, we can provide the following inputs as you think about your own models.

Our Q4 '24 and full year '25 expirations totaled 3.7 million square feet. We have signed leases that we will recognize revenue on of 476,000 square feet during the fourth quarter of '24 and 483,000 square feet for '25, totaling 959,000, which creates an uncovered exposure, if you will, of 2.74 million square feet. Our pipeline of leases in negotiation covers an additional 305,000 square feet of currently vacant space and 395,000 square feet of renewals, all of this set to commence in '24 and '25. Obviously, the remainder involve early renewals with expirations after '25.

This leaves pro forma revenue commencing leasing for the next 5 quarters of about 2 million square feet, for us to be flat for the in-service portfolio. Additional leasing with revenue starting in '25 will be additive. Each of our regional EVPs are in the process of building their business plans for '25, and this will be the basis for the total leasing volumes embedded in our guidance when we talk to you next time.

If you're wondering about the large known '24-'25 expirations, which is often a question we get, the largest are 312,000 square feet at Weston Corporate Center, which has been leased by Biogen, but sublet for years; 200,000 square feet at 1000 Winter Street in Waltham; 50,000 square feet at 200 Fifth Avenue, we own 28% of that; 2 70,000 square foot law firm leases at Embarcadero Center; and 260,000 square feet at Reston Corporate Center, which is leased to GSA. This last building is the site for our next multiphase development in Reston Town Center and the building will be taken out of service on January 1, '25.

We also have active developments that will be added to our in-service portfolio in '25 with availability that is noted in our supplemental materials: 360 Park Avenue South, 651 Gateway, and Reston Next Phase 2.

Our BXP regional teams are spending a lot of energy pursuing alternative uses for our suburban land portfolio, which includes vacant office buildings for which the highest and best use may not be waiting for a recovery in office leasing. We are now deep in a public repermitting process for 17 Hartwell Avenue in Lexington to allow for 312 multifamily units. A similar process is underway for our site containing 2 office buildings at World Gate in Herndon, Virginia, where we are working on a rezoning for 359 units and 99 townhomes, and the Shady Grove Office Park in Rockville, Maryland, with the first phase including 360 multifamily units and 136 townhomes.

Additional land sites in the Bay Area, Waltham, Northern Virginia and Northern New Jersey are being actively evaluated. This quarter, we took 2 buildings out of service that we will work to re-entitle, 1 in Waltham and 1 in Northern Virginia.

During our last call, I explained that we would see up to a 40 basis point decline in our occupancy for Q3 due to the addition of our partially leased development at 180 CityPoint. Owen noted that. With a slight reduction in the in-service portfolio, we only experienced a 10 basis point deterioration, ending the quarter at 87%. We expect to improve by 20 to 30 basis points during the fourth quarter in spite of the delivery of 103 CityPoint, which is 100% available.

This quarter we completed 74 transactions with 32 lease renewals for 681,000 square feet and 42 with new clients encompassing 42,000 square feet. Activity was concentrated in Boston with more than 58% of our total leasing volumes. We completed 647,000 square feet in Boston, 143,000 square feet in New York, 155,000 square feet in D.C., and 163,000 on the West Coast. Ten clients expanded into 142,000 additional square feet, and we had 4 contractions totaling 100,000 square feet.

The majority of the client expansion this quarter came from our Back Bay financial firms. The only significant contraction in the portfolio came from a tech company downsizing in Waltham. They were about 70,000 square feet and went to 15,000. And we have re-leased all of the space that they vacated. We continue to see downsizing of our legal firm clients on the West Coast and in D.C., and we experienced 1 in Embarcadero Center, which was a renewal and downsizing this quarter.

We executed only 1 transaction over 55,000 square feet and 2 others in excess of 45,000 square feet. Our leasing activity this quarter was very granular.

As reported in our supplemental, the mark-to-market of the leases that commenced this quarter, so they may have been signed in '20 or '21 or '22 or '23, 900,000 square feet, was down about 4.5% and the transaction costs averaged $11.83 per year compared to about $11 last quarter. The overall mark-to-market of the starting cash run on leases executed this quarter, of the 1.1 million square feet, relative to the previous in-place cash rents was actually up 9%, with the primary contribution coming from the Boston area. The starting cash rents on leases we signed during this quarter on second-generation space were up 19% in Boston, 10% in New York, and then down 11% in D.C. and 3% on the West Coast.

Owen's comments about the state of the economy and zeitgeist around the importance of in-person work with colleagues is translating into improvements in leasing activity. The level of improvement and the source of the incremental demand continue to vary greatly by market. I would also note that the decision-making continues to be slow, and while more transactions are being completed, the process takes time, lots of time.

Our views this quarter are pretty consistent with the commentary we provided during '24. The submarkets with the largest concentration of users from financial institutions, alternative asset managers, professional service organizations and law firms are showing the most consistent pickup in activity. And as we saw this quarter, in some circumstances, these clients are expanding absorption of space. Concessions are flat and taking market rents have risen during the year.

