Boston Properties Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.24.12 | About: Boston Properties, (BXP)

Boston Properties (NYSE:BXP)

Q3 2012 Earnings Call

October 24, 2012 10:00 am ET

Executives

Arista Joyner - Investor Relations Manager

Mortimer B. Zuckerman - Co-Founder, Chairman, Chief Executive Officer, Head of Office of the Chairman, Member of Special Transactions Committee and Member of Significant Transactions Committee

Douglas T. Linde - Director and President

Michael E. LaBelle - Chief Financial Officer, Senior Vice President and Treasurer

Robert E. Pester - Senior Vice President and Regional Manager of San Francisco office

Raymond A. Ritchey - Executive Vice President, Head of The Washington, D.C. Office, National Director of Acquisitions and Development and Member of Office of The Chairman

Robert E. Selsam - Senior Vice President and Regional Manager of New York Office

Michael R. Walsh - Senior Vice President of Finance

Analysts

Ross T. Nussbaum - UBS Investment Bank, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Robert Stevenson - Macquarie Research

Chris Caton - Morgan Stanley, Research Division

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Jonathan Habermann - Goldman Sachs Group Inc., Research Division

Steve Sakwa - ISI Group Inc., Research Division

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Jeffrey Spector - BofA Merrill Lynch, Research Division

Michael Knott - Green Street Advisors, Inc., Research Division

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

David Harris - Imperial Capital, LLC, Research Division

James W. Sullivan - Cowen and Company, LLC, Research Division

Operator

Good morning, and welcome to the Boston Properties Third Quarter Earnings Call. This call is being recorded. [Operator Instructions] At this time, I'd like to turn the call over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Arista Joyner

Good morning, and welcome to Boston Properties' Third Quarter Earnings Conference Call.

The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com.

An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

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 of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday's press release and from time to time in the company's filings with the SEC. The company does not undertake a duty to update forward-looking statements.

Having said that, I'd like to welcome Mort Zuckerman, Chairman of the Board and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. Also during the question-and-answer portion of our call, our regional management team will be available to answer questions as well.

I would now like to turn the call over to Mort Zuckerman for his formal remarks.

Mortimer B. Zuckerman

Good morning, everybody. I feel compelled to inform you that this is -- my name is Mort Zuckerman and, as we say, I approve this message. We are calling you and speaking to you from Massachusetts and New York, neither of which is a swing state.

I do want to talk to you a little bit about the economy, first of all, because we have been, as many of you may know, kind of very cautious about the economy for quite a number of years. And that caution still remains for a fundamental reason, which is that, for the first time in American history, we are looking at a transformation in the nature of employment in our economy. It has tilted in the direction of a part-time, low-wage nationwide workforce. A full 50% of the jobs created since the recession began have been part-time and their pay is inadequate to enter the middle class. In fact, if you sift through all the numbers, virtually all the net jobs created during the Obama administration have been part-time jobs, leaving millions of people trapped in jobs they would have left in better times. But in this uncertain economic climate, companies feel it's risky to take on people on a full-time basis so they are creating vastly more low-wage part-time jobs. Yes, some people are finding work, but if you look at the numbers in terms of personal disposable income, it is growing at the rate of about half of what it has typically been a couple of years back. What it means is that people are settling for any paycheck they can get.

Working part-time is obviously preferable to not working at all, but millions know that a "20 hour a week" job really makes it tough to pay the bills. In fact, according to Neil Irwin in The Washington Post, the average compensation for the year has only been about $0.59 a week in terms of increases.

Now we are continuing to sort of look at this, but it -- really, we see that virtually everyone below the 90th percentile is still falling in terms of real incomes and the net job increases are really, really distressing and almost nominal. And we are -- what we are having is a -- in a sense, a real, real change in the nature of employment in this country. And nobody knows what the consequences of this. I'll just tell you this: In -- there's an uncomfortable gut feeling in the American public that the American dream is receding. 1/3 of Americans now identify themselves as lower class or lower middle class, according to the Pew Research Center, up from 1/4 just 4 years ago. So this is one of the more troubling statistics, based on the income inequality that underscored the middle class squeeze.

And this really is -- does affect everybody in the economy and it is not something that we have really been able to find a solution to. There are a lot of people writing about it, there are a lot of people commenting about it. We're in the midst of a political campaign in which the economy is a major issue, but the reason why it's a major issue is that we are over 4 years into what is a recession that has really not been -- the back of which has really not been broken yet despite the most stimulative fiscal and monetary policy in our history. So we have to look at this and hope that it's going to sort of gradually pull itself back to a different kind of economic energy. But for the moment, we are still remaining very cautious.

Now having said that, I must say that we have, as a company, been able to -- a, because in part we anticipated this; and b, because we've always been fairly conservative in terms of our financing, we have been able to, we think, really manage our way through this and continue to do relatively well. This goes back to our fundamental strategy which we have followed from the earliest days of this company of really focusing in on what we call, in a simple way, A buildings in A locations. It's not just a casual commentary. It is because we have found, and it has been absolutely reinforced by the experience we've had over the last several years, that in difficult times where rents do go down, a lot of tenants will move into the best buildings because the rent is somewhat lower, and therefore, their occupancy stays at much higher levels compared to a lot of other real estate. And that has been, in fact, our experience.

Now one of the major items that I would like to address with you is the fiscal cliff here, and what might happen if that fiscal cliff does in fact turn out to be a cliff, that would be a very, very serious blow to the level of -- not only of the economy but of business confidence. So I think, if that doesn't get resolved, we are looking at a much more difficult time. But in the markets that we are in there are, virtually almost all in various ways, knowledge-based markets: San Francisco, Princeton, New York, Washington and Boston and Cambridge. And these are the markets, frankly, that have done relatively well. It doesn't mean that everybody in these markets has escaped the consequences. And I would say to you that a lot of the financial firms, in particular in New York, who are dealing with new regulations are facing cost cutting and reduction in employment. Nevertheless, by and large, these markets are doing quite well particularly, as I say, for us, in these -- the best of the buildings.

What -- one of the things that we have just done is to make a strategic investment in a development property in San Francisco. This is what we call the Transbay Tower, and it's going to be a 61-story, 1.4 million-square-foot building and over 1,000 feet tall. That will put it 200 feet above every other high-rise building or any other high-rise building in San Francisco. It's an extraordinary design by Pelli Clarke, Cesar Pelli, a building that we think will be an iconic building. And it is a project that has been approved by the city Planning Commission of San Francisco. And we have entered into a 50-50 joint venture with the Hines organization to purchase the land for approximately $139 per rentable square foot, and we anticipate buying this land in early -- the early part of 2013. The earliest building construction we'd commence is at the beginning of 2014, with an initial delivery sometime in the latter part of 2016. It is, frankly, the last full block site available in the financial district. It's right next to the terminal that's under construction. That will really be a fabulous adjunct to the building in terms of access and in terms of a city place that will attract a lot of people and will attract a lot of tenants. So this, again, is the kind of building that we believe fits into the core strategy of Boston Properties. And we're delighted to be in a partnership here with the Hines organization which also focuses on building outstanding buildings in unique markets. So we are really quite optimistic about this and we are looking forward to this development.

It will be a development, I might add, that will cost in excess of $1 billion. But it is in a market that is remarkably strong. As many of you may know, we have a great deal of real estate assets in the San Francisco area and in San Francisco. One of them is a building on Folsom Street, 680 Folsom Street, a building which is in the process of being completely rehabilitated and which is already well over 80% pre-leased. We also have the Embarcadero Center there, which is 3.4 million square feet of office space, right along the harbor and that is doing extremely well. And in fact, that is one of the strongest markets in the American -- office markets in the American economy for a very simple reason: in that it is the epicenter of the -- a world of new technologies and the online revolution that is affecting everything.

The online revolution, I might say to you, is going to have, on some levels, an effect on office usage because I think it's going to contribute to the ability of companies to shrink their office requirements. And this is something we're watching very carefully and are going to be very cautious in terms of what we do. The markets that we're in, however, to some extent, are -- I won't say immune to it but at least are doing relatively well in this economy: New York, as you know, which is still a financial center and a major financial center and will continue to be that, and so we're very comfortable with what we're doing in New York. But Washington has been an outstanding market for us. We have as close to full occupancy as you can have in all of the buildings there. The new buildings that we did were -- are extraordinarily successful. And in fact, if I may say so -- let me talk to you about both -- Transbay, which is the San Francisco project.

As I mentioned, it's an outstanding site. We have a partnership with an outstanding firm. It's an extraordinary building in a super location. But I do want to suggest to you that the execution of this deal demonstrated the depth and breadth of the Boston Properties team. We mobilized key personnel from 4 different regions, turned around a deal negotiation, due diligence, financial underwriting and preliminary document review and legal documentation and execution in less than 8 business days. So we are very proud of that and I think it was a constructive way to engage with our partners and colleagues in the Hines organization.

I'd like to mention at least one other thing, which is at -- the Urban Land institute, which every year considers hundreds of properties indeed throughout the world for the ULI international award of excellence. It is a high honor for any firm in the real estate business to have one of their projects selected. But this year, in a most highly unusual action, the Urban Land Institute selected 2 of BP's recent projects, Atlantic Wharf and The Avenue, for receipt of this award. We are really thrilled and indeed humbled by this recognition.

Another thing that I want to suggest to you is that the GSC -- GSA acts when it is appropriate to protect their occupancy status in a building. And they renewed its lease at 1301 New York Avenue for over 200,000 feet for 15 years. And we will provide you with more of the specifics of this, but it's consistent with our philosophy of aggressively seeking renewals of key leases before the lead expiration date is an issue, and this was clearly the case in this one.

But I will also point out that there is energy and life in the leasing markets, certainly in D.C. for our D.C. regional leasing meeting highlighted increased levels of activity in virtually all sectors of the market that we are in but especially in our Annapolis Junction project with the Gould family. This activity, coupled with the "If you build it, they will come" philosophy of NSA, resulted in a decision of the Goulds and BP to starting yet another building, a 140,000-square-foot building there for delivery in late 2013.

These are just a few of the highlights that I want to convey to you. And if that's okay, I'll just pass it on now to my colleagues.

Douglas T. Linde

Thanks, Mort. Good morning, everybody. Welcome to the third quarter. I hope that -- I hope Mort's comments on the macro side didn't put people down too much because I think that the reality is that the business economy, which is what we all are dealing with, while it's not doing as well as anybody would like and it's probably doing less well right now than it was 2 or 3 quarters ago, it's still in pretty good shape and I think it'll -- well, as we talk this morning, you'll get a sense of how it's reverberating through our portfolio both from the positive as well as sort of some of the things that are slowing down a little bit.

You probably wouldn't be surprised to hear that our perspective on the overall leasing markets are that -- they're pretty flat. There's not a lot of urgency with regards to lease decisions right now. Leases expire every year, but the tenants that have those leases in front of them are really exercising an abundance of caution as they think about expanding and/or making long-term decisions. I think the thing, though, that has struck us is that nobody has canceled any plans. We have not seen anything like what we were seeing in 2008, in 2009, with sort of an existential perspective with regards to the businesses that we consider our customers. It's really more of a pause, a wait and a -- wait-and-see.

