Piedmont Office Realty Trust Inc

NYSE:PDM

Earnings Call Analysis

Piedmont Office Realty Trust Sees Strong Leasing Momentum and Positive Outlook

Piedmont Office Realty Trust reported a record leasing of approximately 2 million square feet for 2024, with a current lease percentage of 88.8%, the highest since early 2020. This leasing activity is projected to generate an additional $48 million in annual revenue from a backlog of 1.5 million square feet of leases. The company narrowed its core FFO guidance for 2024 to $1.48-$1.50 per share, with same-store NOI growth expected between 2% to 3%. Moving forward, Piedmont anticipates significant improvement in results by late 2025 as newly executed leases commence and current vacancies decrease.

Strong Leasing Performance Boosts Outlook

In the third quarter of 2024, Piedmont Office Realty Trust achieved significant leasing success, executing over 461,000 square feet of leases, bringing the total for the year to approximately 2 million square feet. This marks the highest leasing volume over the first nine months in over a decade. The leasing activity has resulted in an increase in occupancy, with the overall lease percentage climbing to 88.8%, the highest level since early 2020. This upward trend is supported by a robust pipeline of potential leases, totaling around 3 million square feet, indicating a healthy demand for high-quality office spaces as organizations adapt to the return-to-office trend.

Financial Metrics Reflect Transition Phase

Piedmont reported a Core Funds From Operations (FFO) per diluted share of $0.36 for Q3 2024, a decline from $0.43 in the previous year. This decrease is attributed to elevated net interest expenses from recent refinancing and lower rental income due to property sales and lease seasonality. However, the company believes it has reached the bottom of the FFO cycle, predicting improvements in earnings as new leases commence, particularly in the latter half of 2025.

Enhancing Financial Stability through Strategic Moves

Piedmont has made strides in strengthening its balance sheet over the past 18 months, addressing $1.4 billion in maturing debt. The company currently has significant liquidity, with $130 million in cash and full access to a $600 million line of credit. Looking ahead, they plan to use these resources conservatively while also focusing on a $250 million term loan due in early 2025, effectively reducing immediate refinancing pressure. The successful refinancing endeavors, though leading to higher interest expenses, are expected to ease in the coming years, benefiting overall financial health.

Revised Guidance Reflects Optimism

Piedmont has narrowed its guidance for Core FFO for 2024 to between $1.48 and $1.50 per share, with same-store Net Operating Income (NOI) growth projected in the range of 2% to 3%. The company reiterates that this guidance excludes any potential acquisitions or dispositions, directly suggesting confidence in managing the current property portfolio and expected leasing gains. Furthermore, substantial backlog leases totaling 1.5 million square feet, equating to roughly $48 million in potential annual revenue, are anticipated to kick in over the next 6 to 18 months, bolstering FFO growth.

Operational Excellence and Recognition Drives Portfolio Performance

Piedmont's portfolio benefits from high occupancy rates and operational excellence, reflected by an 80% tenant retention rate, significantly above the historical average of 65%. The company has also received accolades for sustainability, achieving top ratings in GRESB assessments. These factors showcase their commitment to providing high-quality, well-managed office environments that meet the evolving demands of tenants.

Outlook on Market Trends and Challenges

The macroeconomic environment shows signs of improvement, with many corporations increasing in-office attendance expectations. Notably, a recent survey indicated that 80% of CEOs anticipate a full-time return to office within three years, signaling a shift that may positively impact leasing dynamics in the greater economy. However, challenges remain, especially in markets like Washington, D.C., which faces unique pressures that could slow recovery. Despite this, Piedmont remains optimistic about its growth potential across well-performing markets like Dallas, Atlanta, and the broader Sunbelt, positioning itself to capitalize on these trends moving forward.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings. Welcome to the Piedmont Office Realty Trust, Incorporated Third Quarter 2024 Earnings Call. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Laura Moon. You may begin.

[Laura Moon, executive]

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's Third Quarter 2024 Earnings Conference Call. Last night, we filed our Form 10-Q and an 8-K that includes our earnings release and our unaudited supplemental information for the third quarter of 2024 that is available for your review on our website at piedmontreit.com under the Investor Relations section.

During this call, you will hear from senior officers at Piedmont. Their prepared remarks, followed by answers to your questions will contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements address matters, which are subject to risks and uncertainties, and therefore actual results may differ from those we anticipate and discuss today.

The risks and uncertainties of these forward-looking statements are discussed in our press release as well as our SEC filings. We encourage everyone to review the more detailed discussion related to risks associated with forward-looking statements in our SEC filings.

Examples of forward-looking statements include those related to Piedmont's future revenues and operating income, dividends and financial guidance, future financing, leasing and investment activity, and the impacts of this activity on the company's financial and operational results.

You should not place any undue reliance on any of these forward-looking statements, and these statements are based upon the information and estimates we have reviewed as of the date the statements are made.

Also on today's call, representatives at the company may refer to certain non-GAAP financial measures such as FFO, Core FFO, AFFO and same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and supplemental financial information which were filed last night.

At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments regarding third quarter operating results. Brent?