So if we think about New York City, the sub-8% availability in the Park Avenue submarket is a direct reflection of these users growing and competing for limited blocks of space. We have no availability at 399 Park Avenue or 601 Lexington. When clients need to expand on these buildings, we proactively discuss possible terminations with their neighbors. While 599 Lex has always been not quite Park Avenue, in strong markets like this, the building is one of the first to experience the spill over of Park Avenue tenants that are unable to find space. We are now in lease with a Park Avenue tenant that was unable to grow in its current building for a couple of floors.

Our most active building in New York during the quarter was the General Motors building. We completed 58,000 square feet of transactions, including the addition of a new private equity client and the expansion of another. Our other availability in this market is at 510 Madison where we are in the middle of an amenity refresh. This building tends to lend itself to smaller financial firms given the 12,000 square foot floor plate. This particular market segment of demand has been slower to make decisions.

Year-to-date, leases executed by technology tenants in Manhattan has still been pretty light. We have seen a pickup in activity among technology tenants touring the market, and this is encouraging given our current availability at 360 Park Avenue South and availability we will have at 200 Fifth Avenue. We are in active conversations with tenants at both buildings, but none have progressed to a lease in negotiation.

The most active building in Boston as well as in the entire BXP portfolio during the quarter was 200 Clarendon Street. We completed more than 460,000 square feet of leases. Virtually all the leases were with the existing clients in the alternative asset management industry, and 50% of those clients added additional space.

We also completed over 116,000 square feet of leasing in our Boston Urban Edge portfolio. This was made up of 8 separate transactions and 7 with new clients for BXP. Our portfolio is uniquely positioned both in terms of quality and availability of capital for investment in new tenant installations. Here the demand came from a national retailer, a few life science companies with office requirements, a small technology firm, and a fund manager.

We didn't execute any leases in our new life science development this quarter. Life science clients in Greater Boston, continue to display very little urgency about any potential new requirements or relocations. We have had tours from some larger users, but the requirements are for late '26 and '27 occupancy. Year-to-date, there have been a handful of leases signed on shelf space that total about 300,000 square feet in the markets outside of Cambridge and Boston.

Our Reston portfolio was responsible for 55% of our executed leases during the quarter in the D.C. region. Leasing activity and tenant demand growth continues to come primarily from 2 industry areas, cybersecurity and defense contracting. This quarter, we had a growing cyber firm more than double its square footage. This client signed its initial lease in Reston Town Center for 9,000 square feet in 2020 and has grown sixfold in the last 4 years. One of the great advantages of BXP's large holdings in Reston is our ability to accommodate the growth of our clients.

We saw a pickup of smaller requirements in our CBD D.C. portfolio this quarter, which was good news. We had 2 clients expand, one at 2200 Penn and another Capital Gallery, and completed leases with 2 new customers at 1330 Connecticut Avenue.

The district's private sector tenant demand continues to be dominated by the legal industry. Many of these potential law firm clients are not satisfied with the existing inventory, either due to the product quality, condition, or the asset's financial condition. While in almost every case, the law firm renewal or relocation is resulting in a smaller requirement, which is leading to negative absorption, these firms prefer to be in the top refurbished amenity-rich, well-capitalized buildings, which is creating a tight micro market. There are limited opportunities in the market and no appetite from traditional lenders to finance any new construction, which has traditionally been the outlet for law firm lease expirations. Our availability at 2200 Penn and 901 New York Avenue will fare well, and we are actually in lease documentation for a late 2026 known expiration at 2200 Penn today.

The San Francisco CBD also continues to act as the financial center of the West Coast with its own set of asset managers, including private equity, venture hedge funds and specialized fund managers and their financial and legal advisers. This is the source of the bulk of the transactions in the market today from a leasing perspective. Tour activity from these non-tech clients has improved during the year. On a comparative basis, San Francisco is seeing much more demand in '24 than it did in '23. There continue to be lots of small clients actively looking for space, and we are seeing these deals at 535 Mission and Embarcadero Center.

We have completed or in negotiations on 5 leases totaling about 40,000 square feet at 535 Mission. This will cover 1/3 of the availability of the building, but we still have another 80,000 square feet to go. At Embarcadero Center, we are in discussions with a number of existing and potentially relocating law firms. In each case, the requirement is a downsizing relative to the current footprint. We will retain the majority of our clients, albeit with space reductions.

We are adding other new customers, but the transaction sizes are small, so gaining occupancy takes time. Additional lease reductions from larger tenants upon lease expiration in the market, JPMorgan is the latest, which is stemming from their acquisition of First Republic, continue to mute the positive demand emanating from the AI organizations that continue to look for additional space.

During the quarter, the market got the long-awaited announcement of OpenAI's 300,000 square foot expansion in Mission Bay. And it's great that Airbnb renewed their headquarters at 888 Brandon, but expansion requirements from large technology tenants are still sparse in San Francisco.

Tenant tour activity is improving in our Mountain View Research R&D buildings where we have about 215,000 square feet of vacancy and its uniquely attractive product. We are in lease for 26,000 square feet with a health care diagnostics company for a vacant building. We completed a renewal with an automotive company, and recently have issued a multiple full building proposal. This is a significant improvement from last year and from last quarter. These buildings are designed for companies that are making some kind of device, be it a car sensor, a photovoltaic panel or a medical device. They don't compete with the large multistory office product that has flooded the market.