I've spoken to you before about sort of one of the things that we track, which is venture capital investing. And way back when, in 2000, the D.C. commitments were running at about $22 billion per quarter. For the last year or so, they've been running between $6 billion and $8 billion per quarter, and this again was a quarter where they were closer to $6 billion than to the $8 billion and slightly down from where they were in the second quarter. But surprise, surprise, where are people investing money in new business formations? The Silicon Valley and San Francisco, the Boston-Cambridge market and New York City. So 3 of the most important markets for us are where the new businesses are going to be formed.

It's clear, as Mort said, that the growth in our markets, in -- certainly in the short and medium term is going to be driven by demand from technology and life sciences companies. And there is going to be this offset from employment reductions and productivity enhancements with regards to the space that's being used by the traditional financial services and professional service firms. And really what that's doing is it's really creating a sort of secondary organic supply in our markets. And it's important to sort of think about what the impact of that are over time particularly because it's going to be granular and sort of spread out through many buildings and the markets are going to have to deal with that.

We are, in fact, as Mort suggested, spending an awful lot of time thinking about how people are using space, the types of tenants that are going to be the winners and the growers on a going-forward basis, and thinking about how we spend our capital to both position our existing assets as well as change our portfolio so that we can be successful in a changing market. Now I do not want to suggest that we are in any way turning our backs on the traditional office user because, quite frankly, they still are the dominant user of office space, but we have to start thinking long and hard about how things are changing as we move forward.

And with this in mind, this is really I think the reason that our acquisition on -- at Folsom Street sort of makes a lot of sense hopefully to you and certainly to us. 680 Folsom is a 14-story glass structure. It's an old AT&T/PacBell building with 15-foot floor-to-floor heights, but it's being totally gutted and brought back with 10-foot-6 brand-new windows. It's a 35,000-square-foot floor and it's exactly the kind of building that a mature technology company would be looking for if they could find that type of product in San Francisco. It is located in the heart of where the tech demand is and it's a very unique product because it's a grown-up building for a mature tenant.

It's leased to -- 85% of the building has been leased to Macys.com and Riverbed and it's going to be delivered in the first quarter of 2014, with a yield-on cost of around 6%. We are asking in the low 60s for the remaining space in the building, which effectively means that there is a pretty significant positive mark-to-market today on the leases that are in place. And as part of it, we're also acquiring a small site called 690 Folsom, which has a 22,000-square-foot structure. That's going to be redeveloped either into some retail space and/or office space. We haven't quite figured that out.

This is the quarter where we talk about our 2013 estimates and our projections for the year, and Mike is going to be laying that out in a few minutes. So I thought, as I talk about the markets in our portfolio today, I would try and do it with a perspective on giving you a sense of the current activities that we are undergoing and how that's going to influence or is influencing our near-term projections.

Leasing across the portfolio for the quarter was just over 1 million square feet, which was quite frankly a drop from the second quarter. The second-generation numbers that you see in the portfolio statistics are pretty good from the perspective of sort of where the mark-to-markets are overall. But there are some pretty interesting things that I just wanted to explain within the individual markets.

So the first is that the San Francisco numbers, once again, have this -- a little impact of $90 rents. So there's about 11,000 square feet in that number where the rents are rolling off over $90-plus. And so if you eliminate that, then it -- the San Francisco numbers are actually positive 2.5% growth and 3.25% on a net basis.

In D.C., the numbers are a little bit skewed. There's about 16,000 square feet of space that we had to let at below market as part of a requirement to relocate about 16,000 square feet of tenants when we did the Bechtel transaction at the Overlook buildings of -- late last year. And if you -- and those rents rolled out to about $32 a square foot, which is probably about $8 or $9 below market. But that's where those tenants were currently paying and our obligation was to find space so they may continue them at the same overall rent. So if you pull that out of the equation, the D.C. numbers are actually positive 7.5% growth and 8.1% on a net basis.

And then in Boston, all the gains are really from Cambridge where we are now leasing space in the high 50s on a gross basis. If you sort of look at the whole portfolio on an entirety basis in terms of our mark-to-mark, it's pretty flat in '13, so that will talk to sort of Mike's same-store numbers as we move forward. And the whole portfolio is up, between 2% and 3%, as of today.

San Francisco and the Silicon Valley clearly are the strongest overall markets in the portfolio. The Silicon Valley, last quarter, had a little bit of a dip, but this quarter, the big-ticket transactions have come -- started coming back again. LinkedIn and Lab 126 both committed to 530,000 and 350,000 square feet of space. Samsung signed a lease for a new 365,000-square-foot development, which is pending approvals. Dell and Arista both took 150,000-square feet on some specular buildings that are being built by Irvine right now. And EMT took another 100,000 square feet of space.

Now the activity is really standard around Mountain View and Sunnyvale, Sta. Clara. So if you think about our portfolio and when it sort of gets to sort of what's going on with us, this year, we leased 2 of the 4 floors that we had available at 611 Gateway, which is in the North Peninsula, which is not strong a market. And while we are seeing some activity on that space, things are slow up there and we probably are not anticipating much in the way of revenue until the very end of 2013.

On the Zanker Road project in North San Jose, really, activity there has not really hit the same pace of acceleration that it has in the rest of the Silicon Valley. And we are studying those buildings and deciding whether or not it makes sense to basically re-skin those buildings, take them out of the services and/or try and lease them at a -- as a discounted product. But one way or the another, there's probably not going to be much revenue from those buildings in 2013.

Our JV assets in Mountain View are actually doing very well. We've seen significant growth in rents there, as we've talked before. But those buildings are now being marketed for sale as the fund that those buildings are in with our 2 outside investors is coming to an end and it was the appropriate course of action to take. So we anticipate some sort of a decision as to whether those buildings are going to get sold before the end of the year.

In CBD. At Embarcadero Center, we're sitting about 96% occupied or leased. Again, we've done about 15 transactions a quarter and it's only totaled about 89,000 square feet this quarter. It was about 80,000 last quarter largely because we just don't have much in the way of space to lease. Our near-term opportunities are pretty limited. There are 2 full floors in EC 1 which are actually under lease negotiation, and those numbers will hit our 2013 commencements. And then we have 3 floors at the -- in the upper portion of EC 4. And there, it's interesting, demand is actually pretty limited. We are marketing that space in the high 70s and low 80s, and frankly that's the one segment of the San Francisco market, the high, high-end segment that is pretty slow right now. So all in all, we are anticipating a pretty modest increase in occupancy towards the end of 2013 from Embarcadero Center, but again, we're starting on a basis of about 96%.

Turning to Boston. Cambridge is obviously the strongest market we have seen. As I talked before, there are actually 6 buildings that are being built right now in Cambridge, totaling almost 1.8 million square feet in there, effectively 100% leased. And our problem, quite frankly, in Cambridge is that we are now 100% occupied. We've got 9,000 square feet of space that we have a transaction on in One Cambridge Center. And after that, the next expiration we're going to see is not until 2014 or 2015. So there's not, unfortunately, much we can do to improve our position in Cambridge, given how well we're doing, but that doesn't mean we haven't stopped thinking about it. We are starting to talk to tenants about 2015 and 2016 lease expirations. And remember that, during the later half of 2013, we're going to be bringing on the building that's connecting the 2 buildings that Google took a lease on, that's about 43,000 square feet, and as well as the 195,000-square-feet development that we are doing for Biogen at 17 Cambridge Center.

In the CBD of Boston, we did 3 more deals at Atlantic Wharf this quarter, about 51,000 square feet, and again have limited our ability to do much more because now that building is 100% occupied, literally 100%. We also signed our first lease at 100 Federal Street for the top -- one of the floors towards the top of that building where we are asking rents in low 60s. So we have 2 other floors in that building that are available. There's reasonable activity on both of them given that the size of those floors are about 30,000 square feet. If assuming we do a deal in the first quarter or the second quarter of 2013, rent commencement probably won't be towards the end -- until the end of '13 or early '14.

In the Back Bay, I think the big news of the quarter was that we signed a 330,000-square-foot lease at 101 Huntington Avenue. The good news is that we've covered all of our lease expirations for 2013 and 2014 there. The bad news is that the lease doesn't commence until 2015 because we have to build a space out for Blue Cross Blue Shield.

We continue to negotiate extensions for tenants that are expiring in the Pru Tower. We have 2 of those going on right now, so there won't be much in the way of occupancy gains there because those tenants will stay. And at -- over at Hancock Tower, we have about 40,000 square feet of uncovered rollover, but we're doing 2 more 2015 leased extensions. The first one was done this week for a full floor and there's a second one involving 4 more floors in the tower that should be done before the end of the year. The real major opportunity for us in the CBD of Boston now is at the low rise of the Hancock where the State Street lease is expiring in -- at the end of 2014. And we've actually begun to market that space both through traditional use as well as a bunch of technology tenants. And we think we found some ways to really change the image and the layout of those floors, given the configuration of the floor plan that would be very effective for an open user of a technology ilk, and we're pretty excited about what the prospects might be for either type of tenancy in that building.

The Boston suburban market is probably the market with our most exposure/opportunity in the region. This is again an area where there is significant tenant demand in the form of tech and life sciences tenants but where, again, the decision making process just keeps being elongated and prolonged. We have about 700,000 square feet of availability in our Waltham/Lexington portfolio and that includes the 100,000-square-foot lease that we have at A21 -- A123 on a company that was part of the energy department's opportunity to create a manufacturing for the Ferrari business for cars that hasn't gone so well. And we anticipate that we may be seeing some of that space back.

But again, in this market, everybody is just being very cautious, from a tenant perspective. We are in negotiations and have been in negotiations for a pretty long period of time with a 150,000-square-foot tenant in one of our buildings that's going to expand by 100,000 square feet. That expansion will occur in '13, '14 and '15, but the lease isn't done yet. We're in discussions with a life science company that wants to take an 80,000-square-foot building and take 50,000 square feet of that building and put an office and lab installation in it. That lease isn't done yet. We have 400,000 square feet of other proposals from tenants for between -- of sizes of between 40,000 and 80,000 square feet that we've -- that have sort of been out there since the early part of the summer, and those tenants just haven't made decisions. And we also have an RFP for a build-to-suit for a 220,000-square-foot technology company that has been looking for a new facility for the better part of 2 years, and we continue to work through that RFP portfolio.

So given the realities of the timing of these decisions, it's just -- it's a struggle to think that any of the leasing that we're going to do in Waltham is going to do much, other than for the very back end of 2013. And so it's just not going to have much in the way of an impact on our 2013 results, but we certainly expect it'll have lots of impact on our 2014 and 2015 results.

Looking at New York City. There, again, I think the leasing markets are sort of stuck in neutral. Availability overall in Midtown is about 12%, and there's just no visibility on large users. And I define large users as 300,000, 400,000 square feet or more. They really have much in the way of any growth objectives. There are certainly tenants that are looking around: Microsoft and Coach and L'Oreal are the ones that have been in the paper recently, with 2015 and 2016 lease expirations, but effectively it's really musical chairs for those companies. I think the one company that is growing and where there is an impact is Google, as they are certainly clearing out all the other tenants in 111 8th Avenue as those leases roll over. And that's clearly impacting the market in Midtown South, which as everyone knows is probably the strongest market right now in New York City.