[Christopher Smith, executive]

Thanks, Laura. Good morning, everyone and thank you for joining us today as we review our third quarter results. In addition to Laura, on the line with me this morning, are George Wells, our Chief Operating Officer; Chris Kollme, our EVP of Investments; Bobby Bowers, our Chief Financial Officer; and Sherry Rexroad, our new EVP, Finance. We also have the usual full complement of our management team available to answer your question.

In our business, there is no doubt name of the game is leasing. Leasing drives occupancy, which drives earnings and ultimately cash flow. And here at Piedmont, we're undoubtedly experiencing great leasing success with the momentum heading into next year.

During the third quarter, we executed over 461,000 square feet of total leasing, which brings our total leasing year-to-date, to approximately 2 million square feet, which is the most leasing we've done in the first 9 months of a year in over a decade.

Importantly, this leasing success helps lift the overall lease percentage of our in-service portfolio to 88.8%, the highest level it's been since the first quarter of 2020, which marks the beginning of the COVID-19 pandemic.

Incidentally, 2 million square feet of leasing on an annual basis is what we would normally call a great year, and we still have another quarter to go with a robust pipeline of approximately 3 million square feet of potential leases in the proposal stage.

I'd also note that the activity is broad based across industries and exhibiting growth in all of our submarkets, excluding Washington, D.C., which has its own unique set of challenges. Furthermore, the leases we have signed so far this year have resulted in double-digit rental rate growth of 12% on a cash basis, and almost 20% on an accrual basis, once those leases begin.

George will provide market specifics and details on the leasing pipeline in a moment. But we believe that the investments that we've made in our portfolio, combined with our relentless focus on best-in-class service and a sustainability mindset, are resonating with both existing and prospective tenants alike, and demonstrating the growing demand for highly amenitized, well-located work environments operated by a financially stable landlord.

The headlines reinforce our belief that the macro environment is improving. JLL's third quarter office report is entitled Tide Beginning to Shift for U.S. office as availability rate declines for the first time in 5 years.

Well-known industry-leading companies like Salesforce, 3M and Amazon continue to require greater in-office attendance, which will likely influence others to follow suit.

A recent KBMG survey of 400 U.S. CEOs revealed that 80% of the CEOs expect corporate employees to be present in their offices full time within 3 years. That's a substantial increase from the 34% expectation in this group's April survey. More widespread in-office attendance is surely contributing to positive trends, like 4 straight quarters of decreasing sublease availabilities and 3 straight years of declining downsized rates.

We've witnessed this phenomenon firsthand in our own portfolio with a number of tenant expansions, including a large e-commerce tenant in Dallas. And from the supply side, JLL also sees favorable trends as new construction starts are dropping to new lows and obsolete commodity office is rationalized and repurposed.

We are seeing positive absorption in the top-tier assets. Though the overall market continues to experience negative absorption, however, that trend too is improving.

As I've noted on prior calls, the top 5 to 10 assets in the submarket are gaining market share and demonstrating positive absorption. It is this improving macro backdrop, combined with the leasing success that we have experienced in our own portfolio, thus far, this year and our robust pipeline that buoys our optimism as we look to the remainder of this year and beyond.

Although, it is true that it will take a few quarters for leasing success to translate to cash flow, we currently have a backlog of 1.5 million square feet of leases, representing approximately $48 million of additional annual revenues and our contractual expirations to the end of 2025 are very manageable, at less than 11% of annual revenue.

Although, there will always be 1 or 2 vacancies in any given year, we have proven over the past several years that our strategy has been very effective in maintaining and attracting new customers in an extraordinarily narrowly competitive environment, and we believe that our prospects for future growth look promising as the overall office environment improves.

Shifting gears, I want to recognize the Piedmont team for once again achieving 5-star and Green Star recognition from GRESB based on 2023 sustainability performance.

Furthermore, our scores ranked in the top decile for participating listed American companies, a huge accomplishment for Piedmont and one that takes daily focus from not only our property management team, but many other team members throughout the company.

If you have a moment, I hope that you will check out our recently published annual ESG report, which is available electronically on our website.

With that, I will hand the call over to George, who will go into more details on third quarter operational results. George?

[George Wells, executive]

Thanks, Brent. Good morning, everyone. Our well-amenitized portfolio generated another quarter of strong operational results. Not only do our existing customers appreciate our team's hospitality, high-touch service and vibrant environments, but new customers are also recognizing our value proposition, as new leasing transactions were completed in all of our core markets.

During the third quarter, we completed 65 lease transactions for over 460,000 square feet of total overall volume, which is on the high-end of our typical quarterly range of 300,000 to 500,000 square feet. Nearly 45% of that volume is related to new tenant lease activity accounting for 32 transactions over 205,000 square feet and contributing to positive net absorption in each of our core markets with the exception of D.C. Metro.

The weighted average lease term achieved was approximately 8 years, and 5 new food and beverage operations were signed this quarter, enhancing the attractiveness of our many rich portfolio.

Continuing with operational metrics for the quarter, lease economics were favorable as well with a 4% and 8.5% roll-up or increase in rents for the quarter on a cash and accrual basis, respectively.

As anticipated, our lease percentage moved up 150 basis points to end the quarter at 88.8%. As we have experienced for several quarters, most of our new tenant lease activity or 60% occurred in our Sunbelt portfolio, where much of our vacancy resides.

