Boston Properties, Inc. (NYSE:BXP) Q3 2021 Earnings Conference Call October 27, 2021 10:00 AM ET
Laura Sesody - Vice President, Corporate Marketing & Communication
Owen Thomas - Chief Executive Officer
Doug Linde - President
Mike LaBelle - Chief Financial Officer
Ray Ritchie - Senior Executive Vice President
Bryan Koop - Executive Vice President, Boston Region
John Powers - Executive Vice President, New York Region
Conference Call Participants
Steve Sakwa - Evercore ISI
Emmanuel Court - Citi
Nick Yulico - Scotia Bank
John Kim - BMO Capital Markets
Alexander Goldfarb - Piper Sandler
Ronald Camden - Morgan Stanley
Blaine Heck - Wells Fargo
Caitlin Burrows - Goldman Sachs
Anthony Powell - Barclays
Peter Abramowitz - Jefferies
Daniel Ismail - Green Street Advisors
Brent Dilts - UBS
Jamie Feldman - Bank of America
Good day, and thank you for standing by [Operator Instructions]. Please be advised that today's conference is being recorded [Operator Instructions].
I would now like to hand the conference over to Laura Sesody. Please go ahead.
Good morning, and welcome to Boston Properties Third Quarter 2021 Earnings Conference Call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investor Relations section of our Web site at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
Although 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 obtained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchie, Senior Executive Vice President, and our regional management teams will be available to address any questions.
I would now like to turn the call over to Owen Thomas for his formal remarks.
Thank you, Laura, and good morning, everyone. This morning, I will cover the economic recovery that's underway in the US, BXP's momentum in terms of financial results and leasing, private equity capital market conditions for office real estate and BXP's capital allocation activities and growth potential. The US economy continues to exhibit strong growth as we emerge from the COVID pandemic. US GDP grew 6.7% in the second quarter but is expected to slow in the third quarter due to the surge in infections caused by the Delta variant. However, daily COVID infection levels have dropped over 50% from highs in September, which bodes well for strong economic growth in future quarters. The relatively low unemployment rate at 4.8% is being driven by both new job creation, which recently has been tepid and workers withdrawing from the workforce. There are over 10 million job openings across the US and virtually every employer, including BXP, is experiencing a highly competitive labor market.
Annual inflation remains high at [5.4%] in September, driven largely by energy prices, which are up 25% versus one year ago. Supply chain challenges are a primary topic this earnings season for many companies, and Doug will cover BXP's experiences in his remarks. Lastly, the 10-year US treasury rate has increased approximately 40 basis points to 1.6% since our last earnings call. Given the prospect of further interest rate increases, we've been very active refinancing our corporate and specific asset level debt. Interest rates remain extremely low relative to office cap rates and the yields we are achieving on our developments, creating the potential for lower cap rates and higher value creation in the quarters ahead.
BXP's financial results for the third quarter continue to reflect the impact of this recovery and an increasingly favorable economic environment. Our FFO per share this quarter was $0.03 above market consensus and $0.04 above the midpoint of our guidance, which Mike will detail shortly. We completed over 1.4 million square feet of leasing, significantly more than double the volume achieved in the first quarter, well above the leasing achieved in the second quarter and just under our long term third quarter average. Our clients continue to make even longer term commitments as the leases signed in the third quarter had a weighted average term of 9.3 years versus 7.5 years in the second quarter. Year-to-date, we have completed 3.3 million square feet of leasing with an average lease term of 8.3 years. This success can be attributed to not only our execution but also the enhanced velocity and economics achieved in the current marketplace for premium quality, well amenitized assets, which are the hallmark of BXP's strategy and portfolio.
In addition to our leasing activity, which included 524,000 square foot long term renewal with Wellington at Atlantic Wharf, Google purchased 1.3 million square foot building in New York for its use. In the Silicon Valley alone, Apple completed 720,000 square foot new requirement. Facebook is looking for 700,000 additional square feet. And ByteDance is searching for approximately 250,000 to 300,000 square feet. In the Seattle region, Facebook is pursuing 0.5 million square foot requirement in South Lake Union and Amazon has executed on enormous growth in Bellevue. I could go on. These examples support our repeatedly stated position that tenants are committed to the office as their location of choice to collaborate, innovate and train, all critical for their long term success.
Measurable census in our portfolio also continues to improve. Our leading region is New York City, which hit 52% occupied last week. Our lagging region is San Francisco, which is increasing but currently at 18% and the remaining regions are in between. From watching on television, stadiums packed with unmasked people to trying to park at busy shopping centers to experiencing difficulties in making restaurant reservations in our core markets, it appears to us people are undoubtedly more comfortable with in-person activities. Liquidity fueled strong business performance and a tight labor market are clearly factoring into remote work decisions by businesses. However, as time progresses and the shortcomings of remote work become more apparent, we increasingly hear concerns from business leaders about the decaying cultures of their companies, inadequate training and difficulties in onboarding new professionals, as well as the potential for deterioration in innovation and competitiveness. We believe it's only a matter of time before employers more strongly encourage their teams to return to in-person work.
Record levels of commercial real estate sold in the third quarter and private capital market activity for office assets is also recovering rapidly. $26 billion of significant office assets were sold in the third quarter, up 38% from last quarter and up 165% from the third quarter a year ago. Cap rates are arguably declining for assets with limited lease rollover in anything life science related given low interest rates, and activity is increasing for assets facing near term lease expirations. Of note this past quarter in all of our markets, One Canal Park an [empty] 112,000 square foot office building in Cambridge sold to a REIT for $131 million or $11.70 a square foot. As mentioned, Google exercised its option to purchase St. John's terminal in New York City, which is 1.3 million square foot office building that fully occupies and the price was $2.1 billion or $1,620 a foot.
Coleman Highline, which is a 660,000 square foot office complex under construction in North San Jose and fully leased to Verizon sold for $775 million, which is $1,180 a square foot and a 4.2% initial cap rate to a non-US buyer. 153 Townsend St., which is 179,000 square foot office building in San Francisco sold for $231 million or $1,290 a square foot to a local operator and fund manager. This asset is fully leased to a single user, which has put the entire building on the sublease market. West 8 is a a 540,000 square foot office building in the Denny Triangle Seattle, sold for $490 million or $910 a square foot to REIT. The building is fully leased but faces significant rollover through 2023. 49% interest in 655 New York Avenue in Washington, D.C. sold for a gross price of $805 million or $1,060 a square foot and a 4.7% cap rate. The building comprises over 760,000 square feet, is 93% leased and sold to a non-US investor with a domestic adviser. And lastly, The Post, which is 100,000 square foot fully leased office building in Beverly Hills, sold for $153 million, which is $1,530 a square foot and 4.8% initial cap rate to a domestic fund manager.
Now moving to BXP's capital market activity. We closed on the acquisition of Safeco Plaza and entered the Seattle market. BXP will own a one third interest in the asset along with two partners in our strategic capital program. We also closed the Shady Grove Biotech Campus acquisition and entered the Montgomery County, Maryland life science market. We're also on track to close the 360 Park Avenue South acquisition with Strategic Capital Program Partners on December 1st, thereby entering the Midtown South market in New York City. I described the economics for all these acquisitions last quarter. Regarding dispositions, we completed the sale of our Spring Street Office Park in Lexington Mass this week, bringing our share of gross sale proceeds from dispositions year-to-date to $225 million. We're also marketing for sale two additional buildings, which, if completed, are projected to yield approximately $200 million in gross proceeds.