We continue to make progress with our second law firm lease, which is 266,000 square feet at 250 West 55th, as well as the retail space. And we really expect that before the year is over, we will be 50% officially leased. As we move into '13, we're really going to be focusing our efforts on the remainder of the building, which are Floors 25 through 38, and those are really going to be geared towards single-floor and multi-floor tenants, tenants that are under 100,000 square feet. And we are now just starting to approach their leasing decision window. So the building's going to be opening some time in first or second quarter of '14, which is sort of right in the heart of where the leasing strategy should take us. So we're sort of gearing up to that.

At 399 Park, we had 150,000-square foot block, and we have now leased 134,000 square feet of that. And those were rents were in the mid-to-upper 90s, which is why you'll see a slight rolldown in the rents to add at in the New York portfolio, where the rents on the existing lease were just over $100 per square foot.

But our real exposure and our real opportunity is in the small space market, at 540 Madison and the new building at 510.

We continue to slug it out and do leases. We did another 7 leases of under 5,000 square feet in the pre-built suites that are in the portfolio. But this is a segment of the market that, again, it's all about business confidence and it's slow and steady. And I just wanted to give you a perspective on the high end of the market.

So back in 2007, there were 106 transactions totaling 2.2 million square feet of deals that were over $100 a square foot. In 2011, there were 45 deals totaling 750,000 square feet under that same $100-square foot starting ramp. Through October 1 of this year, there have been 28, totaling 442,000 square feet. Now the other thing to realize is that lots of those tenants are renewing or expanding in their existing premises. Of the deals that were involved a relocation, every single one of them was under 11,500 square feet, which is the reason that as we've thought about 510 Madison, we determined that the best chance for us to be successful at achieving rents well in excess of $100 a square foot is to do this pre-built suite program. The velocity has been frustrating. But we continue to move forward, we continue to seek tenants each and every week, each and every day. And we are convinced that the building will lease up at the rents that we pro form it. And that there is demand for those small tenants, it's just we're having to get an outside percentage of what is available in the market today.

Mort mentioned the lease that we did at 1301 New York Avenue. And it's sort of interesting because, even with the all the federal budgetary issues in D.C., it actually appears that our perseverance with the GSA is actually making progress. The lease that Mort described is a 15-year 200,000-square foot extension with the Department of Justice. And that's the deal we've been working on for the better part of a year. And additionally, out of Patriots Park, we believe we're going to receive a document from the GSA committing them to a 180,000 square-foot building in Reston for another 20 -- for a 20-year term beginning in the second quarter of 2013.

This is a lease that is a relocation of another defense group that is sharing services with the Defense Intelligence Agency, which is the other tenant in the other 2 buildings in Reston. So that should improve our occupancy in Reston by 5% and bring it to 98% by the end of the second quarter of 2013. Reston continues to be the outlier in terms of overall activity and premium rents in the northern Virginia and the Montgomery County suburbs. We continue to rent space in the mid-to-high $40s. In fact, we've actually done some deals that are in excess of $50 a square foot. And our availability there is really limited to some smaller blocks of space. Not much in the way of lease expirations in 2013 in Reston, so what do we do? We start to begin to work on our 2014 and our 2015 lease expirations. And we have one large one, it's about 250,000 square feet. It's a defense contract, so that is in Two Freedom Square. So We're working on that as we speak.

Reston, while Northern Virginia may have a concentration of defense-related government contractors, the Town Center really has a lot of technology and engineering, professional services and educational users. And those tenants are actually expanding as we speak. So we have 2 tenants right now that are looking at taking additional space from existing tenants that would like to get out of space in Reston to accommodate their growth.

We did complete the acquisition of the other Fountain Square buildings on October 4. So remember, we purchased a 50% interest in those 2 office buildings, totaling about 522,000 square feet as well as 242,000 square feet of retail space.

We are in control, on a day-to-day basis, of all operations, as well as leasing. And we anticipate purchasing the remaining interest in 2016.

So in the district itself, we are 96% leased. And what we have left over in the portfolio are some smaller suites or a floor here and there in 2210 Market Square North and 500 North Capitol, which actually just opened up about 2 weeks ago. There continues to obviously be an abundance of options for all kinds of users in the district and things are pretty slow. So what we've decided to do is sort of follow our course of success in New York City, and start to do some pre-built suites. And we are now building pre-builts, and a modest amount of them in both 2200 Pen, Market Square North and 500 North Capital. And we really hope that's going to increase the velocity of our leasing and our revenue generation in those buildings.

Not much is going to probably happen to improve overall velocity in D.C. largely because there just aren't any lease expirations in a big scale until 2015 and 2016. However, we happen to have one of those opportunities in one of those tenants. We are negotiating a lease of about 368,000 square feet, which is actually a little bit more than I said it was last quarter, because the tenant has gotten a little bit bigger. For our 478,000-square foot development at 601 Mad Avenue. And if we have a pre-lease commitment, we will start this building towards the end of '13 or early '14. And we anticipate also commencing on another 120,000-square foot building up in Annapolis Junction.

That's our 50-50 JV with the Gould family. It's a very small asset, $32 million in total. So our share is about $16 million. And that will be delivered in the fourth quarter of '13. And again, that's really focused on the demand from the NSA from Cyber Command and their private contractors in Fort Meade. And there's a pretty consistent flow of activity out there.

Just to sort of to come back and sum up. So in 2012, we acquired 100 Federal Street and Fountain Square and 680 Folsom. That's for a total of about $1.4 billion of committed capital. Mort described our investment in San Francisco in the Transbay Tower, and that's probably a 2017 revenue event. That's when rent will actually commence on that building. In 2013, we're bringing online 17 Cambridge Center and the Google expansion and the third building at Patriots Park.

In 2014, we have $137 million 359-unit apartment building in Reston Town Center, as well as the first revenue from the tenant leasing that we are doing at 250 West 55th Street. And if we, knock on wood, sign a lease on 601 Mad that building will be delivered in 2015 or early 2016. So I think it's fair to say that we, as a company, continue to find ways to attractively deploy capital even in the conditions and the challenges that Mort described from a macro perspective.

So we are thinking real hard about how we do that. At the same time, we are also reviewing the portfolio. And probably we will see some selective dispositions in 2013 as we rejigger and consider what the right profile of our assets and our capital should be on a going-forward basis. And we will continue to provide updates on that as we go forward. And with that, I will turn it over to Mike.

Michael E. LaBelle

Great. Thanks, Doug. Good morning, everybody.

As you just heard from Mort and Doug, and Doug just went over pretty well, we continue to find accretive ways to invest our capital. In addition to making the 3 acquisitions that Doug just mentioned that really do fit well within our strategy, we also in the capital markets paid out some debt this quarter, about $250 million of debt, which had a high coupon of 6.4%.

And as we look forward to next year, we have $590 million of debt expiring that has average GAAP interest rate of about 6% and a cash interest rate of about 4.25%. We expect to refinance these loans upon maturity. And based upon current market rates, we will continue to lower our average borrowing cost.

On our development pipeline, which has a total investment of $1.8 billion, is now 59% pre-leased and it has about $550 million of equity left to spend. With cash balances of $1.2 billion, we have ample liquidity to fund that pipeline, as well as seek additional opportunities.

The credit markets have been very accommodating over the past quarter, with spreads continuing to come down especially in the public debt market. Our 10-year outstanding bonds are trading at a spread inside of 150 basis points. And we believe we could issue new 10-year unsecured debt today in the 3.25% to 3.5% area. The longer end of the credit curve is also active. And we can price a 30-year bond inside of 5%.

If you look at the mortgage market, it's really been a little stickier, with most of the life insurance companies having a really strong banner year and they're showing restraint in bringing down their pricing. However, the CMBS market had strengthened and is actually becoming more price-competitive. Most institutional mortgage opportunities are in the high 3s to low 4% range per coupon for a moderately-leveraged 10-year loans that are either in the life insurance market or the CMBS market.

Turning to our earnings results for the quarter. We announced funds from operations for the third quarter of $1.16 per share, that was $0.02 per share or about $4 million above the midpoint of our guidance range. The majority of the variance was in our portfolio operations. Our revenues were up by about $2 million, which was spread across the portfolio, including the joint ventures. And our operating expense savings were about $2 million.

Now the vast majority of the expense savings related to the timing of spending, repair and maintenance dollars. So we expect to give most of the savings back in the fourth quarter. We also had savings in our G&A line item of just over $1 million, but that was offset by unbudgeted acquisition expenses of $1.1 million that related to the 680 Folsom Street and Fountain Square acquisitions.

This quarter, we did book the first installment of our historic tax credits related to the Atlantic Wharf residential development. This was in our budget. It totaled $2.9 million and it shows up in the Interest and Other Income line, which is why that line is a little bit higher this quarter than it was in prior quarters. We are going to book this amount annually in the third quarter of each year for the next 5 years. So it will not recur next quarter.

For the rest of 2012, we really don't project any significant changes to our budgets that we outlined last quarter. As I mentioned, we expect to give back most of the expense savings we enjoyed this quarter and project only $0.01 of the third quarter outperformance to or near to the full year. For the same-store portfolio, we're projecting the full-year 2012 to be flat to down 0.5% on a GAAP basis, and down 0.5% to 1% on a cash basis from 2011, and this is slightly better than our last projections from the revenue outperformance I just discussed.

We've managed to maintain roughly flat performance in the same-store, despite experiencing some very meaningful rollover at 111 Huntington Avenue, Patriots Park, 399 Park Avenue, Embarcadero Center and Gateway Center. And this is really a testament to the quality of these assets and their locations, as well as our leasing teams, to be able to minimize the downtime associated with these large lease expirations, especially in such a tough economic environment.

For the full year 2012, we're narrowing our FFO guidance range to $4.87 to $4.89 per share, and project fourth quarter funds from operations of between $1.22 and $1.24 per share. Our fourth quarter run rate is projected to be higher than the third quarter, reflecting the impact of the acquisition of Fountain Square that closed on October 4, and lower interest expense and debt extinguishment cost from our recent debt repayments, which will be offset by the tax credit income I just mentioned that won't recur in the fourth quarter.

I now want to spend a few minutes talking about our expectations and projections for 2013. We've been very, very productive this year. We added meaningful acquisitions to the portfolio and we purchased -- the completion of a portion of our development pipeline, both of which should result in stronger earnings in 2013. Next year, we will see the full year impact of 100 Federal Street and Fountain Square, which are projected to add $18 million to $20 million net of minority interest to our NOI. In the development pipeline, we just recently delivered 500 North Capitol Street in D.C. that Doug mentioned. We only own the 30% share of this building, and it's 82% leased. And in 2013, we will deliver 3 additional fully-leased projects: Patriots Park 2, that is leased to the DIA; 17 Cambridge Center, that is leased to Biogen; and the Cambridge Center Connector building that is leased to Google.

In aggregate, these 4 projects are projected to add approximately $9 million of incremental NOI to 2013.

We also expect to continue to benefit from lower interest expense with the combination of lower average debt cost, as we layer in lower rate financing and higher capitalized interest, with the addition of 680 Folsom Street to the development pipeline and the incremental funding at 250 West 55th Street. We project a reduction of year-to-year net interest expense of $10 million to $20 million. This projection, obviously, could be impacted by the timing or the size and the rate of any new financing we complete. But our model assumes that we refinance the $590 million of debt we have coming due with long-term financing in midyear 2013 at market rates.