The existing tenant retention rate of 80% was much higher than our long-standing retention average of 65%. Interestingly, and perhaps another sign of an improving macro environment, we recorded 7 tenant space expansions during the quarter and no contractions for a net increase of 60,000 square feet and representing an 11% expansion from existing footprint.

Leasing capital spend was approximately $5.5 per square foot per lease year and in line with our average for the past several quarters. Sublease availability continues to hover around 5% and none of that space is expiring in 2024 or early 2025.

That said, I'd like to point out a few highlights in some of our operating markets this quarter. Our 60 Broad Street tower in New York captured nearly 20% of overall volume and landed the largest new transaction this quarter with a full floor 13-year expansion with the state of New York, which is also our largest tenant in our entire Piedmont portfolio, now occupying roughly half of the million square foot building. This transaction brings the total leases executed at the building to roughly 100,000 square feet in the last 12 months with the asset now almost 96% leased.

We continue to have an active though slow-moving dialogue with New York City to renew substantially all of its 313,000 square feet, which expires in the second quarter of 2026. Prospective new tenant interest is very active at 60 Broad with the limited vacancies remaining with some of that demand emanating from office to resi conversions or distressed assets near 60 Broad.

More broadly, Brent had recently reported that Manhattan office demand has returned to pre-pandemic levels. Leasing velocity at 9.5 million square feet was the strongest quarterly volume since the 3 months ending December 2019, a 5-year high.

Other market notables, Atlanta, our largest market, had another impressive performance with 13 transactions for 120,000 square feet and represents 26% or the largest share of our overall quarter lease volume and remains our most consistent performer in attracting new business.

Galleria on The Park again landed another full floor headquarters operation, the ninth in the past 4 years. Dallas, our second largest market, also stood out with 17 transactions or 16% of the company's quarterly leasing volume and every project here experienced positive net absorption, except for Las Colinas Center, which stayed flat.

On the recognition front, our properties and service teams continue to be awarded market recognition as Piedmont won several TOBY Awards recently. TOBY is an acronym for the Outstanding Building of the Year and is determined by BOMA, a widely known international real estate association that sets the standard for operational best practices.

In Orlando, the Exchange won the high-rise category in the Southern region. Also in Orlando, Townpark won the low-rise category in the Southern region. In Minneapolis, Crescent Ridge won the mid-rise category in the Midwest Northern region. And in Boston, Wayside Office Park won in a low-rise category at the highest award tier, the International Level.

Let me take a moment to translate these awards into our leasing success. Each of these buildings share many of the same characteristics, including a preeminent location that's walkable and easily accessible by car. They also offer great conference, fitness, and food and beverage options. They have a great air and light and highly functional floor plates, and they come at a discount to new construction.

And these factors are why we continue to see an increase in proposals across our portfolio, and we remain positive about the future near-term leasing trends.

Our leasing pipeline activity is exceptionally strong with approximately 450,000 square feet already in late-stage activity.

As Brent noted, outstanding proposals at the end of the quarter stand at a record of approximately 3 million square feet, a strong indicator of future leasing activity. Given the strong pipeline and a limited amount of lease expirations remaining for the fourth quarter, for the second quarter in a row, we will be increasing our projected lease percentage by 50 basis points for in-service portfolio to be in the 88% to 89% range at year-end.

I'll now turn the call over to Chris Kollme for any comments on investment activity. Chris?

[Christopher Kollme, executive]

Thank you, George. While there are no material updates this quarter regarding Piedmont's portfolio, we do have a couple of small noncore assets currently on the market. We don't expect any additional dispositions to close this year. And as you all know the transaction market remains choppy and highly uncertain.

Broadly speaking, I would note that we are seeing financing conditions fall just a bit, and a modest improvement in transactional activity in some of our markets. And while there is a long road to recovery ahead for obsolete office inventory, tenant demand for high-quality assets is being validated, and we'd expect pricing for those assets to reach an inflection point and to stabilize in 2025. Anecdotally, there does appear to be growing conviction that we are at or very near the bottom from a pricing perspective.

As we have signaled for several quarters, we are more focused on dispositions than acquisitions, but we do remain in active dialogue around targeted potential opportunities. We will remain patient and highly selective with our capital.

With no other material updates at this time, I'll pass it over to Bobby to cover our financial results. Bobby?

[Robert Bowers, executive]

Thank you, Chris. While we'll be discussing some of this quarter's financial highlights today, please review the entire earnings release, the 10-Q and the accompanying supplemental financial information, which were filed yesterday for more complete details.

Core FFO per diluted share for the third quarter of 2024 was $0.36 versus $0.43 per diluted share for the third quarter of 2023. Approximately $0.03 of the decrease is due to increased net interest expense from our successful refinancings over the past year, with the remaining decrease attributable to lower reported rental income due to the sale of 2 properties this year, as well as, the downtime between the expiration of a few large leases earlier this year before newly executed leases commence.

As we've indicated throughout the year, we believe that we've reached the bottom of the trough for the company's quarterly FFO per share for this real estate cycle. And that results will improve in 2025 as leases commence, particularly in the second half of the year.