In summary, 2024 is shaping up to be a better-than-expected year relative to overall leasing at BXP. Leasing in our development properties continues to lag, but these are some of the highest-quality workplaces in their respective markets, and they will lease. We may not be in a clear positive absorption market, but demand continues to grow, and we will continue to gain market share. Mike?

[Michael LaBelle, executive]

Excellent. Thank you, Doug, and good morning, everybody. I'm going to start with a few comments on the debt markets, and then I'll plan to cover the details of our third quarter performance and the changes to our 2024 earnings guidance, as well as provide some insight into several of the moving pieces that you should be aware of for 2025.

We completed multiple transactions this quarter and continue to have strong access to the debt markets. This quarter, we exercised our right to extend our $334 million mortgage loan secured by 100 Causeway Street in Boston for an additional year at SOFR plus 148 basis points. We also extended $300 million of mortgage financing for Santa Monica Business Park that was scheduled to mature in July 2025, at attractive terms. We bifurcated the loan into a $100 million unsecured term loan and a $200 million mortgage loan. The unsecured loan is for 1 year with 3 1-year extensions, and we reduced the pricing at closing to SOFR plus 105 basis points. And the $200 million mortgage loan will be priced at SOFR plus 160 basis points that matures in 2028.

The secured debt markets have shown meaningful improvement this quarter for high-quality, well-leased office buildings at leverage points of 50% or less. Credit spreads have compressed, and there are significantly more liquidity in the CMBS markets for both conduit and SASB executions. The SASB market, which is where most large loans in excess of $500 million are financed, was nonexistent in 2023. It reopened in early 2024, but with pricing for the AAA tranches that spreads in the low 200s.

More recently, AAA spreads have improved into the mid-100s, which results in a significant improvement in overall pricing, and conduit pricing can be even tighter. This trend is a strong signal of improved liquidity in the sector, though the financing market remains challenged for buildings with vacancy, short-weighted average lease terms or higher leverage.

We have several mortgage financings that are part of our 2025 capital plan, and we plan to take advantage of the improved conditions in the market and extend term. These deals include our $250 million loan for Marriott's new headquarters building in Bethesda and 2 mortgages totaling $487 million on our Hub on Causeway development in Boston. We own a 50% interest in each of these assets.

In the unsecured market, we issued $850 million of 10-year bonds in late August at a 5.75% coupon. We're holding the cash proceeds pending repayment of an $850 million bond that is expiring in January 2025. As we described in our issuance press release in August, we reduced our 2024 FFO guidance by $0.02 per share to account for the incremental net interest expense associated with this bond issuance that was not in our prior earnings guidance.

Now turning to our earnings results for the quarter. We announced third quarter funds from operations of $1.81 per share. That's $0.01 ahead of the midpoint of our guidance as adjusted for our recent bond deal. The primary driver behind our earnings beat is from lower-than-projected G&A expenses. Our portfolio performed in line with our expectations for the quarter.

Doug described the improvement in our leasing activity, both in signed leases and in our pipeline. As we get into the third and fourth quarters of the year, most of this activity will not have a revenue impact in 2024 due to the lag between signing a lease and achieving occupancy and revenue recognition.

Renewals have an immediate impact, but we generally know who is renewing in advance, and the revenue is included in our forecast. My point is that you should not be surprised that our portfolio performance is closely aligned with our 2024 forecast this late in the year.

For the full year 2024, we're narrowing our guidance range for FFO to $7.09 to $7.11 per share. Adjusted for the $0.02 of dilution from our bond deal, our new range maintains the midpoint of our updated guidance.

While we will provide full guidance for 2025 in January, there are a couple of items where we have seen variations in a number of the 2025 models from the analyst community that you should consider. First is interest income, where we project lower cash balances and interest rates next year. Since our bond offering in August, we have been holding $850 million in cash that we are going to utilize in January 2025 for the payoff of our expiring bond of the same size.

We're also using cash balances in combination with operating cash flow to fund our developments. We expect our average cash holdings to be approximately $800 million lower in 2025 than they were in 2024. We expect our interest expense will be flat to modestly lower next year from the burn-off of fair value interest expense and the impact of lower SOFR rates on our floating rate debt portfolio.

We also will be vacating Reston Corporate Center, which is the project Doug described in his comments. We will be taking these 2 older low-rise buildings totaling 260,000 square feet out of service on January 1, 2025 when the full building lease expires. We have entitlements to build over 2 million square feet of mixed-use commercial and multifamily residential on the site as the next phase of our incredibly successful Reston Town Center. This will lead to a significant increase in density where we expect to create incremental value and earnings over time.

From our development pipeline, we will have a full year of contribution from delivering 300 Binney Street this quarter and the Dick's House of Sports store we delivered in the second quarter. We will also have incremental income from the completion and lease-up of our Skymark residential development in Reston, where our ownership is 20%.

Overall we had a solid quarter with a continuation of strong leasing momentum and our volumes year-to-date up 25% over last year. We modestly beat our FFO guidance for the quarter and maintained our full year earnings expectations.

That completes our formal remarks. Operator, can you open the line for questions?