So these positive items that I just mentioned, that aggregate $40 million to $50 million, are offset by a projected decline in the contribution of our joint venture portfolio from the termination of CBS at the GM Building. As you recall, last quarter, we terminated the CBS lease early and accelerated all of their remaining lease payments as termination income into the second quarter of 2012. We are not projecting any income from this phase in 2013, which results in a decline of revenue of $15 million in 2013.

We've seen interest in this space from global retailers and we fully expect to replace the CBS income. However, the timing is uncertain, as the states represents not only a unique opportunity but also a major decision for prospective tenants.

So the net effect of these items resulted in an increase of 2013 FFO of between $25 million and $35 million or $0.18 a share at the midpoint. There are other changes that will impact next year and I'm going to go through the detail behind our projections. But these are the most significant movers that are outside of our normal portfolio operations.

Our current occupancy rate in the portfolio is 91.6%. And with our CBD buildings at 96%, most of our opportunity is in our suburban buildings in Waltham, San Jose, Reston and Princeton. While these suburban markets have activity, the market vacancy rates are still elevated, so competition is tough and as Doug, noted, tenant decision-making is cautious.

If you look at our rollover exposure for the rest of 2012 and 2013, it's really relatively light and manageable, at only 5.5% of the portfolio. We're projecting modest improvement in our occupancy next year and we expect to average between 92% and 93% for the year. The same-store portfolio is projected to improve from occupancy gains and recent leasing in Cambridge at Atlantic Wharf, at 399 Park Avenue and Embarcadero Center.

Our 2 residential projects, both of which stabilized earlier this year are now maintaining strong occupancy in the mid-90% range and are also projected to show improvement year-over-year. We're projecting the same-store NOI to be up 1.5% to 2.5% on a GAAP basis. Now on cash basis, the portfolio would be up significantly, with the burn-off of free rent from some of the larger leasing activity that we had done previously, including 111 Huntington Avenue, at Cambridge Center, 399 Park Avenue, the Bechtel deal at Reston Overlook and Embarcadero Center IV.

We expect cash same-store NOI to be up 6% to 7% in 2013. And with the improvement in our cash NOI, we project stronger FAD next year as well. For the full year 2013, we expect our FAD to be $3.85 to $4 per share, which is approximately $0.55 per share or $90 million higher than 2012. Our non-cash straight-line rent and our fair value rent is projected to be $40 million to $50 million in 2013. And now this is down $50 million from 2012 and that reflects the conversion of free rent to cash rent and part of the improvement in our projected cash NOI.

Our Cambridge Hotel operated in line with our budget this quarter. It continues to show strong Revpar growth year-over-year, with a 16% improvement year-to-date over 2011. We project more moderate growth next year, and expect the hotel to contribute between $10 million and $11 million for 2013.

As I mentioned in the joint venture portfolio, the contribution will be hurt by the vacancy left by CBS at the GM Building. In addition, 540 Madison Avenue has 75,000 square feet of tenants expiring in 2012 and 2013. The transition time between leases at 540 Madison Avenue is expected to result in about $6 million of lower NOI in 2013. We project the FFO contribution from our joint ventures to be $110 million to $120 million, which includes non-cash fair value rental income of approximately $50 million. The joint venture contribution to our FFO is projected to be down $20 million to $30 million from 2012, primarily due to a temporary occupancy decline.

Our income from development in Management Services income will be impacted in 2013 by the completion of 3 major fee development projects. That includes 500 North Capitol Street, which delivered earlier this month; the NPR project, which we expect to complete in April next year; and the tenant improvement work for the DIA at Patriots Park that wraps up in early 2013. The decline in fee income year-to-year for these 3 projects is $4 million, which we don't expect to replicate in 2013. Our projection for income from development and management services is $24 million to $30 million next year.

We're projecting our G&A expenses to be relatively flat next year, with a 3% growth in compensation, offset by onetime severance items we incurred in early 2012. Overall, we're projecting G&A expense of $83 million to $86 million in 2013. And we project our interest expense, as I mentioned, to be lower in 2013, as we reduce our average debt costs with our refinancings and we have higher capitalized interest associated with development.

We expect to spend in excess of $400 million by the end of 2013 on our pipeline. Much of it relates to 680 Folsom Street and 250 West 55th Street, which will offset the impact of ceasing capitalization on the 2012 and 2013 deliveries.

Overall, we project net interest expense for 2013 of $385 million to $395 million, with capitalized interest projected to be $55 million to $65 million.

The other thing I want to mention is that next quarter, you will start to see an increase in our minority interest deduction due to the consolidation of our Fountain Square joint venture. So historically , our run rate for minority interest expense has been about $4 million annually. And we expect that to increase to $10 million to $12 million per year, to account for our JV partners' share of FFO Fountain Square.

So if you aggregate all of these assumptions together, it results in our projected 2013 FFO guidance range of $5 to $5.15 per share. Again, our guidance reflects an increase from 2012 of roughly $0.20 per share or approximately $35 million at the midpoint of each range. The improvement is from the positive impact of our acquisitions, development deliveries, interest expense savings and the same-store improvement I mentioned that, together, total $60 million to $70, million. Offset by the Anticipated $20 million to $30 million decline in our joint ventures and a modest decline in our fee income. We have not incorporated any additional acquisition, disposition or development activity in our projections.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Ross Nussbaum.

Ross T. Nussbaum - UBS Investment Bank, Research Division

It's Ross Nussbaum here with Gabe Hilmoe at UBS.

Guys, I'm a little curious about your, I'll call it, medium-term thoughts on the New York City market as it relates to whether you think there's going to be a pickup in net absorption, given the trend we've seen of the impact of Dodd-Frank as well as tenants becoming smarter about their space efficiency needs. And then on the flipside, with a couple new buildings coming into the picture over the next, call it, 3 to 5 years, is Manhattan over-hyped relative to the asset pricing that's occurring?

Mortimer B. Zuckerman

Well let me take a shot at that. It's Mort. There is, undoubtedly, a review on the part of almost every major firm, particularly financial firms who are taking advantage of technology amongst other things to see how much space they really need. And most of them are heading in the direction of contracting their space. Nevertheless, I have to say that there are a lot of major companies in this market that are looking for huge blocks of space and looking to build their own buildings. Many of them are going to go into places like Hudson Yards on the west side of town. But frankly, I still think this is one of the great markets. It's still the center of finance. It is still the center of a lot of other kinds of activities. But particularly, it is a center for Midtown South. But it -- for the new online economy, the new Internet economy, all of that -- New York is going to be the -- it's probably second only to Silicon Valley for the kinds of startup companies that, in a sense, are feeding off of all of these new technologies. And the addition of the Cornell sort of technology center, which is in the throes of being constructed in conjunction with a major Israeli university, high tech university is going to also provide this market with a lot of the human talent that they need over time. So I think there is a lot of energy still in the city. It is still a city that has a terrific attraction for a lot of talented people and that is still the key ingredient, it seems to me, in the success of a lot of companies where their real, shall we say, future is based on brainpower, and New York is a great city to attract that kind of brainpower. And not just older folks, but a lot of young people. It is outstanding how well New York has done. It's the safest big city in America, it's just doing remarkably well across the whole range of activities I can't predict the valuation of New York real estate, but a part of the valuation of all real estate particularly in the good markets is a reflection as much as anything else about the drop in interest rates. And that has really changed the multiple that people are attributing to real estate income. And I think that's going to continue for quite a while. So I don't see that there's going to be much in the way of a decline of those values. in fact, we are constantly approached by people who want to participate in various buildings in one form or another at very, very attractive rates.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Just one quick question on Transbay. Did you say what the expected yield is on that asset? And is that based on current market rents or what your forecasted rents are in San Francisco?

Douglas T. Linde

We didn't and we're not going to. I mean, it's a project that's going to be built, starting sometime in early '14 at the earliest. It's delivering in 2017. We are -- if there's an improved approved design, it's an amazing design that will hopefully be improved upon dramatically by, well, the combined organizations of Heinz and Boston Properties. And the good news is that it's just too early to be throwing out numbers as to where we think rents are going to be at that point in time and what our project costs are going to be. So we think the cost is going to be somewhere around $700 a square foot, probably. Do we know what the profile of the tenants on the buildings are going to be? No. Do we know how much pre-leasing were going to have? If any, no. So we're just not ready to throw out numbers.

Ross T. Nussbaum - UBS Investment Bank, Research Division

But your intent is to go fully spec on that asset?

Douglas T. Linde

No, I didn't say that. The nice thing is that we don't have to even think about making that decision for the better part of the year.

Mortimer B. Zuckerman

Look, we are very enthused about that building. Just so that there is no ambiguity about it. It is in an outstanding location, as I've said before. The only full block site in the downtown, part of San Francisco are experienced in our other real estate there. And San Francisco is about as strong as any market that we are in. And we are very comfortable and confident about the strength of that market. And this is going to be the iconic building in the city. And so we think there's a very good chance that we will do very well with it. We cannot really predict the exact rent, but I can only tell you though on the basis of our preliminary numbers, we're very excited about the prospect of being involved in this building, we're involved with an outstanding partner who shares our view. So I think we are very much looking forward to it. San Francisco has been just a fabulous market for office space for the last number of years, and we've seen it and experience it with Embarcadero Center, and we just couldn't be happier with the way that's going. So we're really very comfortable about taking on this particular project.

Operator

Your next question comes from the line of Michael Bilerman of Citi.

Michael Bilerman - Citigroup Inc, Research Division

Doug, at the end of your commentary, you talked a little bit about dispositions and I think you said as you think about rejiggering the portfolio as well as capital. And I was wondering if you can sort of elaborate a little bit, did you intend to say that against the cap structure of the company, do you think about differently about how you look at your equity base or your debt base or your cash base or is it simply just recycling of capital in that commentary?

Douglas T. Linde

It was more of a comment on the recycling of our portfolio. So there are buildings and there are locations that probably are less opportunistic for us from a growth perspective on a going-forward basis that don't necessarily meet the same characteristics of attractiveness to tenants in 2014 or 2015 that they did in earlier generations of development and maybe the right time to move out of some of those assets.

Michael Bilerman - Citigroup Inc, Research Division

And then just thinking about the cash into next year. Because obviously you would have it -- as you invest that capital and have a dramatic effect on underlying earnings, and probably the biggest differential between where the Street is today and where your initial guidance is, is the use of that $1.2 billion of cash. And so Mike, I don't know if you could just go over -- obviously, you're generating free cash flow next year. So the cash balance naturally goes up as you retain that cash. And then you have a certain amount of development funding and commitments, next year, which obviously impacts interest expense. I do think you said you're just going to refi the existing debt so that's just in interest savings, but no change in use of that cash. Can you just sort of walk through, under the current plan, where does that cash balance stand at the end of the year? Because then that sort of helps guide what that earnings impact is, as that cash is used.