AFFO generated during the second quarter of 2024 was approximately $30 million, providing ample coverage of the current quarterly dividend and funding for our foreseeable capital needs. As we previously mentioned, CapEx for 2024 was elevated as we wrap up 4 major building redevelopment projects before the end of the year, leaving us with much lower redevelopment requirements for next year.

Turning to the balance sheet. The proactive refinancing activity over the last 18 months is complete with $1.4 billion of maturing debt addressed. Our current liquidity position is strong, comprised of the full capacity on our $600 million line of credit, and over $130 million of cash and cash equivalents, representing the remaining unused proceeds from our last bond offering in June.

We've temporarily invested these proceeds accretively, but intend to use them along with funds received from any potential dispositions and available bank credit to repay the $250 million term loan that matures during the first quarter of next year. Absent this maturity, which is largely prefunded now, we currently have no other final debt maturities until 2027.

Obviously, with the successful refinancing activity that took place in 2023 and 2024, we've repeatedly proven our access to capital in the debt markets, albeit at higher rates, which have temporarily impacted our credit ratios and earnings with interest expense more than doubling over the last 2 years. Fortunately, all unsecured debt maturing in 2027, and for that matter, for the rest of this decade, is expected to be refinanced at lower interest rates given the current forward yield curve and thus be a tailwind to FFO per share growth.

We remain committed to the investment-grade bond market, and we note that our outstanding bonds are all investment-grade rated. With our large backlog of executed yet uncommenced leases or leases in abatement, we are modeling an improvement in our credit ratios next year as these leases begin. Our confidence in the return to FFO and AFFO growth as well as improving debt metrics is increasing.

We're currently experiencing a historically wide 820 basis point gap between our current reported lease percentage of 88.8% and our space currently paying rent, or economically leased at only 80.6%. This over 8% gap is normally in the 4% to 4.5% range. For more information regarding the specific leases contributing to this gap, please refer to Page 39 of the supplemental information filed last night, for details of major leases that have not yet commenced or in abatement, which will largely commence and begin generating cash by the end of next year.

At this time, I'd like to narrow our previously provided 2024 annual core FFO guidance to $1.48 to $1.50 per share, with no change in our midpoint. As a reminder, this guidance does not include any acquisition or disposition activity for the remainder of the year. If such transactions occur, we will update this guidance.

Our same-store NOI guidance for 2024 remains between 2% to 3% for the year. The current quarterly trends are part of that guidance, impacted by downtimes between known lease expirations earlier this year and the commencement of executed leases in our backlog.

As we've typically done, we'll be providing guidance for next year after the end of the current fourth quarter, after we've completed our budget process and presented it to our Board for approval in December. We expect improving quarterly results next year, particularly in the second half of 2025 as significant newly executed leases commence.

This year's quarterly results have slowly declined, primarily due to higher interest expense from recent refinancing and due to lease space downtimes. We expect the inverse of this trend next year, with a low lease expiration schedule, which is anticipated to be less than a 1 million square feet, and as already executed leases commence, generating FFO growth, followed by improving cash flow.

With that, I'll turn the call over to Brent for closing comments.

[Christopher Smith, executive]

Thank you, George, Chris and especially Bobby. As we announced a few weeks ago, Bobby will be stepping down as our CFO this quarter, and I want to take a moment to thank him for his 2 decades of leadership at Piedmont and his invaluable contributions to our business, values and culture. He's left an indelible legacy on the employees of Piedmont, and I will personally miss our daily interaction and strategic collaboration. We do, however, wish him well as he focuses more time on his family and on his other interest outside of Piedmont. If you haven't already had a chance, please reach out and wish him well.

And as we turn this page, we look forward to hearing more on our next call from Sherry Rexroad as our new CFO. Sherry, who is formerly with STORE, BlackRock and CBRE and joined us about a month ago, has been working alongside Bobby, and we look forward to her capable leadership.

As for the rest of us, we are still very much focused on Piedmont's core business, designing, managing and leasing great places, whether that be a place to work or a place to meet, relax, eat or drink. The investments we've made in our portfolio, combined with our customer-centric place-making mindset, continues to resonate with existing and prospective tenants alike. We have no immediate refinancing needs until 2027 and continue to be selective with capital deployment.

Our customer service and leasing strategy targeting small and medium-sized enterprises is driving portfolio leasing volumes and rental rates to new highs, and we're also starting to experience increased demand from large corporates. We believe these trends will be long lasting, and Piedmont is extremely well positioned to compete and gain market share in this next office cycle.

With that, I will now ask the operator to provide our listeners with instructions on how they can submit their questions. We will attempt to answer all of your questions now, or we will follow-up with appropriate public disclosure if necessary. Operator?

[Operator]

[Operator Instructions] Your first question for today is from Anthony Paolone with JPMorgan.

[Anthony Paolone, analyst]

Welcome, Sherry, and thank you, Bobby, for everything and all the best, first of all. My first question is on the 3 million square foot leasing pipeline. Can you maybe talk a bit more about where some of that might be concentrated? And what might be a bit more near term, maybe nature of the tenants? Any other context around that would be great.