On development activities, this quarter, we delivered 0.5 million square feet of Verizon and other tenant space at 100 Causeway and 285,000 square feet of Fannie Mae space at Reston Next. In the aggregate, we have 4.3 million square feet of development [Technical Difficulty] underway that is 72% pre-leased. These future deliveries plus the stabilization of recently delivered projects are projected to add approximately $190 million to our NOI and 3.8% to our annual NOI over growth the next few years. So in summary, we had another active and successful quarter with strong leasing and financial results and entered several new geographic markets. We believe BXP is about to experience a strong growth ramp, which we project to be approximately 13% in FFO per share in 2022, driven by improving economic conditions and leasing activity, recovery of variable revenue streams, delivery of a well leased development pipeline, completion of four new acquisitions, a strong balance sheet combined with capital allocated from large scale private equity partners to pursue additional new investment opportunities as the pandemic recedes, a rapidly expanding life science portfolio in the nation's hottest life science markets and low interest rates and decreasing capital costs. Finally, I'd like to welcome Hillary Span, who is joining this call this morning to BXP's executive team. Hillary joined BXP right after Labor Day and will become our regional head in New York when John Powers retires in January.
Let me turn our remarks over to Doug.
Thanks, Owen. Good morning, everybody. I'm going to begin my remarks this morning with a few comments on the supply chain and its impact on our capital expenditures, both for new construction and our existing assets. So the impacts of the supply chain are both in time and money. Schedule is one of the criteria we use when we bid our jobs. And to date, we've been able to award bids while maintaining the schedules necessary to get our tenants in their spaces as required. The supply chain challenges have made the process much harder but we are still able to deliver the current development pipeline on time and within budget. And as you all know, we have contingencies that are in our budget and at some point, we are using those contingencies. However, in the near term, as we look at new jobs, there are fewer material choices and we are working closely with our consultants and our contractors to make sure that they are not specifying critical path items that could impact schedules. Our construction teams are working a lot harder at figuring out exactly how the key and the parts are put together.
We are intentionally minimizing oversee items and we're releasing our material packages as early as possible. Trucking issues are real and at times, we are being forced to air freight as well as stockpile materials offsite, hence the use of some of our contingencies. There's no single answer to how much more is it going to cost. But when we're budgeting jobs that will start eight to 12 months from now, we're using 5% to 6% escalation in our total construction costs. We are in the process of rebidding our Platform 16 base building project, which was previously budgeted in late 2019 with an eye towards our 2022 restart. And we will have real time perspective in mid-November. But as of today, we just don't know what that's going to be. Supply shortages are also impacting our operating budgets. Energy is a material input into our operating expenses. While our largest utility cost is electricity, we are mostly hedged for 2022 and we have been successfully increasing our procurement from green power. We are still exposed to the marginal cost of electrical generation in the Boston region where we expect double-digit increases from last year.
Cost for security, cleaning and engineering labor continues to increase due to labor shortages across all those trades. However, our lease contracts take two forms. We have net leases under which 100% of the operating expense and real estate taxes are paid by the tenant and we have gross leases with a base year that is set upon the lease commencement with increases in expenses over that base year added to the rental obligation of the tenant. In other words, our exposure is on our vacant space and for new or renewal leases where we are setting a base. This is a pretty small percentage of the total so it really doesn't have a material impact on our actual operating results as we look at 2022. As you saw in our supplemental, our second-generation leasing statistics were weak this quarter, and they need some finer explanation. I wish we could put all this into our press release but we simply can't.
The universe of square footage that is encompassed in the statistics is about 500,000 square feet and it includes 105,000 square feet of short-term transactions 18 to 24 months that we signed in the heart of the pandemic with tenants that were not in a position to make a long term commitment, but they were prepared to extend for a negotiated discounted as-is deal. One of those tenants has since agreed to lease space for 13 years, where the interim rent was $60 a square foot and they'll be paying $103 a square foot, and this is in a New York asset. If you eliminate that 105,000 square feet, the statistics that we would have shown you changed dramatically, going from down 14% to effectively flat. You should also note that our transaction costs were also significantly below our run rate since there were no TIs involved in any of these short term deals.
Our life science and office portfolio make up 91% of our revenues. As we look towards 2022, we currently have more than 800,000 square feet of signed leases that have not commenced. In 2022, lease expirations for the whole portfolio, not just our share, totaled about 2.9 million square feet and we already have renewal conversations underway on over 25% of that space. Historically, we have leased well over 1 million square feet a quarter each and every year. The question will be when those new expected leases will commence. Occupancy should slowly edge up in 2022. The changes in the quarter occupancy this quarter are due to the addition of the Shady Grove and Seattle acquisitions, not a degradation in our occupancy in our existing portfolio. Now let me give you a sense of what's going on in our portfolio today. New York is a good place to start. Tour activity, proposals and ultimately, leases continue to be very consistent with the commentary we've been providing during the last few quarters. The high end buildings are seeing good activity. Brokers that advise the small and midsized financial firms and professional services firms are very busy and their clients are taking action. Many of those users are incrementally increasing their space requirements as they continue to acquire people and AUM.
Sublease space continues to gradually melt from the statistics. You may remember that we were asked about a 200,000 square foot sublet at 399 Park Avenue during various conference calls in 2020. That space has been taken off the market as the user reoccupies. Now there still is significant supply of direct and sublease space in New York City and our view is that net effective rents remain down 10% to 15% from pre-pandemic levels. During the quarter, we completed eight deals totaling 113,000 square feet in the CBD portfolio. Many of these spaces were vacant, but the two largest had a roll up of 8% in one case and a roll down of 4% in another. About 70,000 square feet of leases are in the category of leases that will not have revenue commencement until sometime in mid '22. Last week, we signed a lease at Dock 72 for 42,000 square feet. We don't anticipate this tenant completing their buildout until the latter half of '22. We have an additional 340,000 square feet of leases under negotiation in New York right now, including almost 200,000 square feet at Dock 72. We don't anticipate revenue commencement on [65%] of that space until 2023.
One of the themes for next year is going to be a pickup in signed leases with contribution to occupancy or revenue flow-through occurring when tenants complete their installations in late '22 or '23, and we don't necessarily control those times. At Carnegie Center down in Princeton, we did eight leases for 38,000 square feet and have another 106,000 square feet in active lease documentation. One final note on New York before I turn to the other markets. Our culinary collective The Hugh has opened at our 53rd Street campus in 601 Lex. This is as good an example of place making as we can point to in our portfolio. As users who want to encourage their employees to come back to work this type of experience will dramatically enhance their physical space offering. It's why we do what we do. In Northern Virginia, our leasing team is seeing a consistent flow of inquiries, tours, lease proposals and ultimately, completed transactions. During the quarter, we completed seven leases totaling 70,000 square feet in Reston, and we're in lease negotiation on another seven deals totaling 125,000 square feet. The tech tenants that have identified the DC metro market as a fertile area for workforce expansion are continuing to grow and their growth is going to be in Northern Virginia.
In addition, the contractors that service the defense and the homeland security are also expanding. There are significant vacancy in northern Virginia. But the urban market core in Reston is under 10% vacant, and it continues to dramatically outperform with starting rents in the high 40s to low 50s gross and with our Reston Next project opening up this week, the rents are starting to hit the low 60s. The Reston Next development is welcoming Fannie Mae into the building this month and we are actively marketing and leasing the remaining 160,000 square feet of available space. Our Reston Town Center retail place making is also very active. During the quarter, we completed a lease with a new theater operator for 50,000 square feet. Last week, we signed a 20,000 square foot lease with a local restaurant distillery and yesterday, a new 20,000 square foot fitness operator. We have three more restaurants totaling 22,000 square feet that are close to execution. This 115,000 square feet of leased retail is not expected to have any revenue contribution until 2023. In the District of Columbia, we continue to chip away at our current availability at Net Square 901 New York Avenue and Market Square North. We completed seven leases for 49,000 square feet during the third quarter and have signed another 32,000 square feet during October.