[Operator]

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

[Nicholas Yulico, analyst]

I guess just turning to the leasing markets, can you just give a little bit more feel for what kind of needs to change in San Francisco, West Coast, maybe Boston suburbs as well where I think it's been more of a sort of vacancy drag on the portfolio? What needs to change for that dynamic to improve in those markets?

[Douglas Linde, executive]

So I'll give a general statement and then I'll let Rod and Bryan give their perspectives on San Francisco and the Boston suburbs in particular. In general, we need to see more technology and life science demand come back to the markets, which means we need to see both company formations with capital be it private or public, right? A lot of biotech companies are sort of hoping to go public but aren't able to go public.

And then we need to sort of see the new ideas generated into new jobs and, therefore, new kinds of businesses being formed. And that has really not been part of the sort of demand picture in either market in 2020, '21, '22, '23, '24. It's been sort of more of a retrenching of large tech and, I would say, a slight downsizing from both technology and life science.

So Rod, you can sort of talk about the CBD of San Francisco, and then Brian can talk about Waltham.

[Rodney Diehl, executive]

Yes. Thanks, Nick. I would just add to Doug's comment that I think what needs to happen, at least in San Francisco, the demand has picked up certainly. So as you heard, we've got good activity from multiple sectors and the traditional tenants still dominate, but there's plenty of technology companies that are out in the market.

But I think what needs to happen before you're going to see some meaningful changes in some of the statistics is going to be a burn-off of the sublease availability. That still is an overhang. There's about 8.2 million square feet of sublease space. I would say that the best space has been spoken for. There's still some buildings that are out there, but that's still causing us to compete with sublease space, which is difficult. So I think before you're going to see some changes in the direct vacancy and particularly in our buildings, some of those better assembly spaces need to be leased up, which is happening. So it's been happening for the last couple of years.

[Bryan Koop, executive]

In Boston, I'd say, first off, no surprise, Doug did an excellent job of underwriting the total market where we're at. So I'd encourage you to relook at those things because that was spot on. I would say with our Urban Edge, and you've heard us say this before, the Urban Edge is much different than, let's say, the 495 Ring Road, and then in particular, the P2 corridor as we call it, between the Pike and Route 2 on I-95 is much different.

The themes for us is drastic differences. So there's a drastic difference between the P2 corridor and anything else in the suburbs in terms of activity and also rental rates. And then the other is product. There's a drastic difference between our product at CityPoint, the premier space that all our leadership has talked about today, and, let's say, the rest of the market.

And it's important to note that these markets product is vintage, now over 50 years old. And there's a tremendous amount of that that's dragging down things. But the difference between CityPoint premier office space at 77 CityPoint, 190, 230, 10 and 20 CityPoint is much different. And that includes what we see in Reston, which is the cluster of amenities. And that is the biggest difference that we're seeing. There's drastic differences between product and then also location.

[Operator]

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

[Steve Sakwa, analyst]

I guess, Owen, you sort of talked about 343 Madison and the work that you're doing there. But also you mentioned the disappointment of not seeing some of the leasing happening in places like 360 Park. So I guess the question is, how are you thinking about the pre-leasing and the risks that you take at 343 Madison to move forward in light of the fact that some of the development has been kind of slower to lease up than you would like?

[Owen Thomas, executive]

Yes. I think I'm going to turn it over to Hilary. The big picture answer to your question. Steve, is that north of 42nd Street is primarily a financial services, legal services market, and it's very strong, and particularly with the access to Grand Central. You go south of 42nd Street, much more tech-driven with the issues that Doug described. But let me turn this over to Hilary.

[Hilary Spann, executive]

Thank you, Owen. Steve, I would just echo what Owen has said, and I would add to that that there have been several sizable leasing transactions completed in the third quarter in Midtown proper, meaning north of 42nd Street, as well as a very large lease that printed post the end of the quarter. So Bloomberg signed a renewal for 1 million square feet. Ares signed a lease for 300,000 square feet. Willkie Farr signed a 315,000 square foot lease. All of these leases were in Midtown proper and they're all at scale.

So there is demand from larger tenants in the marketplace. And I think it's just a question of matching the right demand profile client with the premier workplace that we're planning to build.

Very different proposition in Midtown South. The market, as Owen alluded to, is dominated by tech and media tenancy. We are starting to see some more traditional clients poke around in Midtown South as they are figuring out that there's very little high-quality space in Midtown available. But I would say the bulk of that leasing demand continues to be from the more traditional tenant-based, and tech and media simply have not been adding jobs and space the way that finance and the industries that support it have in Midtown proper.

[Operator]

And I show our next question comes from the line of John Kim from BMO Capital Markets.

[John Kim, analyst]

Trying to figure out the occupancy trajectory going forward. Doug, you gave very helpful building blocks on what's the puts and takes over the next few quarters. But at the end of the day, you mentioned 2 million square feet of leases need to be signed over the next 5 quarters with commencements in the next set of quarters, for occupancy to remain flat.

And I'm wondering how realistic that is. This year, you're on pace to sign 4.5 million square feet of leases. And how much of that is commencing this year?