[George Wells, executive]

George Wells here, and thanks for joining us this morning. Look, I'll tell you what, we're quite excited, considering where we've been in the past several quarters around a little over 2 million square feet to see it jump to 3 million square feet. You can just imagine how excited we are about our near-term prospects. I mean, if you take a look at the markets that these -- this demand is emanating in, it's not surprised that Minneapolis is rising to the top. It's the second quarter in a row where they've captured 20% to 25% of our overall proposal volume in terms of new activity. I would say Dallas, NOVA, Atlanta and Boston has about 15% of that new deal activity.

So going back to the 3 million, I'm sorry, I should have speculated upfront or I should have mentioned upfront, 70% of that is for new activity. And so we're pretty pleased with that ratio. In terms of sector that we're seeing it from, it's not unlike what we've seen in the past several quarters. We're seeing it come out of financial, construction, health care, associations, insurance. But surprisingly, again, no technology firms have really stepped up at this point.

When you take a look at the reason for this spike in overall proposals, it's really the result of the fact that we just haven't had many blocks of over 100,000 square feet available for the past several quarters and we now are getting that. One of those we're getting is in Dallas with Ryan, leaving their 112,000 square foot lease here in the first quarter of 2025, and we have a fair amount of deal activity to take care of that.

And as you know, in Minneapolis, we lost Excelsior -- excuse me, we've lost Cargill and Excelsior and U.S. Bank at our Meridian Crossing asset. And the market is really coming around and appreciates what we're doing with those particular assets. In fact, we've got over 12 prospects that are over 50,000 square feet or more, and that's really what's caused the bulk of our spike in overall proposals.

So, I mean, when you look at proposals, you look -- we have in late-stage activity and also the overlayer in that tour activity for the last quarter hit a record number. It just continues to just give us that positive outlook on what we can do here in the near term. And certainly, the PDM brand is resonating with the customers that are looking for that differentiated workplace offering where we have vibrant environments and exceptional customer service.

[Christopher Smith, executive]

Do you have a second question, maybe, Tony?

[Anthony Paolone, analyst]

Yes. Sorry, I was on mute. Appreciate that. So you mentioned the 1 tenant and I think, 1Q '25 for 125,000 square feet. It sounds like that's a known move-out. Can you just note any other larger items to watch for 2025 that we should have on radar?

[Christopher Smith, executive]

Tony, this is Brent. I think as you note, yes, roughly 110,000 square feet we'll get back with from Ryan in Dallas at our Galleria project there. As George noted great traction. We really, last quarter, put to bed the larger expirations that we have in 2025.

So, again, I think that gives us a lot of, I guess, certainty, I guess, around the projection of what we can accomplish, calling this the trough and then looking ahead to next year with limited role. We think we'll have probably less than a 1 million square feet of renewal activity to accomplish next year of expirations once we get to next year, just given what's in the pipeline.

And so we continue to see really no big exposure that gives us concern. And particularly as that $48 million backlog of revenue starts to bleed in the portfolio next year, really over the next, call it, 6 to 18 months, and it really does start to accelerate in the second half of next year as well. So, no major move-out that we see and/or impediments to continuing to drive occupancy through next year.

[Anthony Paolone, analyst]

And then just last one, more specific to D.C. and Northern Virginia, if my math is right, if you take that part of the portfolio out, you're like 91% leased. And so I guess the question is, with that market, like do you think you start to see some traction in occupancy pick up there in the next few quarters? Or do you think a recovery there is a bit further in the offing?

[Christopher Smith, executive]

Yes, great point, Tony. And I think as we alluded in our prepared remarks, we are seeing a broad-based increase in deal flow ex-D.C. And I think, as I noted, D.C. has its own set of challenges without the U.S. government coming back fully to the office. I'd say that really more impacts the district than Northern Virginia, but it is an overall malaise in the market.

And so I think we continue to be cautious about our overall approach to D.C. And we see good activity in NOVA, but again, very cautious in what we think we can accomplish next year in the district in '25.

We've got great product in Boston and Clarendon. It's highly walkable, the rightsized floor plates, and good transactional activity in terms of trading proposals in that part of the market. And I'd note that the district itself only represents about 4.5%, call it, maybe at most 5% of the ALR of the portfolio. So really, that's the most challenged submarket in the whole portfolio. And again, NOVA, we think there will be good activity next year.

[Operator]

Your next question is from Michael Lewis with Truist Securities.

[Michael Lewis, analyst]

I wanted to ask about the strong leasing activity and the surge in the pipeline as well. This is kind of a theme throughout the office REITs right now. There's kind of renewed enthusiasm. Not to throw cold water, I have a little bit of a hard time wrapping my head around that there's a surge in demand because of return to office or the economy is so strong.

And so I wonder kind of what you attribute the increase to inactivity? Is it maybe some of it is -- there's more expirations because there were a lot of short-term leases signed during the pandemic. Maybe this is really a REIT phenomenon. You talked about the growing share for the best properties and the best landlords. I guess, I'm just asking why do you think the pipeline has gotten so strong?

[Christopher Smith, executive]

Michael, great question. This is Brent. I think continuing to follow what similar high-quality landlord owners are seeing, I'd say, it's a couple of different things specifically for our portfolio. But for that upper portion, call it, the top, again, 5 to 10 buildings in the submarket, let's call it the top 20% of the market.