Just as an aside, we completed a major repositioning of Next Square this year. And year-to-date, we've signed 162,000 square feet over eight transactions when we do our work our buildings lease. The urban downtown recovery in San Francisco continues to lag our other markets. Very few businesses have commenced their return to work, downtown streets remain quiet, much of the ground plane remains closed and the city has had a very restrictive mass mandate. As Owen pointed out, daily consensus continues to be significantly below all our other urban markets. There's been a reduction of sublease space in the market stemming from active lease commitments and reoccupancy plans, but overall availability continues to be elevated. This description while accurate overlooked important subtleties in the market. Pre-pandemic, there was very little available space in high-quality, multi-tenanted buildings, particularly those with views. Broadly speaking, those conditions still exist for that segment of the market. The bulk of the demand in the last 18 months has come from traditional financial asset management and professional services firms that have focused on the best space in the best buildings. This has resulted in very little change to leasing economics in the best buildings, particularly in spaces we've used. We've discussed this on recent calls and it continues today.
This quarter, we've completed over 100,000 square feet of leases, including [four] full floor transactions in Embarcadero. The average starting rent was just over $100 a square foot on those full floor deals, a 21% increase over expiring rents. We are negotiating leases on another 106,000 square feet right now. And from what we've seen, these experiences are being repeated in a competitive set north of market. In contrast, sublet transactions are being closed at significant concessions to pre-pandemic economics, but with no capital. Life science activity at our Gateway development continues to be healthy. The BXP ARE joint venture has signed an LOI with a full building user for 751 Gateway, 230,000 square feet and we're actively responding to proposals for our anticipated redevelopment of 651 Gateway, about 300,000 square feet, which won't commence until the third quarter of next year. Further down the Peninsula and Mountain View, activity has picked up in the last 30 days. This quarter, we completed two full building deals totaling 58,000 square feet. We're seeing less information gathering exercises and a lot more active tours with RFPs and the need for immediate occupancy or early 2022 occupancy.
There are, as Owen said, large tech requirements active in the Silicon Valley. For those of you who saw that the Tesla announcement that they're moving their headquarters to Texas, you may have missed that they leased 325,000 square feet in Palo Alto contemporaneously with that announcement. High quality new construction availability is very limited in the valley and we're actively considering when we should restart the construction of Platform 16 next to Diridon Station and the future of Google development in San Jose. Finally, let's touch on Boston. In the high end market in the Boston CBD, particularly in the Back Bay, there is currently limited availability, particularly with use space. Rents have remained at pre-pandemic levels and concessions are only marginally higher. As we move closer to 2023, there will be additional new construction supply entering the market in the CBD but not the Back Bay. As Owen mentioned, the big lease for the quarter was the early renewal with Wellington. They agreed to expand by 70,000 square feet at Atlantic Wharf, and we're going to terminate 156,000 square feet at 100 Federal Street in 2023. The space we're getting back is leased at a rate that's below market, so we're optimistic that we can create additional value through this re-let.
We completed an additional 73,000 square feet of leases in our Back Bay portfolio, and we have about 50,000 square feet of leases under negotiation today in that same group of properties. The Boston retail portfolio is also very active. We have signed an LOI for the 118,000 square feet formerly occupied by Lord & Taylor, as well as 40,000 square feet of in-line space that's currently vacant or in default. This 158,000 square feet will likely commence paying rent in early '23. As we move to the suburbs, life science is dominating our activities. Last week, we signed our first lease at 880 Winter Street, our lab conversion that we started four months ago, 37,000 square foot deal, which will deliver in the middle of next year, and we are in the final stages of negotiation on another 128,000 square feet which will bring that 224,000 square foot building to 74% leased, and we have active dialog on the rest of the space. And during the quarter, we signed over 105,000 square feet of leases with life science tenant at 1,000 [winner], 1,100 [winner] and Reservoir Place for additional office buildings. As we move into '22, we're developing plans to convert additional available office space in Waltham into lab space.
So to summarize, we've seen a recovery in employment, as Owen discussed. Employers are aggressively looking to hire, capital raising in the venture world is breaking through levels never seen and [IPO] takeouts are at a historically high levels. Conditions are right for recovery in office absorption. Employers are going to want to use their physical space to encourage their teams to be together. Our mantra has been to create great places and spaces to allow our customers to use space as a way to attract and retain their talent. If you believe that employees may be spending less time in their offices, it's even more important to have the right space in place when they're present. And I'll stop there and give it over to Mike.
Great. Thanks, Doug. Good morning, everybody. Before I jump into the details of our third quarter earnings as well as our 2021 and 2022 guidance, I want to touch on our recent financing activities. This quarter, we took advantage of the low interest rate environment and very attractive credit spreads to issue $850 million of 12 year unsecured green bonds when the underlying 10 year treasury rate was 1.3%. We achieved a coupon of 2.45%, the lowest in the company's history. We utilized the proceeds to redeem $1 billion of 3.85% unsecured notes on October 15th. Those notes were scheduled to expire in early 2023 and represented our largest debt maturity through 2025. The early prepayment will result in a redemption charge of $0.25 per share in the fourth quarter of 2021.
We will benefit from the 140 basis point drop in the relative debt cost and we are thrilled to issue such attractive long-term financing. The only other significant debt maturity we have in the next 18 months is our $620 million mortgage on 601 Lexington Avenue in New York City that expires in April of next year. Similar to the bond we redeemed, this loan also carries an above-market interest rate of 4.75%. Given the increase in the cash flows from the building, owing partially to the redevelopment we completed earlier this year, we anticipate that we will be able to increase the size of the financing and reduce the interest rate substantially. We're working on this now, and our assumptions include closing before the end of 2021. The impact of these financing activities will be accretive to our 2022 earnings through a meaningful drop in our interest expense from 2021 that I will touch on in a minute. First, I'd like to describe our third quarter 2021 results. For the third quarter, we announced FFO of $1.73 per share, that's $0.04 per share higher than the midpoint of our guidance and $0.03 ahead of consensus estimates. Our outperformance came from better portfolio NOI with $0.02 of higher rental and parking revenue and approximately $0.02 of lower than projected operating expenses.
Looking at our parking revenues, they started to accelerate sequentially as clients and visitors increased driving days into our properties. As Owen described, we're seeing building census grow and the results are evident in our parking. Our share of this quarter's parking revenue totaled $22 million. This compares to a comparable pre-COVID quarterly result from the third quarter 2019 of $28 million. At the bottom, in the second quarter of 2020, our share of parking revenue was $14 million, so we are over 50% of the way back. On an annualized basis using the third quarter run rate, we have about $25 million of revenue or $0.14 per share to recover before we are back to pre-COVID annual parking levels of $113 million. Our Kendall Square hotel was profitable for the first time in six quarters contributing about $1 million of positive NOI. Given the hotel's location in the heart of Cambridge and adjacent to MIT, we expect that it will ultimately restabilize at or above the $15 million annual NOI generated in 2019, though certainly not in 2022.
The third leg of our ancillary income is our retail income. Other than in San Francisco, nearly all of our retailers have returned to paying previous contract rents. This quarter, our share of retail rental revenue was $43.6 million. On an annualized basis, this is $16 million less than our share of 2019 retail revenue, which totaled $190 million. And as Doug mentioned, we have some vacancy in our retail due to the pandemic but we're negotiating leases now on significant portions of that space. If you combine and annualize our third quarter hotel NOI and our share of parking and retail revenues, we have the opportunity to gain approximately $52 million or $0.30 per share to return to 2019 full year levels. We believe that all three of these income streams will fully recover and ultimately exceed prior peaks over time.
Looking at the rest of this year, we released fourth quarter 2021 guidance of $1.50 to $1.52 per share and full year 2021 guidance of $6.50 to $6.52 per share. Our fourth quarter guidance includes the $0.25 share redemption charge related to our bond refinancing. Excluding the charge, our fourth quarter guidance would be sequentially higher than third quarter results by $0.03 per share at the midpoint. The improvement is primarily from Verizon taking occupancy of its 440,000 square foot lease at the Hub on Causeway office development this quarter and lower interest expense after our refinancing. And while we expect our same priority portfolio NOI will also grow sequentially, the growth is partially offset by the FFO dilution from the sale of our Spring Street office campus in suburban Boston that closed for $192 million this week.