Michael E. LaBelle

We'll, we've got about $1.2 billion now and we've got $400 million of development spend over the next 15 months, and then another $150 million of development spend, basically in 2014, to complete 250 West 55th Street and 680 Folsom Street. Our cash flow is going up. We do anticipate that we're going to have positive cash flow. So, as you said, that will help. We expect, based upon refinancing the roughly $600 million, we will have cash balances in the $800 million range at the end of next year. And depending on what our opportunity set looks like, what our investment opportunities may be will drive what we do in the capital markets, in terms of raising additional capital through additional debt. As Doug said, disposing of some assets, that might create some capital or we still have the ability to utilize our ATM which has capital available on it in the context of doing additional investment to keep our leverage balanced.

Michael Bilerman - Citigroup Inc, Research Division

Last question, just on Transbay. Is the joint venture complete 50-50, everyone's at equal portions? That's number one, related to Transbay. Number two is the timing, at least the way Hines was describing it a couple of months ago, seemed to more accelerate it, that they actually want to start this thing mid-summer of '13, with an earlier delivery. So I'm just not sure what sort of change in that thinking or whether you sort of set it out an outside date. And then just in terms of the yield, I guess you use current, let's say a blended mid-60s gross rent on, let's call it a $1 billion building. You're talking a low 5 yield, with some loss factor. And I'm just wondering if that's how we should think, at least about it on a current basis, using current rents.

Michael E. LaBelle

I'm going to -- let me try and answer a couple of portions of that question. So, on the timing, our view on where the drawings currently are and what it will take to complete the building drawings to the point where we would have a set of drawings that we could bid and then get going on a construction, is really about a year. Could it be accelerated by a couple of months? Potentially. But that's sort of the perspective, and the land purchase will occur sometime during the first quarter, probably of 2013. So that's sort of where our timing expectations come from. I mean, believe me, if there's tenant demand and there's a way to accelerate it, we will do everything in our power to put ourselves in a position to meet that tenant demand. With regards to building, the product that we are going to be creating is going to be a pretty unique product, in terms of how it fits within the context of the existing market. And the height of the building, the height of the floors, the mechanical systems, the window systems, the way HVAC is being distributed. It's going to be a pretty unique product. And we clearly believe that the product is not going to be leased at the market in contrast with buildings that were built between 1970 and 1995 or 2000, in San Francisco. So, we clearly believe that it will achieve the rent that is higher than where the actual market is today, on sort of a relative basis.

Michael Bilerman - Citigroup Inc, Research Division

And is the complete 50-50 straight-up JV all equal on everything?

Mortimer B. Zuckerman

Yes.

Operator

Your next question comes from the line of Rob Stevenson of Macquarie.

Robert Stevenson - Macquarie Research

Conversations of retailers for the CBS space to GM. What's your sense of where retail rents are going to wind up being relative to what CBS was paying? And how material does TI spend? Are we looking at, there, to make that suitable for retailers?

Mortimer B. Zuckerman

We certainly are looking at it, to make it suitable for retailers and we're in discussion with any number of them. I'm not saying that we're close to a transaction. But, yes, that is going to be the principal focus of it. That's the kind of the companies that we are talking to.

Robert Stevenson - Macquarie Research

But the sort of rents there versus what CBS was paying, would be sort of ballparkish? I mean, are we looking flattish? Are we looking slightly up, slightly down?

Mortimer B. Zuckerman

I'll just say, go ahead.

Michael E. LaBelle

A big portion of the space is street-level space, which is going to be incredibly attractive opportunistic space. There's also some lower level and third level space. So when you kind of look at it altogether, it's going to be equal to, to down a little bit, from what CBS was paying based upon our current expectations.

Robert Stevenson - Macquarie Research

Okay. And then just lastly, given the commentary on the weakness, the $100-plus price point in New York City, you think that's just a temporary phenomena given the market conditions or are you starting to see more of those tenants when you look at your '14, '15, '16 rolls in your portfolios that might look to move down into high-quality $80, $90 space and save some on the rent. Are we still talking about 10,000-square foot tenants where it's not really material to their overall numbers?

Michael E. LaBelle

I would say it's the latter. And it's not that it's weak, it's just slow. And it's clearly a different type of environment than it was back in 2007, which was sort of my point in providing the contrast numbers. It doesn't mean that it's not going ever get there again, it's just that the market that we're in right now is a different type of a market, and it's a market where you have to be prepared to do smaller transactions to lease a space. The good news is that the floor plan at 510 Madison Avenue, which is the building that, obviously, where we're trying to get $100-plus rents, is 11,500 square feet or less. So it is sort of been created and it's been positioned to maximize the opportunity set for those types of tenants.

Operator

Your next question comes from the line of Chris Caton from Morgan Stanley.

Chris Caton - Morgan Stanley, Research Division

More information on San Francisco, you talked about the higher-end market is a little bit weaker. And I wonder, what kind of needs to happen in the market, in your view, for a pickup to occur? Because presumably, some of that market will need to lease the Transbay Tower.

Mortimer B. Zuckerman

Well look at by this, I have to tell you, that is a very, very strong market. San Francisco remains a very, very strong office market. And we've seen it in all the things that we've done there and we've got a big exposure there, given us the chance to test that market. So we're very comfortable with that market. I can't tell you where it's going to be in a year because that market, while it is primarily dependent upon the world of new technologies, who knows where that's going to go. But from all indications, it's just going in a very positive way. So frankly, I'm very bullish about that market compared to almost any other market. And we've had that experience in terms of, both the quantity of space and the rents that we've been getting, quantity of space leased and the rents we've been getting, both at 680 Folsom Street. But also, in particular, at our major office complex that we already have, which is 3.4 million feet of space. It's Embarcadero Center, which is done very, very well and at growing rents and growing occupancy rates. We have real comforts with that market, to lease as good as any other market we know.

Robert E. Pester

This is Bob Pester. I just might just add that the floors Doug mentioned, that we have an EC 4 that are vacant right now, which are high-end floors. It's not that they are without activity, we actually have several proposals pending on those floors. Whether we make those deals remains to be seen, but we do have activity on those floors.

Chris Caton - Morgan Stanley, Research Division

Can you spend a minute just talking about uses of cash and opportunities for external growth? You've bought into a development, 2 development sites here in San Francisco. I wonder, are you looking at similar opportunities in other markets? Or what is the tenor of the acquisition pipeline as it stands now?

Mortimer B. Zuckerman

Well, look, generally speaking, because of our experience with, and our comfort with, and frankly, our ability to deliver, in a sense the highest yields we get out of development projects in which we are playing a major role and that's what we're seeing in San Francisco. But it is also true that there are opportunities that will come by and we are in a position to take advantage of them. And we saw, with buildings like the John Hancock building or indeed Prudential Center or indeed the General Motors Building, all of which were acquisitions. So we're, in a sense -- we balance out our development pipeline with our acquisitions, they are different. We have, in our judgment, and will continue to have, access to the capital markets if we need more capital for major acquisitions. Providing of course we continue to do well and invest well, and we think we will. So these are the 2 ways in which we have grown our asset portfolio. We're going to be very cautious about building new buildings, unless we're very comfortable with where the market is. And the reason for that is obvious, we do not know and nobody does know, in our judgment, just where this economy is going. As many of you know, I'd be quite bearish about this economy. And happily so, given what we're able to do about it for the last 6 or 7 years. And I don't see that this economy is a very strong economy at this point. Now, just to give you an example, we don't know what the fiscal cliff consequences will be, if we ever hit the fiscal cliff. But, obviously, that would have a major effect of the economy. We don't know what it will be if we have a new administration. If you do have a new administration that does inspire the confidence of the business community in ways that the current administration doesn't, I think that will have a positive effect on the economy, particularly on the business economy. So, I think we just -- as we had done ever since the company was started, we basically just try and adapt to the conditions that we are in or where we see they are going. There are couple of big question marks out there at the moment, such as the election and the fiscal cliff that I think will make us a little bit more cautious over the short run. Unless we can find an investment where we think the rents are reasonable in relation to the market and where we have a long-term credit lease on it, so that we will be able to do well given the gap between the yield at which we can buy the property and the financing that we have to -- financing cost that we have to incur if we, basically, expand our financing in the capital markets. And we have that option, and frankly, we don't think we are doing it just for the sake of investing to earn a 2% or 3% differential above our financing cuff. But we're also looking at the real estate because we really do have a conscious awareness of the quality of real estate and its long-term viability. So it's just an entrepreneurial time and an entrepreneurial business in general, and we have been able, I think, to be nimble enough to do well in good markets and in bad markets. And we'll just have to pay attention to what's going on and see if we can come up with opportunities. We've been able to do it in both good markets and bad markets, and we have to say that, although we can't give anybody any assurances, that we think will be able to continue to do that.

Douglas T. Linde

Yes, Chris. I think Mort made some really great points. Because, in Calgary 2012, we're going to have committed $1.4 billion of acquisitions. I try to describe sort of a profile of development in other things that are coming through in 2014 and 2015, and 2016 and 2017. And you would not be surprised to hear us say that there are lots of buildings that are for sale. There are lots of buildings that we have spent time analyzing and debating internally, and there are lots of buildings that haven't chose to make a serious bid on. And they're in San Francisco, they're in Boston, they're in Washington, D.C., they're in New York City. And so, the opportunities are out there, in terms of just simply buying buildings if you just want to buy buildings. But I think Mort makes a great point which is, we're not interested in growing the company for the sake of growing the company. And we've been -- I guess we have the luxury of being picky about the types of assets that we want to buy and the particular characteristics of those assets in their various submarkets. And whether we feel good or bad about what the opportunities that might be, from those buildings to improve their cash flow or whatever our whole period is, which is typically incident. So I think that we're going to be thoughtful and we're going to be cautious, and we're going to be very aggressive at looking at things. I don't know how aggressive we'll be at doing things. But I'd say, I feel no different today than I did at the beginning of 2012, in terms of what the opportunity that might be.

Operator

Your next question comes from the line of Alexander Goldfarb from Sandler O'Neill.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Mort, if you take your comments on the business community, if you look at what's going on the consumer side, it seems like the consumer sentiment is improving. So shouldn't, at some point, we see that spill over in the business feeling better about the environment to sell goods or can the 2 sort coexist on different paths?