We've seen a couple of different factors. For our portfolio, we own a little bit of a more approachable price point. We've got a bigger addressable market, and we've seen those that are looking to move up from Bs to As, really gravitate to high quality, but not necessarily new development.

You've heard me talk about that, looking for a more value price point for that type of environment that their workforce wants to be in. I also -- so that's one leg of the stool, and that's continued migration and floating to, again, the high-quality landlords typically are well capitalized, and they're able to invest in their assets and also write commissions and TIs, etcetera.

I think the other leg of this stool is we have seen bigger users, non-tech, I would point out, start to make a little bit more decision activity. And I do think that is a component of the return to office phenomenon.

Admittingly, we continue to see utilization still hover around 70%, but there is a different feeling in the air in terms of people expecting their workforce to come back to the office through mandates, through other initiatives.

And we've seen it also gravitate towards that tenant engagement and creating unique environments at the building, as we've talked about, to really capture teams of 2, 5, 10, 50, 100-plus and allow that collaboration environment. And we're seeing more and more of those corporates who said, my workforce can be remotely realized, the culture, creativity and collaboration has to occur around an office building and in person, whether that's 3 days a week or 5 days a week, they need that space, and it's not overall changing the demand profile.

I think a lot of the industry has gone through the pain. You now have either seen space come back and those obsolete buildings go from 70% leased down to 30% leased. And you can tell what part of the market needs to be pulled out of the denominator. But overall, you're going to continue to see the focus on the upper-end of the market, and that's where the demand is.

And as that has occurred, you're seeing vacancy shrink now in that segment, 10%, sometimes even tighter levels of vacancy. And so that's also, I think, creating a sense of urgency from big users to say, okay, I want high-quality space at a reasonable price. I need to take a hold of it now in some of these markets, because once I factor out the obsolete products, the landlords that have no capital, I'm only left with a certain subset.

And so I think that, plus, again, that small, medium enterprise looking to uplift into a better quality asset have been the 2 big drivers for our pipeline. And I think, again, for high-quality landlords, they would echo that sentiment.

[Michael Lewis, analyst]

And you sold the one Dallas asset. I was going to ask about the 2 Houston assets. I know you had a buyer, I think, several quarters ago that wanted seller financing until you passed. It sounds like from Chris' comments, maybe that's more of a 2025 activity. Also, Chris said something interesting about maybe a bottom in office pricing right now, but you guys are more focused on being a seller versus a buyer.

Maybe just elaborate on that, right? So like at a high level, very simple, right, you would think when prices are low, maybe you're not a seller, maybe you're a buyer, if you can be and you kind of wait this out a little bit. So maybe just kind of what are your thoughts on the right timing to sell some of these non-core assets versus when the time is to play offense?

[Christopher Smith, executive]

Great question, Michael, on the capital markets. And I think first, a couple -- point out a couple of things. We sold 2 assets in Dallas this year, roughly about $77 million. First one, the first quarter was to a user group. Second one was more of a private equity, smaller shop.

But I think it's indicative of what we see overall in the market is that those users who -- sorry, those groups that are either users and have a known kind of need for a building and/or those who are local private equity and have a conviction around just the return to office are where we see a lot of the transactional activity.

But overall, if you take our One Lincoln Park asset, it was really a different profile than the 750 West John Carpenter Freeway, which we felt just wasn't going to have be positioned well in the kind of modern office age going forward. And so that was both those transactions, $50 million or less, which is where we see the demand right now.

But I think as Chris alluded to in his prepared remarks, really where we're seeing liquidity return, it's modest. It's probably the start of turning the corner, but it is for those higher-quality assets. And so I think there's still immense distress at the bottom part of the market, but we are seeing firming of pricing at the, call it, higher end of the market, call it the top 25% of the quality assets.

Pricing has moved meaningfully, let's be clear, over the last 3 years, but you're seeing at least some convictions in transactional trades around some of those assets. And so that's what gives us the thought or at least the perspective that we're starting to see further liquidity come into the market and pricing start to be discovered.

We still think there will be immense distress in the sector for the next couple of years, and that does provide us with an opportunity to consider recycling capital and playing -- continuing to move the portfolio towards our targeted Sunbelt markets.

In terms of Houston, specifically, we continue to have those assets "in the market" very lightly. We've talked to a few user groups, they are well leased, but we do have the intention and

are non-core to sell them and the target is next year. I'd say, again, we're starting to see a little bit of return to capital for core. And so that's what gives us the hope that we can execute on that next year.

[Michael Lewis, analyst]

And then lastly for me, Tony kind of asked the question about D.C. that I was going to pose. But I do ask this question every 4 years and every 4 years, I forget the answer. Does the election and a change in administration, does that drive leasing activity in D.C.? Or do you expect that or just wondering since the election is right around the corner now?

[Christopher Smith, executive]

Yes. I think broadly, just speaking, we haven't seen the election impact decision-making across the portfolio. For D.C. specifically, it's anybody's guess, but I would say both groups, Republicans and Democrats, there was a bipartisan bill put forth that merely is trying to accelerate decision-making by the U.S. government around space.

So I guess I might call that an incremental positive, and I think both sides of the aisle are considering that. I think overall, though, again, I don't see a clear path that brings the federal workforce necessarily back with either side, maybe more so with the Republican than the Democrat.