[Douglas Linde, executive]

I can't answer your latter question because I don't know the actual number in terms of all the things that were signed this year, how much has commenced. We are, I would say, at this point, optimistic that we will sign 2-plus million square feet of leases that will have revenue commencing in 2024 and 2025, so that our occupancy will be at a minimum, be flat.

I'm hoping that when we go through our planning process with our EVPs, we're going to see some opportunities that will be better than that. But again, we're not giving guidance for 2025 at the moment.

[Operator]

And I show our next question comes from the line of Jeffrey Spector from Bank of America Securities.

[Jeffrey Spector, analyst]

Just back on the West Coast, and I know it's smaller presence there. But given it's such an important question topic, and I know you discussed it already, but there is a lot of skepticism over the latest return-to-office mandates, in particular, tech. I know earlier in the year, when we did our tour, we kept hearing, tech, they're just not using the stick that bring people back. And so I know, Owen, you talked about that a little bit. Doug, you talked about some of the challenges in San Francisco.

Are there lessons learned from New York City? Or do we really need to stop comparing New York to West Coast? West Coast just are truly just different dynamics, and it's going to take several years for tech firms to really figure out their space needs?

[Douglas Linde, executive]

So Jeff, my answer is I do think there is a cultural difference between the business community on the West Coast and the business community in cities like New York and Boston. And there's a differentiation. However, that differentiation, I don't believe, will result in any difference in terms of the utilization of space from a company's perspective. It may reduce the number of days any particular company demands their people come to work.

And so we are seeing, as Owen said, a lot of organizations saying whatever we have been doing is no longer working for us and we need to be more aggressive about asking our associates to be more present more of the time. I believe we will see month after month, over the next number of months and years, a continual pickup in the West Coast.

And clearly, the companies that are involved in the artificial intelligence industry large scale have said the speed of which we are needing to do all of the work that's required to be "on top and a winner" means we need space and we need our people to be in that space. And as that sector of the economy starts to dominate the culture out there, I would hope that we will see an even larger pickup in other companies responding to the need from a talent perspective relative to productivity. And Rod, you may have a different perspective.

[Rodney Diehl, executive]

I don't have a different perspective. I completely agree. And I can tell you that it has picked up. And Salesforce, in particular, as of October 1, that's when they kind of instituted their policy of getting people back in the office. And they are tracking that data very closely with our team at the building. And it seems to have -- if you were down there in that building today and you were sitting in that lobby, you would feel a different vibe than you did a year ago.

And then one other small anecdote, I'm coming in from the East Bay, which is where I live, the BART system, which is our light rail train system, the train station that I go to, there's 3 basic parking lots. And the third lot which was most distant had very few cars in it for the last few years. That lot is filling up on days Tuesday, Wednesday, Thursday. And that hasn't happened before. So they're going somewhere, they're going into the city. And so I think we are seeing a shift.

[Douglas Linde, executive]

And Jeff, I'd just add one other thing. And again, these are -- this is very anecdotal. But up in Seattle, we've done 2 leases at Madison Center in 2024. Both of them have been from branches of technology companies that gave space back early during the pandemic, and when they changed their policy relative to return to work, needed more space and took an additional floor in both cases at Madison Center.

So that does not suggest that any of these companies are going to demand everyone comes back and they're going to start firing people if they don't. We don't know how the "stick" is going to work. But there are clearly organizations that have said in the technology business on the West Coast that we need to have our people in space and we want to have the space for those people.

[Operator]

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

[Anthony Paolone, analyst]

Owen, you mentioned in your comments public markets, leading private markets maybe alluding to opportunities to invest. So can you maybe give us a sense as to where you think or where you see BXP's capital cost being versus maybe what you think you might make on something like 343 Madison or on investment opportunities you might be getting shown? And if we should really start to think about external growth in 2025?

[Owen Thomas, executive]

Yes. BXP's look-through cap rate today at current share prices in the mid, yes, call it, mid-6s. In terms of development yields in New York, before the pandemic, development yields were about 6%. And today, I think they're materially higher than that. And that's certainly going to be our target.

And then on acquisitions, there have been very few deals done in this premier workplace segment, although there were a couple last quarter, which I provided in my remarks. And again, it's a little bit all over the place, depends on the leasing status and ground lease and all those types of things. But it feels to me like the bid at least is in kind of the high 6% to 7% cap rate on a stabilized basis. So that's where the market is.

In terms of the acquisitions, there haven't been a lot of takers of that. In other words, sellers are not accepting that price and that's why there haven't been that many transactions, but that could clearly change. I also think transaction activity will probably go up in the coming quarters because there is more availability of financing, particularly in the CMBS market, which I described.

[Operator]

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

[Blaine Heck, analyst]

So along those same lines, in the past, you guys have been pretty transparent about your desire to grow in some of the markets that you've entered most recently, like L.A. and Seattle. I guess, can you just talk about whether your appetite to grow in those markets has changed at all given the tougher operating environment, and just whether you guys are seeing any interesting investment opportunities in those markets? Or do you think you'll focus your acquisition efforts on markets that are a little bit healthier now?

[Owen Thomas, executive]

Yes. Our strategy top down is to establish a perimeter, which we have with the 6 markets that we operate in, including some, in a couple of cases like Waltham and Reston, places that are outside the CBD. So that's for the top-down strategy.