Turning to our assumptions for 2022. Last night, we released our 2022 FFO guidance. We have three major drivers that are all headed in the right direction that provide for very strong FFO growth of 13% at the midpoint over 2021. The drivers include delivering a significant volume of leased new developments and acquisitions, growth in our same property portfolio and our refinancing activities that lower our interest expense. The first growth driver is developments and acquisitions. We're delivering five of our development properties over the next four quarters, totaling $1.6 billion of investment. These projects totaled 3 million square feet of additions to our portfolio and are 92% leased, they include; the Hub on Causeway in Boston that is leased to Verizon; 325 Main Street in Cambridge that is leased to Google; the 200 West Street Life Science development in Waltham that is leased to Translate Bio; Marriott's new headquarters facility in Bethesda, Maryland; and Reston Next that is leased to Fannie Mae and Volkswagen in Reston. It is also possible that our Life Science conversion at 880 Winter Street in Waltham will begin to contribute in late 2022.
In total, we expect our development deliveries to contribute an incremental $65 million to $70 million to our FFO in 2022. Additionally, we've layered in several acquisitions that we completed this year, most notably Safeco Plaza in Seattle and our Life Science project we acquired in Waltham. We expect these acquisitions will add $7 million to $10 million to our share of NOI next year. The second growth driver for 2022 is the projected growth in our same property portfolio NOI. Our guidance assumes that our share of same property NOI will grow between 2% and 3.5% next year. The growth is expected to come from higher parking revenues, improvement in occupancy and pricing in our residential portfolio, higher NOI from our hotel and increased occupancy in our office portfolio.
Our leasing velocity has picked up in the last two quarters where we've leased 2.7 million square feet of signed leases. Given the length of the typical leasing cycle, many of these leases we've signed or are negotiating will take occupancy either in late '22 or '23. We expect the improvement in our headline office occupancy to be gradual. As Doug described, we have several larger leases in the works for vacant space where we anticipate occupancy will occur in 2023. On a cash basis, we expect our share of 2022 same property NOI growth to be much stronger at between 5.5% and 6.5% over 2021. This equates to between $90 million and $100 million of incremental cash NOI to 2022. Much of our cash NOI growth is coming from approximately $50 million of free rent that is burning off in contractual leases.
Our third FFO growth driver is coming from lower interest expense. As I mentioned earlier, we will incur a debt redemption charge of $0.25 per share in the fourth quarter of '21. We do not expect that this will recur. Also, we are aggressively refinancing loans that were placed five to 10 years ago in a higher interest rate environment with low cost current market financing. Partially offsetting this, we do expect to see higher interest expense in our joint venture portfolio. This is because we will cease capitalization of interest on the Marriott and Hub on Causeway projects when they are delivered into service. In aggregate, we expect that 2022 interest expense will be $52 million to $60 million less than in 2021. That equates to $0.30 to $0.34 of incremental positive impact on our 2022 FFO.
So to summarize, our guidance for 2022 FFO was $7.25 to $7.45 per share. The midpoint of our range is $7.35, which is 13% or $0.84 a share higher than the midpoint of our 2021 guidance. At the midpoint, the incremental growth is coming from $0.43 from development and acquisitions, $0.25 from our same property portfolio and $0.32 from lower interest expense. This will be offset by $0.06 of dilution from our 2021 disposition activity, $0.06 of lower termination income and $0.04 of higher G&A. The past 18 months have brought challenges and uncertainty to so many, including our team at BXP. These past few months, it's been heartening to see our cities reopen, our colleagues and our clients starting to return to their offices and office leasing volumes picking up. As I spelled out, we anticipate very strong FFO growth in 2022. And beyond 2022, we have more developments underway that will deliver additional FFO. Plus, we have the highest quality portfolio of office buildings that we believe will generate higher occupancy rates and earnings in the future.
Operator, that completes our remarks. Can you please open the line up for questions?
[Operator Instructions] Your first response is from Steve Sakwa, Evercore ISI.
Appreciate all the detail. I don't think I caught everything, but two quick questions. Mike, when you talked about retail and sort of what you were potentially recapturing, I just want to make sure for tenants that are currently in occupancy today but maybe aren't fully paying their stated rent, can you remind us what that dollar amount is just on a quarterly basis?
I don't think I have that number in front of me, Steve, but we've got $43.6 million that is our share currently. So we’re missing about $16 million on an annual basis. So most of that, honestly, is coming from filling vacant space. I would say that there's very little remaining in the way of kind of deferrals and things like that for retail tenants right now. In San Francisco, which is the smallest retail portfolio we have because the tenants there just don't pay high rents, that's where the tenants haven't all returned to occupancy and the vast majority of them are not paying rent. So that's the place where those deferrals are. I mean I think that's probably $2 million a year, something like that, that's not the most significant piece. The big chunks are some of the stuff Doug talked about, where we're filling the Lord & Taylor space, that's a big 120,000 square feet. We've got a number of new retailers coming into the Pru where we had vacancy that was created by some bankruptcies there and then in Reston as well. So those are kind of the big ticket items where it's coming from. So I would say most of it is coming from filling vacant space, not from tenants that were deferring rents and are going to be paying contract going forward.
If you take the summation of all the spaces that I described where I sort of basically said we're not going to receiving rent until probably late '22 or early '23, I want to say it's somewhere north of 250,000 square feet and the average rent is probably $45 a square foot net. So we're talking about $11 million or $12 million of incremental revenue from that portfolio of available, that’s currently either leased or LOI space that we will get leased in the next couple of months.
And then I just wanted to circle back on the average occupancy that you sort of outlined for '22, the 88% to 90%. Just to be clear, is that wide range really sort of, I guess, due to the uncertainty over when leases will start or is some of that uncertainty because leases actually need to get signed over the next, say, three to six months and then they need to commence? I'm just trying to figure out how much is a timing of when the revenue will start from a GAAP perspective versus how much actually needs to get leased?
So again, just going back to where I started from. So right now, we'll call it 88% plus leased, and we have 800,000 square feet of signed leases that haven't commenced yet. Most of that will commence in the latter parts of 2022. As I said, we're working on renewals on about 25% right now of our 2.9 million square feet of space, which is, call it, 700,000 square feet of space, plus or minus. And we've been doing over 1 million square feet a quarter of incremental leasing in the portfolio. So we don't have -- it's not a heavy lift for us to get the space leased. The challenge is we're not sure what the timing is going to be. We don't -- you know we're going to sign a lease for 195,000 square feet with another tenant at Dock 72 and unlikely they're going to be in, in '22, but they could be. But we're assuming or not, right? So that's the sort of the, I'd say, the art behind our range of occupancy.
Our next response is from Emmanuel Court with Citi.
Doug, I think you mentioned the net effective levels in New York versus pre-COVID of about 10% to 15%, if I caught that correctly. Do you have similar metrics for the rest of your markets?
I would tell you that, I guess, I tried to imply this. Rents and concessions haven't changed in San francisco. They haven't changed in Boston. I mean, as we've talked about, they've actually gotten better in suburban Boston and in Cambridge because we've been doing more life science as opposed to office. So I'd say that they're up to flat. And then in Washington D.C., they're actually slightly down and rested because there's a slight amount of concession increase but rents are pretty consistent with where they were. And honestly, I don't think they've really changed in Washington D.C. because Washington D.C. market was very challenged pre-pandemic and those conditions just remain today.
And then if we look at your leasing pipeline, how much of your pipeline is new to market tenants versus moves or trade trade-ups maybe from other buildings in the market, if you could classify it that way?