Mortimer B. Zuckerman

Well, let's just look at the overall economy now. I mean, GDP growth in the second quarter has been lowered to an annualized rate, I think of about 1.3% from 1.7%. Now that is in the context of the most stimulus fiscal and monetary policy in our history, by far. So something is not going right in the economy and nobody quite knows why it is going so bad. Some of it, of course, is the lack of confidence in the business community in the policies of this administration, to be blunt about it. And I just don't know where it's going to go. Frankly, we have a $1.3 trillion deficit this year. I keep on saying we've run up deficits in 4 years that took us 217 years, from the founding of this country, to run a similar amount of money. I don't what the consequences of that kind of debt will be on what we need to do in this country to continue to be effective and competitive. We've got to support education, we've got the support infrastructure. I could give you a laundry list of things. What are we going to be able to do with the kind of debts we're incurring. I don't know the answer to that because it's unprecedented, and therefore, unpredictable. All I'm saying is, frankly, there are real issues that we need to look at and nobody knows how they're going to work out. I mean, I don't know any -- I certainly don't know and I follow this stuff is closed to most people because it's just unprecedented. And everybody's going to say, let's wait and see how it goes over the next year. There is some improvement, there is some build-up, there's a modest increase in expenditures. But the net worth of the average American family has gone down fairly dramatically, almost 40% from 2007 to today. Mostly were because of the drop in value of their homes. But the residential market is coming back, at least a little bit. The energy picture of this country is being transformed by what we're now in a position to develop, the new methods of tapping into natural gas, particularly, but oil as well. So there are some positive things that are going on in this country. How they balance out over time is, frankly, is just unknown. I think we have had a tendency, and I think rightly, of being a little bit cautious under these circumstances. And thank god that we were and at the time we were because, frankly, it has enabled us to, for example, make some great acquisitions. When we sold a lot of buildings. We have the money to make some acquisitions. I think there will be similar opportunities for us in the way of acquisitions. And we will continue to look for development deals that we think make sense in the markets that we are in. We are continuing to find development opportunities that make sense for us. And those are the markets that, by and large, not perfectly, are the best markets in the country and we focus on these markets for the reasons that we have gone over many, many times. They have worked out relatively well, we have, perhaps, weakness in one market. But, by and large, the kinds of brain power that we try -- and the companies that we try to attract are in the markets that we are in, and those are the markets that should be growing. I mean, I'm not saying there's a lot of brainpower in Washington. That's a whole other issue. But setting aside, the government is continuing to grow and they're still the primary input in the economic health of the region, along now with a lot of other high-tech and life-enhancing technologies that are just burgeoning in that part of the world. So you just have play it by ear. That's why I keep on emphasizing that this is an entrepreneurial business, not just a -- more than anything else, we have to be very careful in what we do, but we also have to be in a position where we look for the advantageous acquisition to buy their land or development sites or buildings, and to apply the capital that we are fortunate to be able to raise, and we expect to continue doing that. We've been doing it for quite a long time and I certainly hope we'll to be continuing doing it for quite a long time. And all I can tell you is that there is no predictability of this in the sense that you will have in a number of other businesses other than an extrapolation of the record that we have accomplished over all the years that we have been in business.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay. So just following up there . As you guys spoke earlier about the growth of tech and life science being driver tenants, especially here in New York. What has that done to do with the way you guys cost developments? Are saying developments have to be re-costed or designed differently to accommodate the willingness of those tenants to pay their rents or those tenants will still pay the same rents that financial services, professional services, will pay to build new buildings?

Douglas T. Linde

Let me just give you a couple of examples. People are paying more in that midtown and south market, today, for space than they are paying on 6th Avenue, for the portions of buildings that are vacant, particularly the lower portions of buildings. So I think that would suggest to you that it's not a question of price, necessarily, it's a question of product and location. And, similarity in San Francisco, you are probably seeing rents that are higher in some of the buildings, not just south of the market, but sort of outside of the traditional office areas on Market Street, because of the particular location and the environment that those buildings are providing and the attractiveness to the tenants that happen to be in those markets today. And similarly, and if you look at some of the tenants that have gone to Cambridge, there, the rents in Cambridge are higher than the rents in places like in the low-rise in the financial district of Boston. So it's not about price, Andrew, it's about product and it's about location.

Operator

Your next question comes from the line of John Guinee of Stifel.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Quick question. First, for Mike. Can you refresh our memory as to what your 2012 and 2013 FFO would be after deducting out FAS-141? Is that $0.40 a share for '12 and maybe $0.25 per share for '13?

Michael E. LaBelle

The FAS-141 for 2013 is just over $60 million for the company, including both the wholly-owned and the JVs and it was about $5 million higher in 2012.

Jonathan Habermann - Goldman Sachs Group Inc., Research Division

Okay, not much of an adjustment at all?

Michael E. LaBelle

No.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Second, maybe, Doug. I think the most important number you guys threw out was an incredibly strong FAS number for 2013. Where are you on taxable income for '12 and '13, and how are you thinking about the dividend?

Douglas T. Linde

So our taxable income for 2013 is certainly projected to be higher than our income for 2012. You might infer from that, that we need to think about our dividend, which is a good inference. We've begun those conversations at the board and we anticipate concluding those conversations over the relatively short period of time and letting the Street know how our dividend policy will work towards our projection on our 2013 numbers.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Great. Okay, and Ray Ritchey, if he's there. Big picture number, Ray. Forgetting your own portfolio, I know it's Impossible to do, but 350 million and 450 million square foot market, greater D.C., MFA. Do you see flat, negative or positive absorption in 2013?

Raymond A. Ritchey

Well, I still think, John, that the uncertainty, the overhang from the election will be in place probably for another 3 or 4 or 5 months, even after the election. And not to take a page from Mr. Zuckerman, but I think it's going to depend very much and who the winner of the election is. But I do think there's tremendous pent-up demand. I think like, virtually every market, there's winners and losers. And, again, I think we position ourselves to be, very much, in the winner side of that equation. But, again, I think is going to be very much dependent on the election.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Okay, and that's a great segue for Mort. Mort, why don't you give a prediction in terms of who wins and the electoral count?

Mortimer B. Zuckerman

Well, I have believed, for all of this year, that Romney will win the election. Primarily because of the terrible unemployment numbers that this country is dealing with, a lot of which doesn't even get publicity. But I'll just give you a couple of examples. It's not only the 23 million people out of work. The unemployment numbers do not really give you an indication of how serious the unemployment is. The unemployment number is 7.8%, it's what is called U3, and that measures people who've actively applied for a job. That is, they have to have sort of filled out an application form or gone for an interview. And that is the number, that is 7.8%. But the number of 7.8% only went down because 582,000 people moved out of being unemployed into part-time employment. But if you measure, what they call involuntary part-time employment, which is U6, that's 14.7%, it hasn't gone down at all. But even that doesn't give you the full number. Disability insurance has gone up by 5.4 million people just in the period that President Obama has gone. It's almost doubled the number. Okay. Now, if you think that the 5.4 million people who were suddenly disabled as a result of their work, I think that's a very optimistic interpretation. I think a lot of people have gone into that as they've run out of unemployment compensation or what-have-you and they've been able to do it, but they don't count as unemployed. Nor do people who were put on leave, even if it's temporary leave, and a lot of people have been. So the unemployment numbers, to my mind, it's known by the people who are unemployed. It's known by their families, it's known by their friends, and by their children. And some -- at some point or another, there is going to be a feeling -- there's got to be a change. Like it or not, that's where I think is the driving force of this economy. And the one thing that have to happen, which I believe has happened, is that Governor Romney has established himself as a credible President. He was extremely presidential in the first debate, broke through to the consciousness of most Americans. And I believe, as this goes on over the next couple of weeks, the trend lines which are basically now favoring him, will moderately continue, and that he will eke out a victory. And I felt this way even when these numbers weren't as favorable to Romney as I think they are.

Operator

Your next question --

Mortimer B. Zuckerman

But if you want to make a bet on it, I'm willing up to $10, I'm willing to make a bet on it.

Unknown Analyst

I'll take your side.

Operator

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

Steve Sakwa - ISI Group Inc., Research Division

Doug, I guess you were talking about space usage and how people are using space differently today. I'm wondering if you or Ray or Bob could just talk about when you guys are laying out new leases, and people are doing space planning, what is kind of the new -- what's the new norm? And I assume 250 is kind of thrown out the window. But how do you guys see people using space? And how much further do you think that can go down?

Douglas T. Linde

I'll start then I'll let others jump in. It obviously depends upon the industry group and the kind of work that's done. But as an example, law firms have probably gone from somewhere between 750 and 800 square feet to somewhere below 600 square feet on a per partner basis, and probably close to the 500 square feet per person on an employee basis. There are technology companies that have gone to table format types of environments, where they're well under 200 square feet per person, probably closer to 130 to 140 square feet per person. The one thing that has changed, however, is that the ability to have areas where they can congregate, their staff has become more important. Because there are lots of what we refer to as "we" spaces and community spaces that are being constructed in these types of configurations. And so the layout and the building function is pretty important. And then the most crucial thing, when you think about the amount of people you're putting in these spaces is light and air. So to the extent that you have an overly deep floor with a relatively poor window line, you're battling against a very difficult wave. Because you're just not providing the environment that these companies want to use to retain and recruit employees.

Unknown Executive

Just to follow up on that. Relative to that deep floor point. This is really motivating a lot of the law firms in Washington, D.C. from a wholesale move out of an older building into the newer buildings that are specifically designed for this new space dynamic. And also, Steve, on the public sector side, here in Washington, we're seeing the GSA, regardless of who gets elected, really forcing the square footage ratios down to below 200 square feet per person. And I think that's motivating some of their early renewals. I think that was one of the factors with us, renewing DOJ at 1301 New York prior to the 2014 expiration. They wanted to lock in the space and stay where they are as opposed to be subject to these new space dynamics.

Steve Sakwa - ISI Group Inc., Research Division

Okay. I guess that kind of leads in the question to. Doug, you sort of talked about maybe dispositions and some of the portfolio maybe being on the block. I mean how do these new dynamics -- kind of, how do you think about that in terms of the portfolio? What you want to own going forward? What may become more structurally obsolete? And when you look at the occupancy rates, there's obviously a big divergence between the CBD occupancy and the suburban. So is it fair to say that there are bigger challenges and opportunities for disposition in the suburban or is that not the case?

Douglas T. Linde

I think that's a very fair characterization. Although there are some CBD assets that we are looking at and saying, "Is the cash flow of this asset such that we think we can maximize the value today or do we think that when the lease roll's over, there is going to be an opportunity for significant improvement and therefore we should sort of hang on to this asset?" And there are -- I mean there are cases like that. I mean, no difference in the decision we made with our building with Ernst & Young in Times Square, back in 2004 -- or '06 when we sold that. There are some core assets like that, that we would look at in a disposition format as well. But I think the focus is on some of the suburban markets.

Steve Sakwa - ISI Group Inc., Research Division

Okay. And then I guess just a question that sort of relates to Transbay. That project and then there's a number of other developments that are also either about to start or can be built in that SOMO market. So there's probably upwards of maybe 2 million feet that can be built in that market over the next couple of years. I mean, do you anticipate there being additional migration of tenants into that downtown market? Or is this really more of a game of musical chairs?

Douglas T. Linde

I think more than any other city in the country, Steve, I think it's not musical chairs, it's growth. The -- in the last 2 years, the proportion of transactions that have occurred involving technology companies, and these are -- many of these are technology companies that didn't exist 5 years ago, is the majority of the leasing transactions in San Francisco. And our view right now is that there are lots of transactions that are going to occur based upon employment and the fact that there are lots of technology companies that would like to have employees who live in the city working for them, and the commuting patterns associated with moving out to the Silicon Valley are challenging. And there are more and more that would -- are prepared to -- who sort of say, "Well, if we want the best and the brightest, we also need to consider having a location in the city to attract that type of a workforce." And so I think that there will be -- if there is a city with a chance for there to be significant job growth and demand generation from corporate companies, I think San Francisco is the market that has the best chance for that.

Mortimer B. Zuckerman

Just to give you an illustration of that, let me just take a second, okay? There is a company called Salesforce, which in the last number of months has taken 800,000 square feet of space. It's a brand-new company that didn't exist 3 or 4 years ago -- 4 or 5 years ago. Now this is only happening in San Francisco, and this is what makes that market so unique. And there's a spinoff out of all of these companies that affects all of the other typical companies that -- or firms that work in downtown market. And there is no market like that in the United States. And for that reason, it makes it a very attractive market. As I say, we have been the beneficiary of it in various ways, but we've seen it in Embarcadero Center and 680 Folsom. I mean these are just the kind of energy -- tenant energy that exists there. It just doesn't exist anywhere else. And that's what makes the San Francisco market so unique and, frankly, so attractive.