In terms of what we actually invest in, it's bottoms up. We're opportunistic. What can we find? What's available? What can our teams generate? We're going to look for and execute on those investments that have the best risk return opportunities. So we certainly look at where the contributions come from the various regions to our overall result, but we want to be opportunistic in the way we do deals within the perimeter that I described.

The last thing I'll say on this is there are opportunities in the West, but they're clearly harder to underwrite. When you're looking at a building in New York or Boston, for example, or say in the Reston area, it's easier to have a view on what are the rents, what can the leasing velocity be, what should we expect? Whereas in the West, particularly for some types of assets, that's more challenging because the leasing is slower. So I'm not suggesting we won't do or try to do deals in the West, but they're harder to underwrite.

[Operator]

And I show our next question comes from the line of Michael Griffin from Citi.

[Michael Griffin, analyst]

I'm curious if you can give any color just on the Bain renewal in Boston and whether or not they were a potential candidate for that development you've got potential in the Back Bay, 171 Dartmouth. Did you just need maybe more of a commitment in terms of rents or weighted average lease term to maybe justify moving them over to the new development? Just any color there would be helpful.

[Douglas Linde, executive]

So I'm not going to comment about what Bain's decision-making process was. Suffice it to say that a new building construction in Boston today probably cost somewhere in the neighborhood of $1,400 to $1,600 a square foot depending on whether or not you want to include a value for land. And if you need a return, and Owen described sort of our development expectations, that will create a rent that is materially higher than the rents that are achievable in existing both under construction and recently delivered new buildings in the financial district and the level of rents that we can currently command in the Back Bay. And so I think the timing at the moment for that new development in Boston doesn't really pencil relative to where existing rents are.

Now if the SOFR curve goes from 5.5% to 3%, and lending conditions go from 350 to 400, to nonexistent over to 150 basis points over, and there is some softening in some of the inputs of the building, and the building cost comes down, there's probably a different conversation that could happen at some point in the future, with a number of tenants in our Back Bay portfolio about wanting to go to the new building at 170 Dartmouth Street. And we hope to start that building at some point, but it's not sort of part of the calculus in 2025.

[Operator]

And I show our next question comes from the line of Alexander Goldfarb from Piper Sandler.

[Alexander Goldfarb, analyst]

Just a question on the D.C. market. You guys made some positive comments on what's going on in D.C. and certainly echoes what we saw when we were down that market earlier in the month. Just looking at twofold. One, as you think about the rents that are rolling in D.C., directionally, do you see those rents, especially in the district, rolling up, rolling down? Just trying to get a sense given that this market has had a tough time over the past decade.

And then two, is there a willingness, are the tenants themselves willing to pay the rents necessary for new development? Or do you see this market as really just trying to cram into the existing buildings that you have right now?

[Douglas Linde, executive]

Yes. So Alex, thanks for the question. I'm going to answer the first part, and then I'll let Jake Stroman answer the second part. So in the District of Columbia, every lease that we sign has somewhere between 2.25% and a 3% annual bump. And generally, those leases are at a minimum of 10 years and generally 15 to 20 years. And so if you compound the rents that -- where we started with those rents, it is almost impossible to have a rent roll up in D.C. on a like building. However, and I'll let Jake describe sort of where the new market might be for rents in new buildings and how that might impact sort of what the opportunity might be for us. Jake?

[Jake Stroman, executive]

Yes, sure. Thanks, Doug, and hello, Alex. Look, Alex, there's no doubt that the preeminent office space and the demand for preeminent office space in the district is driven by the legal industry, as Doug alluded to in his comments. And there are definitely opportunities that exist, and there are active prospects in the market that are looking for better-amenitized and well-located, new, high-quality product. And so we do believe that there will be opportunities in the D.C. market whereby, hopefully, BXP is able to capitalize on those opportunities.

[Douglas Linde, executive]

And just -- and the rents, Jake, that would be necessary for those are what compared to where sort of existing product is?

[Jake Stroman, executive]

Yes, they're probably 15% to 20% higher than existing sort of trophy quality product that exists in the market.

[Operator]

And I show our next question comes from the line of Floris Van Dijkum from Compass Point LLC.

[Floris Gerbrand van Dijkum, analyst]

Owen, if I look at the public, and you sort of alluded to this a little bit earlier in your remarks, the public office owners, not all of them, by the way, but some of them like yourselves are getting a green light to grow externally from the market. You're all trading at a premium to consensus and estimated NAV. But you have this issue about the lack of transactions in the market as well.

How do you think about -- as the timing or potential, what are the catalysts that are going to need to occur for transaction activity to pick up? And how do you think about your cost of equity to fund those potential transactions going forward?

[Owen Thomas, executive]

Yes. Well, I mentioned -- I answered the second question earlier, which is our look-through cap rate today, depending on different models, but it's in the mid-6s.

In terms of what is going to spark new activity, I think one of several things, or more multiple of several things. One, lower interest rates would certainly help. I talked about a new market phenomenon, which is very constructive, which is the opening of the CMBS market for the office sector. I think that will help buyers create liquidity to buy things. So I think that's a catalyst.