I don't know how you define a new-to-market tenant, because there are very few companies that are now relocating to any of these places from others. So I'd say, in general, we're moving up our quality and/or we're expanding in the market relative to the amount of space we have, or we're consolidating into a better building from where we were before it. That's where the bulk of the demand is coming from other than obviously, life science. Those are new formations the companies are located here. But I mean, the least we're negotiating right now, for example, at 880 is a company that did their IPO. They're moving from 80,000 square feet or [60,000] square feet currently and they're adding another 120,000 square feet, that's sort of dramatic growth that's occurring.
I guess maybe to ask the question different way. If we look at the market vacancies, so if we listen to any of the broker calls or read any of the reports, when we look at the market vacancies. How much should we expect those market vacancies to change versus you sort of getting a bigger share of the pie and your occupancy can move up but market vacancies might be sticky at the levels they're at?
It's a hard question to answer. Part of it is going to have to do with how much of the sublet space gets absorbed. So as the sublet space gets absorbed that will improve the overall market statistic. So for example, if you look at Manhattan, I want to say there's probably been 4 million to 5 million square feet of space that's been taken off the sublet market over the last couple of quarters, that's improving the statistics but you're still talking about a very high level. I would say that we will outperform the market relative to where we are. I can't tell you whether our percentage change will be higher or lower than the market, because we just don't have enough clarity on how much of the sublet space, which is the bulk of where the existing availability came from in San Francisco and in New York City, which is obviously those are the two weakest markets from a statistical perspective, how much of that is going to melt.
Your next response is from Nick Yulico with Scotia Bank.
I was hoping to just get a feel for what the leasing spreads were on signed leases in the quarter? I know you quote those on commenced leases.
So I tried to give you that where I could. I mean I told you that, again, when we have vacant space that's been vacant for less than 12 -- more than 12 months, we don't quote what the spread is. But I said in San Francisco, the spread was about 20%. In New York City of the larger deals we did, I said some of it was up 8% and some of it was down 4%. So I guess what I was trying to convey was that it's sort of flattish in New York City right now with the portfolio of spaces that we did this quarter. In the greater Boston market virtually everything is up. And then again, if you look at our D.C. market, the deals that we're doing in Reston are modestly up or down on the rent level because of the question of how much growth there was in the rent over the last period of time that the existing tenant was in there. So if we had a deal that was done 10 years ago and we had 3% increases every year, there was probably a modest amount of negative rental rate growth. If the tenant was a shorter term deal, it's probably positive because there's been a pickup in terms of, I guess, the strength of the market over the last 12 to 18 months.
And Nick, these rents are all cash to cash. So GAAP to GAAP, It's much higher.
Just second question is on San Francisco, and hear a little bit more about your thoughts about the potential for that city to recover. Obviously, it's much different dynamic. You talked about mass mandates, it's also a city that's kind of split between a financial district being more empty than the residential areas of the city. You have tech companies that aren't pushing employees back to work in the way that banks are in New York. So I guess just a thought on kind of how the recovery potential of that market, if there's also maybe a return of some larger potential tenants looking for space in that market? And then the second part is, your willingness to invest further in the city since there is talk about one of the larger development sites in the city potentially coming up as an opportunity?
COVID has had the biggest impact on San Francisco of all the markets where we operate. And I think a lot of that has been the technology tenants in some ways, leading the way on work from home and second, the very restrictive COVID mandates that have been put in place. And the lifting of those mandates has lagged all of our other cities and that's undoubtedly had an impact on the census data that I mentioned earlier. That all being said, San Francisco remains arguably the technology capital of the world. It's got the largest cluster of computer science workers certainly in the United States. And we believe in the long term recovery of the San Francisco market, but I do think it will lag our other markets. We will continue to invest in the area. Doug talked about the potential for us to restart our Platform 16 development. We haven't made that decision yet but that's something that we'll be talking more about in future quarters. We also have a very attractive development site at 4th and Harrison that we will be looking at certainly in '22 and '23. And we are open for business and we'll consider other investments if they make sense for shareholders.
Your next response is from John Kim with BMO Capital Markets.
The concerns with the supply chain, do you think this will delay or taper development projects, either for you or your competitors, just given market rents are not really moving up in lockstep with the additional cost?
So I guess what you're getting at is how is inflation going to impact the overall development model going forward. If there is significant inflation then the rents that are necessary to justify new construction, assuming interest rates are also going up are going to need to rise, and there's no question that speculative development will be more challenging. But there are still lots of customers in this country who want new construction and want the best and brightest of the way buildings are built, potentially being very green carbon neutral, net zero, whatever you want to describe it as, it's harder to do that with an older building. And so I think the question will be, what will the character of the leasing be and where will it occur. But I don't think it's going to necessarily stop new construction. I do think that speculative office development is a very, I'd say, challenging proposition today in most markets because of the amount of supply that exists.
But remember that when you're starting a new building, you're talking about delivering somewhere between 36 and 48 months later if it's a high rise. And then even if it's a low rise building, it's a minimum of 24 months. So people's views on what the world will look like when we get to those periods of time, will it be influential. And I mean, as Owen just suggested, we're looking at the Silicon Valley and we're looking at Platform 16, and we're saying to ourselves that's a really interesting market relative to the amount of demand that currently exists today. The lack of high quality first class Class A office product, the potential location of the building that we would be building relative to transportation. And so we're pretty optimistic in certain instances but clearly, it's not what it would have been three years ago.
And Doug, you mentioned the impact that the short term leases had on your leasing spreads this quarter. How much of a drag will that be in future quarters?
I think there's very little remaining. I mean, it was kind of a tsunami of these deals, all starting in this quarter of 2021. I mean just to sort of give you a little bit of the sausage making. We're sitting out in late 2020 and we have leases expiring in '21 and the tenants aren't using their spaces. And they're coming to us and saying, well, we're not sure what we're going to do. We might just give the space back. But if you cut us a deal in a short term, we'll hold the space and we'll continue to look at it and we'll think about what we're going to do in the future, it's a negotiation. And our view was very sort of selfishly rather have half a dollar than a whole dollar versus no dollar. And again, we're starting to see the success of that strategy, which is the tenants that did those short term commitments are going to likely be renewing on a long-term basis, and we'll get a dramatic uptick. And I guess, when you see in New York City in a couple of quarters, big increases because we went from $60 net gross number to $100 gross number, it's not because the market has gotten better it's because we're moving away from what we did in the last couple of quarters.
Your next response is from Alexander Goldfarb with Piper Sandler.
So two questions. First, OT, as you talk -- or Doug, as you guys talk to different CEOs and office managers, what are they telling you as far as the decision of some, not all, but to keep punting on the return to office? I mean, in fact, we even heard of one company that suspended indefinitely return to office. Is it a fear that these companies have that their employees will just go elsewhere because it's such a tight labor market? Is it that commutes are still really bad and people just don't feel like schlep in, whether it's New York or San Francisco where I know you guys are in Chicago, but Chicago is another sort of hard hit CBD. What is the reason that you're hearing that these companies keep delaying? Because obviously, as you point out, restaurants are full, planes are full, leisure hotels are full. So it's clearly not a fear of COVID that's keeping people at home.
I think pretty much universally, the CEOs and business leaders we talk to, if they're not back in the office, they want to figure out a way to get back in the office for all the reasons I articulated in my opening remarks. So we think that's going on. The delay that we experienced this fall, I do think was driven by health security. The infection levels from the delta variant elevated, cities put on mask mandates and things, it's not pleasant to be in an office building wearing a mask. So that's a very real thing even if you're not concerned about COVID. But that being said, as I mentioned, the infection levels are down. And I do think the tight labor market is factoring into CEO's decisions and the desire by some, certainly not all, employees to continue to work remotely that has caused some delays. But as I articulated, I think over time, I can't predict what the virus is going to do. But I do think over time, you're going to see more and more companies bringing their employees back to the office because those leaders are concerned about the future competitiveness and cohesion of their companies.