Robert E. Pester

Steve, this is Bob. Ken Rosen just did an in-depth analytical study of the Bay Area markets from a commercial real estate perspective and job growth perspective. If you take a look at that, that's probably the most compelling argument I've seen on why San Francisco will continue to grow, and I'd be happy to send you a copy.

Steve Sakwa - ISI Group Inc., Research Division

Okay. And then last question, I guess, for Michael LaBelle. And you gave us a lot of detail. Would you be able to just kind of bracket for us what you think cash NOI in kind of just gross dollars would be in 2013?

Michael E. LaBelle

One second.

Operator

Your next question comes from the line of Jordan Sadler of KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

I can wait for you to give the answer.

Michael E. LaBelle

We have to add up a lot of numbers here, you know. It's not easy.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Some I'm kind of curious regarding the cash balance. Still a very significant number. Mike, in your commentary, you sort of alluded to where the capital markets are these days, in terms of your ability to borrow, probably in significant size. You're able to obviously source investments, but you have a lot of availability in the revolver. You'll live through very -- a very difficult period with limited cash going into it, and here you are in the other side of it. I'm just kind of curious on the thoughts to sort of maintain $800 million average cash balances going forward.

Douglas T. Linde

Let me try and answer that question. I will probably won't do as good a job as Mike would do. But I guess the view is, in a market where we believe that there are going to be plentiful opportunities, in certain cases, being able to move quickly is not a insignificant strategic advantage. And some of these deals could be in excess of $1 billion. Yes, you can line up financing, yes you can go to the capital markets. What we have seen over the past 2 or 3 years is that, even in a very strong market, from a rate perspective, there are weeks and months where the concerns about the risks in these sovereign debt crisis in Europe or the banking crisis in Europe or the inability of the United States government to lift the debt ceiling, close those markets down for a period of time, but the opportunities don't necessarily go away. And so, having the availability of that capital is not necessarily a bad thing. But we recognize that it's a luxury that we are asking our shareholders to allow us to have via effectively holding $800 million of cash and not sort of using our line and being incredibly efficient. But it's because we really do believe there is an opportunity out there, and we do believe that there are risks associated with not having capital available should there be significant dislocations in the capital markets at any point in time when we might need money to do something, including paying off a debt.

Michael E. LaBelle

Just going back to the question that we had to go look at the numbers for. So the cash NOI, which would include the NOI from the same-store portfolio, the acquisition, the developments coming online and the joint ventures is about $1.3 billion.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. I appreciate that. I'll make sure to call Steve up and let him know. So separately, in terms of the opportunity, just sort of back to that, in response to the last question, do you see greater opportunity ahead, just sort of CMBS maturities? I mean, like to a greater extent opportunity -- I mean, well -- could you see greater opportunity than you saw in 2012 -- or you've seen in 2012? The $1.4 billion or so?

Michael E. LaBelle

As I said before, I think -- I feel like as we enter 2013, it's a very similar type of environment that it was in 2012. It's interesting. All of the problems that Mort has been talking about are all of the same problems he was referring to a year ago. And we've just sort of moved through another calendar without much in the way of a resolution on any of it, unfortunately. So I think the opportunity set is sort of there other than maybe the lifecycle of some of the people who've made investments in previous times has gotten further along. And if they're IRR driven, maybe they are -- there's receptivity to selling. And there's a concern that the low interest rate environment may be less of a prolonged period than it was a year ago. But aside from that, I really do think that, that things just sort of feel like they're the same.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. And that's fair. Mort, is it safe to assume if Romney wins you'd advised Doug and Jim to take that cash balances down?

Mortimer B. Zuckerman

Only if we can find the right kind of investments. Just because he gets elected, doesn't mean he's going to be able to turn around this economy. We're in really an unprecedented kind of economic condition. It's obviously the worst kind of economic condition since the Great Depression, that's why it's called the great recession. And we're just going to have to watch it, and we'll see what opportunities come by. I mean the good news about, frankly, the position that we are in as a company and the access to capital that we have, which we like to sort of accumulate it when the accumulation is going well. We just always seem to find opportunities and as, Doug said, we want to be able to be in a position to move quickly and to move authoritatively, and not to worry about having to put together financing at the time that an opportunity comes up. It really does give us a competitive advantage, and people who want to get -- to dispose of assets and know that, and we're prepared to make those commitment in very, very strong terms when we make our proposals. So for my point of view, this is an opportunity for us because we have a comparative advantage over a number of different investors. It doesn't mean we have a unique advantage but it certainly is a comparative advantage, and we're going to try and take advantage of it. And when you can get into a situation where you can find outstanding buildings with a relative good leasing profile. Obviously, on some level, there's lower risk in that than starting a new building because of the condition of the markets, in general. Until we see a better economy, we'll sort of look at it a little bit with some skepticism over anticipating any assumptions that anticipate a big regrowth in the demand for office space. So I think we -- from our point of view, it is one of the great advantages that we have had, that we have taken advantage of, which is to be able to commit, in a sense, commit capital and then reraise or raise more capital because of the quality of the buildings we've bought and how well we've done with them. And that is just something we're not going to walk away from. I can't tell you how it's going to work because as I've said over and over again it's an entrepreneurial business, and we've got to be able to do to what we have been able to do in the past, we have to be able to do that in the future, you just never know how that's going to work out. We just think that over a year, or around a year, we found out that we take advantage of various opportunities that come our way, even on a competitive basis. And we're going to keep ourselves in a position to do that. And we have a very long-term view about the real estate that we invest in because we really hope that whatever the conditions are today, when you look at the building 5 years out and 10 years out, you want to be able to feel comfortable that the rents that are currently in place have a reasonable chance of being significantly improved. Some of the leases that we buy into have automatic step-ups after 5 years and after 10 years. And given the GAAP, as I said, between our financing costs and the yields in which we can buy buildings, when you compound that with the kind of increases that are mandated, within existing leases it's a fairly good combination in conjunction with the development work we're doing. So that's -- we've been doing this for years. And the unique conditions that we're in now just require a sort of a different kind of concentration on different aspects of it. But I still think and do feel that there's going to be a number of opportunities to come up. It's not going to come up -- there's not going to be 2 every month or one every quarter or whatever it is. They come up when they come up, and we want to be able to move as soon as those opportunities are available.

Operator

Your next question comes from the line of Jeff Spector of Bank of America Merrill Lynch.

Jeffrey Spector - BofA Merrill Lynch, Research Division

I believe on the last call, Mort, in your commentary you had mentioned 2 potential acquisitions that you might tie up in the next short while. I assume one of those was at the Folsom Street. I was wondering if you could comment on the second.

Mortimer B. Zuckerman

We haven't acquired it yet. So I'd just leave it hanging at the moment. But the Folsom Street was one, and we are very happy with that transaction. That's going to work out extremely well for us.

Jeffrey Spector - BofA Merrill Lynch, Research Division

Second -- I mean has the second one fallen out or it's actually something you're still working on?

Mortimer B. Zuckerman

No. No. No. We're still working on it.

Jeffrey Spector - BofA Merrill Lynch, Research Division

Okay. And then turning to San Francisco, I mean -- I know we're seeing a lot of leases get signed there, but could you talk a little bit about just the number of employees actually in those spaces? I mean are tenants signing leases expecting to find employees to grow? Or are they kind of foreseeing the scenes that need new space? And the reason I asked, just talking to brokers out there, it sounds like there's some concern about people just being able to find talent to grow.

Robert E. Pester

I'll answer that, this is Bob. I think it depends on the tenant. I mean, certainly there are some tenants that are taking more space than they need. But I think that would be the exception rather than the rule. Macy's.com, which is occupying space in 680 Folsom and it has approximately 220,000 square feet, we met with them the other day and they actually are looking at taking additional spaces at this time. In fact, they just leased some space over on Fourth Street to tide them over until they move into this building. So I think you're seeing a combination of 2 types of tenants, some that, for the most part, take the space they need with little growth, and then other tenants that are taking space with the anticipation of that they're going to grow.

Jeffrey Spector - BofA Merrill Lynch, Research Division

Okay. And then just thinking about the commentary on space for employees, do you guys get the sense that maybe the pendulum swing a little too far? And we've kind of hit the bottom and maybe things will start moving the other way? Or do you think this is here to stay?

Michael E. LaBelle

So we've been in a -- how shall we say it? Employee or er-friendly labor market for an extensive period of time. When you get into an employee market where there's an opportunity for employees to move, I think that the environment that those employees have been asked to live in is going to become an important determinant as to whether or not they are just sticking around or moving to the next opportunity. That along with compensation obviously. And so, I think there's certainly a risk that companies that are looking simply at their employees as a cost, and they're looking to try and squeeze them into the smallest amount of space possible so they can reduce their costs, are going to be at risk for being in difficult situation. But there's also are different ways, people are working. And as people think about how they're working differently and they're using space differently, it may be that it becomes much more comfortable and traditional 5 years to have employees that are working at, effectively, trading operations types of debt spaces with big community areas and lots of conference rooms and telephone rooms so that they can get their privacy when it's necessary. And that made me feel very comfortable. So I think it's going to really be dependent upon the particular industry group and how those individual companies really treat their employees from both a -- community space as well as an individual space.

Robert E. Selsam

It's Robert Selsam. I want to add one flow to that. It depends entirely on the industry that you're looking at. For example law firms have shrunk their usage space per partner dramatically. But you'll get to a point where they still want private-windowed offices. So the shrinkage there cannot go much further unless they dramatically change the way law firms work. And thus far, I have not seen that, and they're a good part of our portfolio.

Jeffrey Spector - BofA Merrill Lynch, Research Division

Okay. A final question for Ray. The fact that you got the GSA to sign a lease, it sounds like maybe we'll see more kind of defense-related, just what's the pipeline of demand there and why you think leases are getting signed now?

Unknown Executive

Well, as I said previously, I think some are kind of opportunistic type of execution of leases. I think the renewal of 1301 clearly falls in that case. I think our discussions with the last piece of space at Patriots Park is also opportunistic. I think the private sector is really the one we need to focus on, and whether the defense cuts that are planned are actually implemented, that could be that has a profound impact. I think the other thing is GSA is still trying to sort its way out from the issues they have relative to the internal controls both on the execution of leases but also their G&A. And we're seeing many GSA contract officers just waiting on the sidelines to make sure the actions are about to take will not be scrutinized either by other GSA officials or congress. So there was a temporary paralysis hopefully after the first of the year will break loose both on the public and the private side.

Operator

Your next question comes from the line of Michael Knott of Green Street Advisors.

Michael Knott - Green Street Advisors, Inc., Research Division

A quick question for -- obviously 2013, cash -- seems NOI is very good. That's a story of free rent burn off. That -- wouldn't it be logical to conclude that the story of 2014 if we speculate ahead that far would also look pretty healthy from, sort of, a mix of still some free rent burn off, improving occupancy and probably by that time, hopefully better re-leasing spreads.