But overall, I think that demand is going to be diminished in the district for some period of time. And as we've talked about, it's really hard to differentiate an asset in that market. So we still remain very cautious about our long-term leasing success in that market. But it will turn around over time. I just think it's going to take it a lot longer than the rest of the U.S.

[Operator]

Your next question is from Nick Thillman with Baird.

[Nicholas Thillman, analyst]

Maybe touching a little bit more on leasing, just some clarification. On the 450,000 square foot late-stage pipeline, can you give the breakdown on renewal versus new? I think the 70% was to the 3 million square feet. And then just on that 70% renewal on proposals outstanding, I guess, any -- you guys mentioned no downsizing on that. But just curious on kind of what those tenants are thinking about those spaces currently.

[Christopher Smith, executive]

Certainly, Nick. Out of the late-stage activity that we're seeing, which is around 450,000 square feet, 25% of that is related to new activity. And again, it's happening in all of our markets. So -- and the sectors are pretty familiar, similar as well as what we've seen in the past couple of quarters.

Getting back to the larger deals, the 70% of the $3 million, I'm not sure that we're seeing a lot of downsizing in those large users that we're chasing. I think what we are seeing is that those are more intermarket moves. Those are not migrations from other cities, so far, although there are some inbound activity occurring in Dallas and Atlanta, but those are not the deals that we're seeing. They're more inner market moves at this point.

And to add too, just in terms of that renewal probability, I think we continue to look back, look forward in that 60% to 70% annual range still feels like where the portfolio is landing. We're seeing, again, as George noted, less contraction than expansions meaningfully this quarter. In fact, we had no contractions in the third quarter, only expansions. But we feel that that's a conservative but achievable level in that 60% to 70% renewal range.

[Nicholas Thillman, analyst]

And you guys have had like strong kind of spread this year. I guess you're having your discussions on these renewals on early stages, are you still seeing roll-off in rents? Or like do you think this is a common trend we could see for '25 and '26?

[Christopher Smith, executive]

Yes. Nick, we've actually -- looking at an interesting stat, we've leased now almost 60% of the portfolio since the pandemic with an average cash roll-up of 7% to 8%. I think that is very indicative of what we see across the portfolio in terms of -- in some instances last quarter, we did 1 million square feet, and it was a roll-off on a cash basis, I believe, in the low teens, yes, about 12%, 13%.

So again, I think the demand for -- and our addressable market is very strong. And so that's leading to our ability to push rate pretty meaningfully across definitely the Sunbelt markets, but even we're seeing some ability in some of our northern markets as well to push rate, New York is an example, where we did 100,000 square feet there this year alone up in the tower.

[Nicholas Thillman, analyst]

And then maybe a question for Chris. On the dispositions, the 3 to 4 smaller buildings, are these more stabilized assets? Or is there some vacancy with these assets? And then just kind of what's like a rough range of kind of proceeds you expect from these sales in '25?

[Christopher Kollme, executive]

I don't know that we want to necessarily get into expected proceeds. I'll defer to Brent and Bobby and Sherry on that. But as you know, we've closed about $75 million year-to-date. Very pleased to get those 2 deals done given the environment.

In terms of what we have out in the market, again, they're mostly smaller assets in our portfolio. They've been on our disposition list for some time. If we're able to move any of them, I don't think you'll be surprised with the decision or the rationale.

These are typically either -- Brent mentioned 1 or 2 land opportunities. There's another asset that's about 80% leased, and I don't want to get into too many details on the balance. But these are, again, our assets that are non-core assets that have been on our disposition list for some time.

We do feel cautiously optimistic the conditions are improving, and we'll be able to move them. Certainly won't be in 2024, but hopefully first half of 2025.

[Christopher Smith, executive]

Yes. And I'd just add to that. We probably think we can accomplish maybe $60 million to $50 million in sales in the next 6, 12 months or so, given what we have in the market and some traction.

I'd characterize it as core plus. These are well leased. They're not problematic assets. We've left a little bit of meat on the bone. But they are what we would consider to be towards the lower end of the quality spectrum for our portfolio, and again, smaller in size.

So we do think there's demand there. But in both of these situations, we've actually shown really good lease-up -- or sorry, the ones that are in the market that our assets, good lease-up over the last, call it, year. And so we think that we've proven that they, again, meet the demand for today's modern workforce, and we're hopeful we can execute.

[Nicholas Thillman, analyst]

And then I'd be remiss if I didn't ask Bobby a question on his last conference call. So on the redevelopment, what's the remaining spend for those 3 assets? And I assume most of that is planned for the fourth quarter?

[Robert Bowers, executive]

Yes. Actually, year-to-date, we have about 5 projects that in total are about $10 million left to complete. So those are projects that totaled $100 million. So you can see the vast majority of that's done with very little rolling into next year.

[Christopher Smith, executive]

I would just add on top of that, Nick, we really feel like we've touched a lot of the portfolio and given it Piedmont placemaking as we characterize it. And that means really investing in the assets, creating the tenant engagement programs and creating that environment, again, that we call the modern office environment. And so we're reaping the rewards of that, we think, next year in terms of just increased leasing velocity, and getting through some heavier construction periods as we know and have seen.