I would also say, Alex, that there's something else going on, which is you get a lot of public positive reaction when you say, hey, we're thinking of remaining hybrid or we're thinking of delaying our return. You don't get that same hurrah when you say everyone must be back by January 3rd. And what we're seeing, I mean, we had two conversations yesterday, one with a tech company, one with a professional services company, and they both told us they've already sent out announcements to their folks that, hey, in one case, they want everybody to start coming back to the office on a hybrid model in November. And the other one is, hey, you better be near your office because we expect it to be back in January. Those companies are companies that have also, we know publicly have said, we're not sure when we're coming back and we've delayed things, and they're not publicly stating what I just described. So I think there's more going on right now relative to companies starting to put pressure on their existing employee base that it's time to start to think real hard about moving yourself into the right location so that you can be in the office on a much more consistent basis going forward.
I just thought, I mean if you have companies paying people, the one paying gets to drive the bus. So it's funny that right now, it's like the passengers driving instead of the bus driver, but…
I think the other demonstration of proof of concept is look at all the leasing that's going on in our own company and in the market. If companies weren't committed to the office, why would they be leasing all the space?
The next question is, as far as life science goes, you entered D.C. -- I mean, you entered Maryland. On life science, you hadn't been there before. I was just reading an article this week or last week that people are contemplating in the Navy Yards trying to do life science. As you guys look around your portfolio, whether it's now like south Lake Union in Seattle, maybe the Navy Yards in Brooklyn is a spot, maybe, maybe not, or maybe San Diego would be a good life science market to enter. How many areas do you see the potential to expand your life science development program to? And do you think it would lead you to new markets driven by life science or most of the life science development that you're looking at is really in your existing markets plus Seattle?
First thing I would say is almost half of the lab space in the country is in Boston and in the San Francisco area where we're already very active. And if you look at the best opportunity we have as a company is to build what we have. I mean we have 5 million square feet, plus or minus, of land for development and multiple millions of square feet of redevelopments. And we control all that real estate at pre-COVID, pre-life science pricing. So I think that's our best opportunity. But that being said, just as we did in Montgomery County, we're open for business for making new acquisitions and we're certainly going to focus in the markets where we're active first.
Your next response is from Ronald Camden with Morgan Stanley.
A couple of quick ones for me. Just first is just a lot of transparency sort of the 2022 outlook and the same store cash NOI guidance. I was just wondering, I think you touched on some of the drivers for same store cash NOI. But is there a way to quantify sort of the contribution from whether it's retail or for the hotel versus sort of the core office, that would be helpful.
So look, I think we're going to get some nice benefit from parking coming back. If you look at quarter-over-quarter over quarter, it's continuing to improve. So I think that's a big one. I also think we're going to get some nice benefit from some of the residential properties that we have, where pricing is improving and we've got some lease-up opportunity there. The hotel is a little bit harder to gauge, honestly, because it's just tougher to project. So I would say we're not necessarily expecting -- I think it will improve but we're not expecting a huge impact there. And then the portfolio is the rest and it's going to be a little bit more moderate. And again, I think it's related to what we see as kind of a gradual improvement in our occupancy with the hotel, which we think is going to accelerate into 2023 as some of these leases that we're talking about are going into occupancy and actually generating revenue.
And then sort of the second question was just maybe asking a compare contrast between New York and San Francisco a different way. Certainly heard that clearly, San Francisco is behind New York. But is the expectation still that at some point they're going to be on the same recovery trajectory, or is there anything that you're hearing or seeing that’s may be different between those markets that that could solve that? So when you think about Europe versus San Francisco, are there any sort of unique factors in San Francisco for the lag basically?
You're asking honestly, a social question more than an office question in my opinion, because the reason that San Francisco and quite frankly, the State of California is behind is because of the decisions that have been made by the health departments and the political leadership. And we unfortunately don't control those decisions. When San Francisco starts to have a significant return to the office wave, I think it will pick up rapidly and that we will start to see a significant recovery. Remember that pre-pandemic, Manhattan and New York had a supply problem and San Francisco did not have a supply problem. So the opportunity from for San Francisco is how much of that labor will want to come back and how quickly will those companies that have grown dramatically in terms of their own headcounts during the pandemic want to bring those people into close proximity with each other on a day-to-day basis.
And there's an opportunity for San Francisco to accelerate and to quickly return, it's got a challenge from a political perspective right now and it's got a challenge from a statistical perspective because there's a lot more available space on a percentage basis than there was and has ever been from a sublet perspective. Manhattan is still way below where it once was, call it, 2002, 2003 from a sublet as a percentage of the market. San Francisco is way above where it's been historically. And again, a lot of that space could be reoccupied by the companies that chose to kind of cope up on the sublet market. And so I think that's what ultimately is going to be the thing that changes the trajectory of San Francisco in terms of its rate of recovery pace.
Doug, as evidence of what you mentioned on social, for Boston -- this is Bryan Koop. Pre-Labor Day, we were ticking up every week in terms of occupancy. And then the City of Boston that the state came out with a stricter mandate on masking, et cetera, and that changed the return for like five to six of our major firms, and it ticked back down. We're starting to see that come back up again. And in fact, one of our buildings, 888 hit, I believe, close to 70% occupancy last week. So it's evidence of the social part in the city saying what's going on for that particular market.
Your next response is from Blaine Heck with Wells Fargo.
Owen or Doug, as I think you guys mentioned a few times in your remarks, it seems like we're still seeing the majority of leasing activity, and even investment sales activity is concentrated in high quality assets that are either recently developed or have recently undergone major renovations. So I guess to take the opposite side of an earlier question, do you think there's a risk in any of your specific markets that these trends spur additional new development as office landlords kind of position themselves to benefit from the flight to quality that we're seeing but ultimately, maybe they end up hurting the market as a whole by adding new space?
I'm not sure that's a risk we're concerned about at this time. I mean the -- I agree with what you said about the interest by both investors. I would say, by the way, the interest by investors is in assets that are of high quality or have the potential to be high quality, and on the interest by tenants in higher quality buildings. But the markets, even though they're recovering the level of availability, including sublease space is quite high and that will be a headwind. And as Doug described, construction costs are going up because of supply chain issues, which makes development more difficult. So it's an interesting question but I'm not sure that's a major risk that faces us at this time.
And then maybe one for Mike. You guys have been running at high operating margins relative to prepandemic levels. So I wanted to get your sense for how sustainable those margins are going forward and how sticky any of the expense savings that you guys achieved during the pandemic might be as utilization and physical occupancy increases within your portfolio?
I mean, I think our margins should be continuing to run between 63.5% and 64.5%. As Doug described, the increases that we may see in some of our operating expenses, the vast majority of that stuff gets passed through to our tenants. So we don't expect to see an impact, significant impact from those items. And if you look over time, we've gone through inflationary and deflationary times over long periods of time and our operating margins have been within a band. So I would not expect that we would suddenly have a 200 basis point change or something like that in those margins, that's just not what we see happening.
Your next response is from Caitlin Burrows with Goldman Sachs.
This is Julien on for Caitlin. There's been a lot of talk, obviously, and this is following up on some of the questions about shifting to tenant demand towards newer high quality well amenitized product. And obviously, that shift will benefit some of your assets, both your recent builds and redeveloped assets. But is the elevated vacancy at the tail end of your portfolio, call it that older vintage, non-lease certified office product making you reconsider the strategic fit of some of these assets? I'm thinking of vacancies at Carnegie Center, Gateway Commons, Bay Colony Corporate Center, Colorado Center, et cetera. And then second part of that question would be, does it make economic sense to make capital intensive redevelopments in some cases? Sounds like you have plans at Gateway, not sure if Bay Colony would be eligible for conversion to lab space. But more broadly, maybe to try to elevate some of these assets to lead gold platinum certifications?