And then I think, lastly, fatigue on the sales side. You're an owner of an asset, you have a business strategy, you want to downsize your office exposure, you want to sell a particular building. You want to reuse the capital to do something else. You have goals. And at some point, you're going to move forward and try to accomplish those goals. So I think that will be part of the calculus going forward as well.

[Operator]

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

[Caitlin Burrows, analyst]

I know you aren't giving 2025 guidance, so you're probably less inclined to talk further out. But with that said, I guess, bigger picture, as you consider occupancy improving development coming online, in-place debt being refinanced, any comments you can give on kind of the trajectory of FFO? Or could you quantify any of those building blocks?

[Douglas Linde, executive]

I will just say, Caitlin, that we are an optimistic group here, and we believe that the markets will continue to recover, and we believe that we will pick up a meaningful amount of occupancy over time. And our average rent is somewhere around $80 a square foot, and we should hopefully get to a stabilized level at some point of 400-plus basis points or more of occupancy gain. And you're talking about 80 times -- a 50 million square foot portfolio, so every 100 basis points is 500,000 square feet, so you're talking about 80 times 2 million square feet of space. That's a significant amount of growth on both in occupancy and, therefore, internally.

Owen just described hopefully the ability to do some external transactions, which we would believe would be accretive, maybe not a lot in the short, short term, but certainly on a medium- to long-term basis. So we're optimistic about the growth of our earnings over time.

And I'm sort of the outlier at BXP relative to where long-term interest rates are, but it's clear that short-term interest rates are coming down, which is a good thing. So I think that that will sort of be a little bit of a sort of neutral for us over the next number of years because we have $1.8 billion of floating rate debt that's going to come down. And as we refinance things, we'll have some amount of increase in our interest expense on the "fixed rate" side. But we feel good about the long-term perspective.

[Operator]

And I show our next question comes from the line of Upal Rana from KeyBanc Capital Markets.

[Upal Rana, analyst]

Could you give us some color on the sublease market across your markets? I know you talked about San Francisco already, but what about the others? And then do you have a sense of what percentage of your tenants are currently subleasing their space?

[Douglas Linde, executive]

So sublease is -- the biggest issue is clearly on the West Coast, and it's most dominated in San Francisco and then in Seattle. After that, it falls off pretty dramatically. We really don't have much in the way of a sublease problem in New York City, certainly not in the markets that we are competing with.

In our portfolio, there's probably 2 million to 3 million square feet overall of space that has been sublet that's not "on the sublease market." Again, we've had these transactions like I just described in Weston where Biogen sublet their space for a long time. And 2 quarters ago, we had the [ River Bend ] space. So we have some sort of chunkier pieces like that. We have one of those in rest of Virginia with the college board. So I'd say it's sort of at that level.

But we're not competing with our own tenants relative to transactions in our buildings because most of it was done a long time ago. And in the short term, there's been very little in the way of new sublet space that's been brought on in our portfolio per se.

[Operator]

And I show our next question comes from the line of Peter Abramowitz from Jefferies.

[Peter Abramowitz, analyst]

Yes. So you talked about the survey for CEOs I think that something like 83% or 85% see their people coming back 5 days a week over the next couple of years. I guess just could you sort of square that with what you're seeing real time sort of on-the-ground conversations? I know some of the tech tenants have been calling their folks back to the office 5 days a week, and you gave some helpful anecdotes there on the West Coast. But just kind of curious with how we square survey results like that with the reality of what your conversations are yielding.

[Douglas Linde, executive]

Sure. So the way you need to think about this is when you say someone is coming back to the office 5 days a week, they are never in the office 5 days a week, right? So in 2019, in the best building that we had in our portfolio, if 80% of the seats that were "in the building" were being used on a given day, that would have been nirvana.

And so what we are seeing is that in New York City, we are basically at that level. In greater Boston and even in Washington, D.C. now, where we have measurements for turnstiles, we are sort of at the sort of 85% to 90% of that level. However, on the West Coast in San Francisco, we are still sort of at a 65% of that level.

And so that's the sort of -- that's what the buildings are telling us. They're also telling us that, in all of the markets, the people that are coming in are coming in 3-plus days a week. So individual card-swipe by a human being that we can identify, in general, when you are doing -- coming in, you're coming in very frequently. And so I think it's just a question of building the number of those people who are coming in more frequently that is going to sort of be the thing that creates more "activity" in these buildings.

[Owen Thomas, executive]

Yes. And just to add to Doug's data, and I've mentioned this a few times on prior calls, first of all, CEOs are very -- they're not positive about remote work. They want employees back in the office. They have been reluctant to do so for competitive purposes.

Remote work is a benefit that many employees want, but it has a real cost. It's like compensation, other benefits you provide employees. And I think it's notable that groups like Amazon and Salesforce, and particularly all the start-up AI companies, are saying, you know what, this is a benefit that we're no longer able to provide, we need you to come back. And I think those companies taking those actions will allow their competitors to take similar actions because they're all competing for talent.

So I'm not surprised by the survey. It's what we hear from our CEO clients, and I think slowly over time, this issue will continue to dissipate in importance.

[Operator]

And I show our next question comes from the line of Dylan Burzinski from Green Street.