And what we're seeing in Minneapolis is when you're deep in construction, it's tough to get tour activity and demand. But as you're about 3 months away from completion, things really start to pick up and the vision starts to take hold, and that's when we start to really see a pickup in demand and proposals, et cetera.

So again, I think we've touched a lot of that redevelopment capital. You'll see it wind down here in the beginning of next year. And then I think we'll be reaping the rewards of that for years to come.

[Operator]

[Operator Instructions] Your next question for today is from Dylan Burzinski with Green Street.

[Dylan Burzinski, analyst]

Just a quick one. Brent, I know you mentioned being able to push base rents across the portfolio. But just sort of curious how the concessionary environment is trending? Are we starting to see relief on that front as you guys start to approach that 90% lease percentage within your portfolio?

[Christopher Smith, executive]

That's a great question, Dylan, and thanks for joining us today. As we continue -- as noted, we have pushed base rents, and we've seen net effective rents grow in the Sunbelt. I think it's been mostly flat kind of in the North, maybe even a little bit negative in D.C.

But again, the concessions around increasing base rents, we've finally seen concessions level off. I think that's fair to say. But it is -- has been a pretty meaningful movement over the last couple of years where you've seen it go from, call it, $6 to $8 per square foot per year, closer to $8 to $10 depending on the circumstances.

So the good news is, though, as TIs, I think, has leveled off, we've continued to try to rein in free rent, and we have continued to push that lower as we talk about and negotiate transactions. But capital, unfortunately, is paramount, and it is expensive. And so that is what tenants focus on in terms of negotiations.

The ability that we also can drive lower concessions is through a modest spec suite program in which we build out the space first for some of the smaller users. Say, for instance, we're building out an 18,000-square-foot space on a 22,000-square-foot floor. Economies of scale, we'll go ahead and prebuild the remaining space of the floor and then utilize that in our leasing program. It's been very successful strategy. It keeps costs down. And more importantly, it keeps costs down on the TI front.

And more importantly, we get earlier starts in terms of commencement, and we're also able to really drive free rent lower in those instances as well. So in short, concessions are probably TI capitals increased 20% over the last 2, 2.5 years. Free rent is now starting to come down, and we're continuing to find strategies to reduce the overall concession package and continue to drive better economics and higher NERs going forward.

[Dylan Burzinski, analyst]

And then I guess just pivoting over to your comments on acquisitions and not necessarily likely doing anything on that front over the near term. But I mean, as you sort of think about the opportunity set, and obviously, Piedmont's portfolio is high quality. So I assume so your investable universe is going to be smaller than one might expect. We've seen some of your peers sort of go at this right now through the debt angle or the mortgage angle. Is that sort of an avenue or a path that Piedmont is looking at today?

[Christopher Smith, executive]

Great question, Dylan. And I would say, we continue to focus very much on our Sunbelt markets for opportunities, really primarily Atlanta and Dallas at the moment. And we know that 10 to 15 assets in each market we'd like to own. So we stay very close to those groups.

We're very comfortable playing up and down the capital stack. In instances, we bought a note coming out of the last crisis in Chicago. We foreclosed on that asset, and we sold it for about a $70 million, $80 million gain in 2019 as part of our exit out of Chicago.

So we're very comfortable. We consider that. We have looked at notes. We've looked at direct equity and talked to groups. But again, I think right now, we're focused on continuing to position the balance sheet for executions in '25. And so that means looking to continue to deleverage modestly through non-core asset sales, and continuing to get EBITDA into the portfolio as well with all this backlog of leasing to uplift our credit metrics and put us in a position to play a stronger offensive strategy next year, and thinking about acquisitions.

And as Chris noted, we're looking to try to find unique opportunities that we can create value in for shareholders that would be accretive to earnings and really be a logical acquisition -- logical to bring into the portfolio.

I would note that if we were to go after a note, we're looking for a way to get to the asset. I think we would probably view that as a hostile strategy, but something that we would consider for the right asset.

[Operator]

We have reached the end of the question-and-answer session, and I will now turn the call over to Brent Smith for closing remarks.

[Christopher Smith, executive]

I want to thank everybody for joining us today. If you haven't kind of gotten the feeling, I think management is extremely excited about the track record of leasing that we've accomplished to date, 2 million square feet is a record. And more importantly, the operational growth that we seem to be positioned given the platform and the activity that we're seeing across the portfolio as we do see increases from return to office.

I want to encourage investors to -- if you have time, please schedule a meeting with management at NAREIT. That conference is the 19th to 20th in Las Vegas. But more importantly, I'd also encourage investors, if you've got the time, you're coming through Atlanta. We -- management would really appreciate the opportunity to tour you through. In 2 hours, you can cover probably about $1.4 billion of real estate and really see the strategy that we're putting forth. So we'd love to host you.

And then I would be remiss, if I didn't one last time say, how much myself and all the Piedmont employees, will miss working with Bobby. His contributions and impact have left an indelible impression on the firm, myself and all my fellow colleagues. Bobby, I want to congratulate you for what you've accomplished, during your illustrious career and for what lies ahead.

And with that, thank you, everyone. Have a good day.

[Operator]

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.