So I'm not trying to be cheeky here, but you and Caitlin should spend some time actually coming out and seeing our portfolio, because I think a lot of these questions would be answered. We've been talking about all of the renovations that we've been doing up at Bay Colony as an example. And I mentioned a few minutes ago that we've done 100,000 square feet of new leases with life science companies, and we're actively looking at converting some of those buildings to full life science buildings. Carnegie Center is probably the most amenitized project in Central New Jersey and we have a tremendous amount of investment that's been made and it's been very receptive. So I think that the -- and by the way, we are probably at the forefront of lead, not just silver but platinum, new lead standards, energy efficiency, indoor air quality. I mean we are doing those things as a road task today everywhere in our portfolio.
So I would tell you that the portfolio doesn't have any of those issues that you might describe as challenges. And honestly, we have as much vacancy in a Class A office building today as we've had in other challenging time periods. And again, we are committed to picking up our occupancy rate and we are doing that as I described in my comments relative to the amount of leasing that we're doing today. So we feel really good about the whole portfolio. Now there are some markets that are less hearty as than others relative to the amount of leasing demand and San Francisco is obviously one of them. But as an example, you mentioned Gateway. We're taking 651 Gateway out of service to convert it to life science. It's why it's got a 90, square foot lease and 300,000 square foot building. We're trying to clear it out. So we are actively doing those things. But I would really encourage you guys to actually spend some time with our teams and get a feel for the portfolio.
And the only thing I would add to what Doug said is, we have 53 million plus or minus square foot portfolio. We sell to the $500 million of assets per year. So we are in constantly refreshing our portfolio, not only in the things that Doug described in terms of amenitization but also selling assets where we think we can get a a good price that may not have some of the characteristics he described.
Your next response is from Anthony Powell with Barclays.
Just a question on census. Where do you think that number goes to on a stabilized basis given we've seen more companies even that are backing office, say that employees can work from home on Fridays? And can census and I guess the leasing demand decouple in the future as tenants still want space but allow their employees a bit more flexibility?
I think the census -- the denominator of the census was the physical occupancy of the buildings the month before the pandemic started. So I think as we've been saying over and over again, we think our clients are going to return to the office but we also think hybrid work is going to be a bigger factor for many employers. And what we're also seeing for our clients that have returned to the office, most of them have a hybrid work option but they're saying to their employees, we got to have everybody in the office on certain days of the week. So the answer to your question is, I think our census should go back up to 100%, but it may not be every day of the week. It may only be in the middle of the week, Mondays and Fridays would probably be a little slower.
And just the only other thing I'd add is that over time, there maybe more spatial considerations given by our tenants, so they may actually have fewer people in their spaces, not because they're any less occupied but because they were so tight together and so densely packed and that given the issues associated with the pandemic and health security, and indoor air quality, and having people just feel comfortable in their spaces, they may actually have to either increase their space in order to maintain their same occupancy or they will have fewer badges at any one time because there just aren't going to be as many seats as they want to add.
And maybe on Dock 72, seem like there's some momentum there. Can you talk about just conversations you've had with more tenants at Dock 72 and just the feeling around the building?
John Powers, do you want to take that?
Well, as Doug said, we did a deal. We're very happy with that transaction and we have a lease out for 192,000 feet. We have some action on the prebuilds and we've had more people coming to the Navy yard and seeing it, which is really what we need, because it's a fantastic building.
Your next response is from Peter Abramowitz with Jefferies.
Just sort of a high level strategy question here. Sort of as you're evaluating new markets, how do you think about Miami as a potential next market? Seems like a place that would kind of fit with your strategy of being coastal markets, maybe not as high barrier to entry as New York and California but certainly a more kind of business friendly environment and addition of demographic shifts that are kind of benefiting it as a result of the pandemic. So any thoughts of how you look at a market like that or any potential other markets where you might enter?
We are very focused on the six coastal large gateway markets where we currently operate. We believe those markets have the largest clusters of knowledge workers that are important to the growth businesses that we serve, particularly in the technology and the life science sectors. We also see stronger barriers to new entry in those six markets, and that's where we're focused. And within that, we are building a life science business as well as an office business in many of those markets, and that's going to be our focus for the foreseeable future.
Your next response is from Daniel Ismail with Green Street.
Doug, you touched on this earlier about how vacancy might change relative to markets. But is it your sense that leasing volume will reach pre-COVID levels in '22, or is that a '23 event?
I'll try and articulate what I've said in the past, which is that for the large tenants, what I would refer to as the tech titans and those tenants haven't left the market and they're going to continue to do what they were doing. And those are the kind of companies that Owens was describing they're looking for space down in Silicon Valley, and have made major expansions in the urban areas of all our markets. And then on the small side, tenants that are less than a [four], they are back doing exactly what they were otherwise doing. And so there is plenty of volume in that sector. I think the challenge is the companies that are thinking about what it is that hybrid means and how hybrid will work for them. And those companies will need to get their people back into a consistent in-person environment or understand what their employees want to do and what they want them to do. And that's going to take some time. And so I believe that 2022 will be a lighter year relative to absorption than pre-pandemic. And then in 2023 when the experiments have all run their courses and companies understand what their expectations are for human capital and physical capital that's when we will see, I believe, and I think Owen articulates as well the reasons why we'll see a very strong pickup in absorption and demand, gross demand.
And then maybe just last one, a bigger picture question. We've discussed high quality and ground up and renovated office buildings seeing strong pricing recently. But is it your sense there is any pricing differential between ground up construction and a fully renovated office building? And is there any difference in tenant demand between those two categories?
Are you talking about sales values or rental rates?
Sales value and then tenant demand as well. I guess they go hand-in-hand.
I mean, I think it's a little bit dependent on the market that you're in. I mean let's take New York, for example. There's been strong technology demand on the West side and Midtown South, and a lot of the stock there ground up development, it has happened, but it's not as available. So there have been some very successful and interesting renovations of existing stock. I would say some of the best buildings in Midtown South are actually older buildings that have been renovated and we intend to make 360 Park Avenue South one of them. So I think it's very dependent on the local market, I think a very high quality older building that's been fully renovated in Midtown South is going to get equivalent pricing to something that's new.
And on the demand side, Danny, the only thing that you can't fix or change on a renovation is the structure. So everything else can basically go. You can literally rip off the facade and put a brand new energy efficient window system in, you can dramatically change the mechanical. You can even create new shafts for a larger duct work and change the mechanical equipment in the buildings. So if the building has a really challenged structural system, meaning lots and lots columns or a very low slab to slab, I think those are the impediments to a renovated building relative to new construction where you're going to see many fewer columns and you're going to see much larger volumes of space. But other than those two characteristics, a fabulous renovation of a building is going to get the same, I think, level of interest as a new construction building.
And then one more, if I may. You mentioned 360 Park Avenue. I believe you issued a few OP units to do that deal. Just the risk of higher pass throughs seems to be increasing. Is utilizing that structure increasing more in your discussions when you're out looking for new acquisitions?
It is a very valuable structure that we can offer and it gives us, as a public company, a competitive advantage to be able to exchange OP units for a tax sensitive seller. And it's been a long time since the last OP unit deal. But I would say today that we are having dialogs with other owners of real estate about a similar structure.
I think it's very case specific, though. I would say, yes, the dialogues are higher, but I also wouldn't suggest the tidal wave of this activity either.
Your next response is from Brent Dilts with UBS.
Just could you talk about how demand for your Flex product has evolved this year, and where you see co-working demand going from here as physical occupancy improves?
Bryan, do you want to talk about Flex by BXP?