[Dylan Burzinski, analyst]

Doug, or maybe it was Owen, you talked about tech touring activity picking up in New York. Can you kind of compare that acceleration or pickup in that tenant touring activity to some of your West Coast gateway markets, excluding any of the AI tenants that are in the market? I guess what I'm trying to get at is, are you seeing that New York even lead on the tech touring activity front as well?

[Douglas Linde, executive]

So I will let Hilary talk about the tech in New York, and I'll let Rod talk about the tech demand in San Francisco, and you can make your own conclusion.

[Hilary Spann, executive]

Dylan, this is Hilary. The tech demand, I would say, really started to perk up a little bit after Labor Day. And I think it was pretty close to coincident with the timing of the interest rate cut. And it just seems like businesses across the board are having an easier time making planning decisions at this point.

That having been said, to Doug's point earlier, it is taking people an exceptionally long time to actually get through the process of making a decision about what space they want to take. So OpenAI recently committed to space in the market at the Puck building. There are other tech tenants that are touring in the marketplace, but I think it's too early to say that there is a solid trend toward them increasing the amount of space they're taking.

Certainly, as we've been talking to executives amongst tech companies, they're more constructive on back-to-office and, therefore, the amount of space they need. But I think we're still in the process of sorting out what that means for the actual amount of space that's going to be taken in the market, particularly in Midtown South.

[Rodney Diehl, executive]

Just add on the West Coast that I think, in addition to the headlines coming out of the AI companies, which has been great, there's definitely a broader base of other technology companies, particularly down in the Valley. And I would just make one note of the autonomous vehicle industry. There's a handful of tenants that we're talking to down there that are -- some of them are already our clients, but there's others. And so it's not just AI, definitely.

[Operator]

And I show our next question comes from the line of Ronald Kamdem from Morgan Stanley.

[Ronald Kamdem, analyst]

Just quickly looking at the health of the New York market overall and the quarter-over-quarter decline in occupancy. Can you guys just speak to how much of that was baked into your expectations in the quarter? And looking forward, do you expect a rebound in the fourth quarter? Or are there any headwinds that faced Manhattan office market that maybe were not as well appreciated by the market?

[Douglas Linde, executive]

I hope that we've been pretty clear that we were going to lose O'Melveny & Meyers at Times Square Tower in the third quarter, and that's entirely the only major change in our occupancy in Manhattan. And I would say, in fact, our other leasing activity in Manhattan is above expectation.

Now many of those leases haven't commenced yet, so they haven't rolled into occupancy. But our buildings in Manhattan 360 Park Avenue, Park Avenue South side are seeing a significant amount of interest. And we have active dialogue at buildings like Times Square Tower, at buildings like 200 Fifth Avenue, a lot of activity at 599 Lex. And so it's -- we feel really good about the overall level of sort of transactional demand that is possible for '24 and '25 in our Midtown and, hopefully, our Park Avenue/South Midtown South market as well.

[Operator]

And I show our last question in the queue comes from the line of Brendan Lynch from Barclays.

[Brendan Lynch, analyst]

It sounds like you're potentially interested in acquiring more residential and you have some residential projects beginning the entitlement process. Just wondering if you could give us some color on what the playbook is there.

[Owen Thomas, executive]

Yes. So all of what you said is true. We have -- we own today, pushing 2,000 units, and we have several projects on land we control that we're pushing forward with. And as Doug described in his remarks, we're looking at some other sites that we thought in a prior market might be well suited for office. And we think that they can potentially be re-entitled to residential.

Our playbook in residential is going to be different from what we do with office and life science. Skymark is a good example of this in -- at Reston Town Center. We own the site, we entitled the site, we did all the development work, we're supervising the construction. We have an 80% capital partner. And we also don't lease and manage the properties.

So I think what you should expect from our residential business is less long-term hold and more generation of fees, generation of profits on a minority LP interest and generation of carried interest, as opposed to long-term hold.

[Douglas Linde, executive]

Yes. And I would just add the following about our land inventory. And again, I said this in my prepared remarks. We have a significant amount of land inventory where we are carrying that both from an operating perspective as well as a cost of capital perspective. And we are not going to sit around and just wait for the markets to recover.

And so we are actively looking at how we can put those resources to use in an accretive way. And it's both multifamily units where we will likely be the developer with third-party money, townhouses where we will probably sell the parcels, and Owen referred -- described a couple of parcels that are potentially going to get sold. That's what those are. We are also -- we have some sites that might be good for big box use.

We have a site that we've been in contact with somebody who wants to do data centers. And so we are looking to try and as effectively and as quickly as possible, create value from this land inventory because it's not anywhere on our balance sheet that we get no credit for it relative to our share price. And we think there's actually a significant amount of opportunity there that we are going to try and mine over the next couple of years. And you will start to see some of this occurring in the first quarter of 2025 when hopefully we'll be announcing the commencement of this development at 17 Hartwell Avenue Lexington, which will be the first of these things.

[Operator]

Thank you. That concludes our Q&A session. At this time, I'd like to turn the conference back to Owen Thomas, Chairman and CEO, for closing remarks.

[Owen Thomas, executive]

Yes. We have no more formal remarks. Thanks to all of you for your interest in BXP.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.