Michael E. LaBelle

Certainly possible, Michael. I mean we've got, as I've said, our occupancy we're talking about going from 91.6 today to an average of between 92 and 93 in 2013. So there is certainly still room to grow that occupancy. And you've got space in New York City in places like 510 Madison Avenue, 540 Madison Avenue, as you leased up the space, which as Doug pointed out he kind of went through some of the spaces that we kind of didn't say we're going to lease until the end of '13. Those are high-quality spaces, very marketable spaces they will lease. So as they lease, they will improve our cash flow in those periods.

Unknown Executive

Michael, I'd -- just to protect Mike and the rest of us , we're not nearly ready to talk about 2014.

Michael E. LaBelle

The only other thing that I would mention that we've mentioned in the past, Michael, is that the Hancock Tower. We still have the Bain Capital lease on free rent through 2013. And into the beginning of 2014, that's a 270,000-square foot lease.

Michael Knott - Green Street Advisors, Inc., Research Division

On San Francisco, not that they would be mutually exclusive, but how did you think about on with [indiscernible] as opposed to buying 101 California, which was recently on the market?

Mortimer B. Zuckerman

Well let me just say that we, number one, expect the yields on the development that we are anticipating to frankly be better and higher than the 101 California. But frankly, we would have bought 101 California if we could have gotten it at price we prepared to pay. It's just a very good building.

Unknown Executive

Michael, I'd just might add, that 101 treated at a low sub for CAP rate. Actually, it was in the 3s. And it's a 35, 40-year-old building at this point, and we feel on Transbay that we can sell the building for a similar cost with higher yield.

Michael E. LaBelle

So -- and, Michael, just to give you a perspective. So when we looked at 101, we looked at 333 market which is Wells Fargo building. And If you -- in order to sort of get to the same -- or the kind of IRR that you need to sort of rationalize those investments, the rents that you're looking for in those buildings are actually higher on a projected basis than they're what we were looking at for the rents that we would be leasing at, at the Transbay tower in 2015 and 2017.

Michael Knott - Green Street Advisors, Inc., Research Division

Okay. That's really helpful. And then just my last question. It sounds like you answered this earlier, but your official position on new supply in San Francisco CBD is that you're not worried about the impact on that market.

Douglas T. Linde

I think we're always worried about new supply. But if -- but our view is that if there is a market that's going to be able to handle new supply over the next 5 years, san Francisco is that market. Largely because there are very few large financial institutions in that city that are going through a downsizing. So I think while those law firms may move through their natural lease expirations, they may get a little bit smaller. And now we're hearing about law firms putting -- pushing their back office operations to places like Nashville, Tennessee. That could occur. But there aren't a lot of large firms that are 500,000 square feet or more that are in that type of a market in San Francisco. And that the month of growth from the technology companies that is taking place in the CBD, South of Market, Mission Bay, North of Market, however, you want to characterize it, is very significant. And it's becoming a very dominant user of space in the city on an incremental basis. And so having the opportunity to satisfy that demand set, relative to any other city in the country on a relative basis, seems like the right place to be thinking about a new development.

Operator

Your next question comes from the line of Tayo Okusanya of Jefferies.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

A couple of positive comments you made about the life sciences space in general. Just wondering what your appetite would be to increase exposure to that particular area? What that might involve and which particular life sciences market would you be attracted to?

Douglas T. Linde

So, Tayo, the only life science market that we have any experience in is the life science market around Cambridge, Massachusetts. And so, it's clearly the place. Look -- they're -- if the Silicon Valley has sort of become the dominant cluster for that -- new technology companies, the Cambridge and the suburban Boston market has become the dominant cluster for life sciences and biotech. I mean, you just hear about company after company that's sort of moving their R&D and moving their thought -- their big thinkers into the Cambridge, Marketplace. So that's the pleased where -- we were considering. And by the way, when Sports City was looking at the sale of their 50% interest in their MIT portfolio that was purchased by one of the other REITs last year, we look at that. So we have an interest in looking at those types of properties at the right -- at relatively the right pricing level and the right location, it's something we would be interested in.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

You wouldn't consider South San Francisco?

Douglas T. Linde

I think that South San Francisco marketplace is largely dominated by one major tenant that really -- that would prefer to own as opposed to lease space.

Operator

Your next question comes from the line of David Harris of Imperial Capital.

David Harris - Imperial Capital, LLC, Research Division

On your 2013 guidance, is it fair to assume that you are assuming that there is no -- we don't go over the fiscal cliff and there is no impact?

Douglas T. Linde

I would -- I don't think that, that's a fair characterization. I would assume that, I think that we are assuming that whether we may or may not go over the fiscal cliff, we have been pretty, I think, reasonable at our lease up projections are on available space in the portfolio. If we go over the fiscal cliff, there's going to be a resolution after that point. It's not going to be a prolonged let's cut our noses off to spite our face. I mean, I think, unfortunately, there is the precedent who believes that this unit -- this country has to get to the precipice of a crisis before it can have the political desire on the part of the legislature to get something worked out. And so, it could happen and then at some point it will get reversed. I don't think it's a -- we're going to -- go to the fiscal cliff, and then for the next 3 years, we're going to be looking at that higher taxes and lower spending.

David Harris - Imperial Capital, LLC, Research Division

I won't quote Winston Churchill, but we know him and somebody you might be referring to, I think. But could I paraphrase your answer then, Doug, if I may. So what you're saying is if we do go over the fiscal cliff, is there would be no impact on your 2013 guidance?

Douglas T. Linde

No, I didn't say there would be no impact, but I think we were reasonably conservative about what we think the overall economic impacts are going to be whether there is or isn't a positive solution in the short-term.

David Harris - Imperial Capital, LLC, Research Division

Okay. So the numbers could be low if we get early resolution in lame duck if we take a very optimistic scenario?

Douglas T. Linde

I don't think so. Because from a macro perspective, it's not going to -- things are just not going to get better quickly. I think that the psychology will get better. If the psychology gets better, people will want to start to make decisions. But as we know in the real estate world, it takes time from a decision to a lease. And so 2013 is just a year where there's not going to be a lot of strong opportunities for those things to happen.

Mortimer B. Zuckerman

We draw a distinction between an optimist and a pessimist today in the following way: an optimist thinks this is the best of all possible worlds, and a pessimist fears he may be right.

David Harris - Imperial Capital, LLC, Research Division

Well that matches Mr. Churchill's quote so I think [indiscernible] Can they -- just a couple of points of detail, and this is probably for Mike. G&A capitalization is going to increase at the same rate as your interest capitalization?

Michael R. Walsh

It's Michael Walsh, David. It should be flat to what it's been. A slight increase because of adding 680 Folsom, but nothing material.

David Harris - Imperial Capital, LLC, Research Division

Okay. And then there was no ATM issuance in third quarter?

Michael E. LaBelle

No. There has been none.

Unknown Analyst

So the capacity on the programs is the same as you reported in the second quarter.

Michael E. LaBelle

Yes. We had about $300 million left on it.

Operator

Your next question comes from the line of James Sullivan of Cowen and Company.

James W. Sullivan - Cowen and Company, LLC, Research Division

One quick question. Mike LaBelle, your 2013 guide, does it assume any lease up of Bay Colony from where Bay Colony stands at the end of Q3?

Michael E. LaBelle

Yes. I mean, as Doug mentioned, we have some good activity from some, probably, sizable tenants. Tenants are -- that are between 40,000 and 60,000 square feet that are looking at Bay Colony, that have been excited about our plan there. We completed one of the buildings and re-did all the common areas, we re-skinned another building and it looks great out there. The challenges Doug went through is getting these people from I'm excited about this to actually making a decision to lease space. And none of them have said we're staying where we are, we're changing our mind, so what we have done is we said we aren't going to do some leasing in Bay Colony, it's going to be later in the year in 2013 though. As opposed to sometime in the next 2 quarters.

James W. Sullivan - Cowen and Company, LLC, Research Division

Okay. Just a quick related question for Doug. In terms of the -- in terms of your target marketing, if you will, for Bay Colony. I think it was about a year ago that you say that you were looking for tenants who were -- that you were going to focus your search on tenants that were looking for larger spaces as Mike has detailed? Has there been any shift in your opinion in terms of submarket desirability such that the market that you thought might be there is either looking elsewhere in the greater Boston area? Or is it just a slowness in the decision process that we've heard you mention a few times?

Douglas T. Linde

No. I think our focus is correct. Interestingly, the thing that we've seen is that there's been an in-migration of the venture capital community. Out of places like Bay Colony into places like Cambridge and into Boston, but the technology companies that are being formed through the VC funds unless they are life sciences, they're not -- they're -- then they are in Cambridge unit at the start. And as soon as they get to a scale, they realize that they can no longer afford to be in Cambridge. So they move out of Cambridge. And some are moving to the Seaport District, and some are moving out to the suburbs. But we've actually seen more growth from a tenant perspective and more successes in Waltham, Lexington market from a demand perspective than we've seen anywhere else other than Cambridge.

Operator

Your next question comes from the line of Michael Bilerman of Citi.

Michael Bilerman - Citigroup Inc, Research Division

A quick question on Hancock. Can you update us on where you stand on releasing and rolling up some of sub-tenants? I think when you bought the building, you said there was about 800,000 square feet that you thought would go to the $60s from $35 to $40 in 2014 and beyond. But how much of that have you already locked in through forward leasing and have you been able to get to a sort of rent increases?

Douglas T. Linde

So we have a relet approximately 200,000 square feet of space that had 2015 lease expirations. There's probably another 75,000 to 100,000 square feet that we are currently working on, which I described. The rest of it is in the base of the building and that's where State Street is currently located and that -- those leases don't expire until the end of 2014. And those tenants are not going to be staying at the base of the building in all likelihood, so our assumption is that those are going to be new tenants. As opposed to what we've done previously, which is we have existing tenants who have no interest in leaving who have come to us and said we want to do an early renewal because we want to lock in for 10 years after 2015. And in every single case, we've seen the rollups that we anticipated. They haven't -- a lot of them haven't come through our numbers yet because the existing sub-tenant leases are still in place, right? So -- but in every cases, we are seeing the rents that we anticipated but not more.

Michael Bilerman - Citigroup Inc, Research Division

And there was a similar rollup opportunity for the State Street space?

Douglas T. Linde

There is a similar rollup opportunity for the State Street space. It's -- I think the rents will not be as high, I mean if we're getting mid-60s-plus from up the 22nd floor to the 50th floor, the rents that we've projected at the base of the building were more in the nature of $45 to $50 a square foot, and that's where we're making proposals today. But there's still a lot of significant rollup from where State Street is currently leasing space from us.

Michael Bilerman - Citigroup Inc, Research Division

Okay. And one more question, I know this is from Westfield but on the GM Building, are your currently being paid for the signage? Or is that still a future opportunity for you?

Douglas T. Linde

We're -- there's -- nobody has any signage rights on the building right now.

Operator

At this time, I would like to turn the call back to management for any additional remarks.

Douglas T. Linde

I think we've overextended our welcome with you as investors. So have a good lunch. And we will see some of you in the REIT in San Diego and some of you we'll see I'm sure in the halls of the various conferences that occur in the beginning of the year in New York City. So thanks and have a nice day.

Operator

This concludes today's Boston Properties conference call. Thank you again for attending and have a good day.

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