Our Flex from BXP in Boston got four locations and it’s great stability throughout COVID. And we're starting to see some pickup in activity, but not really of the kind of that we'd be really proud to be saying has taken place pre-COVID. But we definitely have interest in it and we've got inquiries on it coming up. And mainly from corporate users versus entrepreneurs seems to be the theme, where it's a corporate use saying we're going to have a special project, what do you have in 2022 that we can take immediately.
And I think in terms of the broader market, I would continue to reiterate what we've said in the past is we think flexible office space will be an important part of the office business going forward. We've seen in our own portfolio its value to small companies that just want space and they want it now and they want flexibility. And I also think larger corporates will see value in procuring a small percentage of their space on a flexible basis given their business often changes more rapidly than space can be delivered to them. But I think the first thing that has to happen in the market is roughly 2% to 3% of US office space today is flexible. It needs to refill. I mean that's the first thing that needs to happen. And then the question will be, if it's going to grow, how is it going to get financed. I'm not sure that operators are going to be financing additional growth of flexible office space. I think it's going to be the landlords and where, and when, and how much will they elect to do going forward. And I think we'll see -- I don't think those decisions will need to be answered for the next year or so.
And then just one other one here. I heard your comments on physical occupancy, maybe not being the same as card counts and stuff in the future. So as companies have been returning employees to the office in bigger numbers, has there been any increase in those tenants making changes to floor plans or amenities? And just related to that, are there any new tenants in the portfolio requesting anything in terms of build out that's been different versus pre-COVID?
So I am surprised that I'm going to say what I'm saying, which is we've seen virtually no existing tenants do anything that requires a building permit. That doesn't mean that they aren't moving furniture around or they're not eliminating workstations or they're converting small chat rooms into offices, we don't know if that's going on or not. But to date, the the energy has been on simply getting people to get comfortable coming back into their office environment not changing the physical infrastructure. And again, even the companies are saying, hey, we want you back, it's going to take some time for those companies to get all of their employees to come back on a consistent basis. And I think it's at that point that they will have a better understanding of their space needs to be organized to effectively fit the way they want their people to be working when they are in person.
Your next question is from Jamie Feldman with Bank of America.
I just want to go back to your last answer on Flex office. Now that we've seen WeWork as a public company, they are one of your largest tenants. I mean do you think they're going to grow in the portfolio going forward? Just how do you think your BXP and WeWork will function together going forward?
Well, we have a great relationship with them. We're delighted that they were able to go public. And we have, I believe, five different stores with them right now and we're going to have to see how their success evolves and the whole Flex market evolves. As I mentioned a minute ago, the flexible space is less occupied and there needs to be some recovery of that market before we could consider additional growth. So we will consider in the future but I think that's at least a year off.
Are there characteristics of the flex office leases that you're seeing more tenants request in terms of duration or breaks, or anything like that?
So Jamie, the reason that we did our own flex space was because we have enough volume of space in our portfolio where we wanted to be able to satisfy those customers who basically said. We don't want to think about anything other than can we be in the space tomorrow and we don't have to buy furniture, we don't have to buy technology services, we don't have to do anything other than bring our people in and go. And so that was the nature of the experiment that we have doing been with our spaces. I would tell you that we continue to see requests from small companies for, hey, what do you have for me, I'm looking for some short-term space. And that's exactly what our Flex product should be about.
What we are not doing and don't have any intention of doing is taking large pieces of our space and converting it to Flex space and competing with WeWork or any of the other flexible space operators for corporate users who are looking for large blocks of space, because that's just part of their strategy. That's not what we're going to be doing. Relative to where our buildings are and the amenitization we have, I think that's the attraction of why the companies that are in our spaces have gone there is because you can go to the Prudential Center, or you can go to the Hub on Causeway, or you can go to 100 Federal Street and get the advantage of all the amenitization and the great place and space making that we have done and do it on a short term basis, if that's what your business strategy calls for.
I mean I think the decision to grow from our seat is really two things. One is what Doug is describing, which is, is this something we should just have to attract more customers, particularly where we have a high concentration of office space like at the Pru or at Reston or Embarcadero Center? If you're building an apartment building, you don't just build single bedrooms. You have studios and two bedrooms. So this is a different product. And is it valuable to have that product at one of our facilities? And also, by the way, does it create tenants that might move, become successful and bigger and then like being at the Pru, for example, and become a longer term customer? So that's one question. Then the second question is what's the math? And that's a big question, because you have to do turnkey build-out, cost hundreds of dollars a square foot. You face vacancy, because you don't have long term leases and you have to understand what the math looks like.
Yes, 100% of what Doug said on our corporate users is evidenced at the Hub. So we've got a full floor in the last space that is flex space. And 100% of our clients in there are users in the buildings and they tend to be special project related for six to one year in term. And as a great example is we have a e-gaming division in one of the units that's a subsidiary of one of our clients up above. So the Hub is a great example. It's 100% of our clientele in that one. In other locations, it's probably 50% to 60% but it tends to be longer in term, not month-to-month. And then again, our Flex product is totally different than co-working. We're not doing co-working. These are spaces that are prebuilt and we have no social aspects to the needs of our clients, they do that.
And then I guess just some housekeeping questions for Mike on the guidance. What are you assuming for leasing spreads? And then can you talk about CapEx next year and maybe to help us get to like an AFFO number?
So I mean, look, leasing spreads, it's not going to change that dramatically. Boston and San Francisco, spreads are going to be up in our view. And the deals that Doug talked about that we're doing in San Francisco this quarter and the things that we have under discussion are going to be rolled up. Same thing with Boston and Cambridge and the suburbs. I think Reston will be closer to flat, maybe slightly up on the leasing that we do. And New York City is going to be a little bit more volatile, because it really depends on the space. We have certain spaces that are going to be rolled out in certain spaces that are going to be rolled up. So I think you will see more volatility in New York City there.
With respect to kind of AFFO, if you look at '21 and we've got three quarters in the books, I mean, I think our AFFO is getting pretty close to where it was in 2019, honestly. We have a shot of getting to, I think it was $4.43 a share in 2019. So I think we have a shot of getting there. We maybe slightly below. And looking out at 2022, I would say, on the CapEx side, probably pretty similar to what we're seeing this year, which is $100 million, maybe $120 million max in kind of CapEx. Leasing costs, they're running somewhere in the mid-200s on an annual basis, which is not that significantly different than what they've been in '21 and prior years. And then we've got a lot of, obviously, free rent burning off. Our noncash rent is going to be slightly lower than we guided for 2020 one, and we gave that guidance is $90 million to $110 million of noncash rent, but there's a lot of free rent burning off. And then you have other noncash items that go the other way like stock comp and fair value ground lease rent and things like that, that's about $75 million the other way.
So the way I kind of look at it is, if you want to add up all those adjustments, there's probably $370 million to $400 million of adjustments off of our FFO. So that's $2.25 a share. So that will drive you to 2022 to an AFFO that's around $5, which is up significantly from where we'll be in '21, but also from where it was in 2019 pre-COVID , because of all the cash NOI growth we've had and developments that have come in and are increasing our cash NOI. So I think it's a very positive story.
And then how do you think about just dividend coverage and growth?
Well, I mean, I think as our cash NOI goes up, you're going to see our dividend coverage improve. Obviously, it's been pretty tight for the first quarter and second quarter. Our FAD ratio has been in the high 90s. It went way down this quarter. It was like 72% because as kind of Doug talked about, our transaction costs were lower this quarter, which helped us. And as our FFO grows and our cash NOI grows, it's going to improve and improve. At this point, we haven't made any decisions about a dividend policy or strategy going forward but it's certainly something we'll be discussing with the Board on a quarterly basis as this cash NOI comes in.
There are no further questions in the queue at this time.
Okay. Operator, thank you. That concludes management's remarks and thank all of you for your interest in Boston Properties. Have a good day.
This concludes today's conference call. Thank you for participating. You may now disconnect.