Good day. And thank you for standing by. Welcome to BXP's Q 4 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference call is being recorded. I would now like to hand the conference call over to your first speaker, Helen Han, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to BXP's fourth quarter 2024 earnings conference call. The press release and supplemental package were distributed last night, and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time-to-time in BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchie, Senior Executive Vice President, and our regional management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to only one question. If you have an additional clarity or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Helen. Good morning and happy Lunar New Year to all of you. Our results in the fourth quarter demonstrated strong performance given our execution and the property and capital market recovery that is underway. Our FFO per share was in line with our forecast and market consensus for the fourth quarter. We completed over 2.3 million square feet of leasing in the quarter, which was the most quarterly leasing we have experienced since the second quarter of 2019. It was 130% of our long-term average leasing for the fourth quarter and our fifth largest quarter of leasing ever. Over the last few months, we have made several significant leasing announcements with important clients such as Bain Capital, Ropes & Gray, McDermott Will & Emery, and KnitWell. We leased over 5.6 million square feet for all of 2024, which was 35% greater than 2023, and the average term for over 291 leases completed in 2024 was just under 10 years. Though the fourth quarter is usually our most productive leasing quarter due to year end seasonality effects, momentum is clearly building in the market and our leasing results. As I discussed at some length last quarter, the most important market forces impacting BXP, corporate earnings growth, return to office behavior and outperformance of premier workplaces continues to work in our favor, serving as a tailwind for BXP's performance. The one critical factor with a more uncertain trajectory is interest rates. Inflation measured at CPI has risen the last three months to 2.9%, stubbornly above the Fed's 2% target and the December employment release indicated new job creation was well in excess of market expectations. As a result, the Fed has become more cautious lowering its forecast of Fed's fund rate cuts in 2025. And in the fixed income markets,…

Thanks Owen. Good morning, everybody. So as Owen said BXP's regional leasing teams had an outstanding fourth quarter and we greatly exceeded our 2024 baseline leasing expectation of three 3.5 million square feet. We did a significant amount of future year expiration leasing during the fourth quarter which followed a pattern that we set over the last 12 months. This has had the effect of dramatically reducing our 2026 and 2027 expirations. During the last 15 months, our 2026 expirations were cut by more than 1.5 million square feet. So as of 12/31/24, 2026 expirations sit at 1.86 million square feet, 3.8% of our portfolio and 2027 sits at 2.2 million square feet, 4.4% of the portfolio and the largest expiration we have in 2026 is 134,000 square feet and the largest expiration we have in 2027 is 143,000 square feet. We are today in renewal or replacement client discussions on more than 500,000 square feet of the 2026 expiration. ‘26 and ‘27 will be exceptionally low rollover years for BXP. Why am I emphasizing this? Because if we continue to lease two to three million square feet of vacancy and expiring space in ‘26 and ‘27, there will be a material improvement in our occupancy. 490,000 square feet is 100 basis points. Mike thought I should just stop right there today, but I'm going to keep going. Our in-service properties finished the year at 87.5% occupancy. A 50 basis point increase from last quarter and slightly ahead of the estimate we provided on our last call. Remember, our occupancy reflects the square footage of space where we are recognizing GAAP revenue. Our leased square footage includes the addition of any spaces that have been leased but have yet to commence GAAP revenue. At the end of the fourth quarter,…

Excellent. Thanks Doug. Good morning, everybody. So this morning I plan to cover the details of our fourth quarter and full year ‘24 performance. And I'm going to spend most of my time describing our ‘25 initial earnings guidance that was included in our press release with additional details in our supplemental financial package. For 2024, we reported total consolidated revenues of $3.4 billion and full year FFO of $1.25 billion or $7.10 per share. We continue to grow our portfolio and saw revenue increase by 4% in 2024, primarily from bringing new developments into service. Our fourth quarter FFO of $1.79 per share was in line with the midpoint of the guidance we provided last quarter, and our portfolio performed consistent with our expectations. As Doug mentioned, our occupancy climbed this quarter by 50 basis points to 87.5%. Our Premier Workplace CBD buildings that contribute nearly 90% of the company's revenues continue to outperform and are 90.9% occupied and 92.8% leased. Our CBD occupancy improved by 80 basis points in the fourth quarter with positive absorption in Boston, New York City, and Seattle. We also recorded 2024 full year AFFO, which we refer to as FAD in our supplemental, of $894 million, which exceeds our dividend payout by over $200 million. While not impacting our FFO, we recorded non-cash impairment charges totaling $341 million this quarter related to three of our unconsolidated joint ventures. The charges all relate to assets located on the West Coast and include our interest in Colorado Center, Gateway Commons, and Safeco Plaza. With that, I will turn to our 2025 guidance. On a high level, our 2025 guidance can be summarized as follows. Growth from a full year of contribution of development deliveries, higher fee income, and relatively flat 2025 same property portfolio of…

[Operator Instructions] I share our first question. It comes from the line of Steve Sakwa from Evercore ISI.

Yes, thanks. Good morning. Doug, you provided a litany of information. I'm not sure that I was able to transcribe it all 100% accurately, but high level, when you sort of look at the rollover this year, just help me think through kind of your retention ratio and given to no move out. So like what you expect to retain of the expiring spaces here and then I guess what is your broad expectations for I’ll call new leasing activity on vacant space.

Okay. I'm going to answer your question circuitously. In a year when we have very large lease expirations, so we have a 350,000 or 400,000 square foot lease expiring, highly unlikely that we've retained that organization. When we have a year when we have the multitude of our leases expiring that are between 40,000 square feet and 5,000 square feet, we're probably retaining a very high percentage of those tenants. So as I look forward into what we have remaining in 2024 that are ‘25 that are known expirations, all of the large ones we've already sort of quote unquote acknowledge are going to be known vacancies. And we are now leasing that space to other customers. So the obvious example that we're going to talk about on the call was 200 Fifth Avenue, we have a 350,000 square foot lease expiring, and we were in negotiation on a 240,000 square foot replacement tenant on that, right? So that's, I think that's sort of the way that works. In a quote unquote non-large lease expiration year, generally we are quote unquote renewing somewhere between 45% and 50% of our existing tenants. Some of those are actually growing so we may actually be picking up additional square footage there, but that's sort of what our quote unquote known retention rate is. If you look at 2025, what we are looking at this year is that we will cover somewhere in the neighborhood of three plus or minus million square feet of vacancy and known leasing expirations of tenants that are expiring plus the renewals of the smaller tenants that are sort of moving forward through the normal process. So we have a whole host of those. So as I describe sort of what we're currently working on today, in the year we're covering some vacant space. We have leases on known expirations and then I said we have about 75,000 square feet of leases in progress on just sort of normal as ordinary sort of ordinary course of business expirations that are occurring on a day-to-day basis in the portfolio. So as I look into ‘26 and ‘27, those numbers are exceedingly low and the bulkiness is also low, right. If I start with 1.8 million square feet today, which is the number in the supplemental on a 100% basis and I have 500,000 square feet that I'm actively working on that I expect to get done in 2025, that means when we get to this point in 2026, my known expirations for ‘26 are going to be under 1.3 million square feet. If I lease on a sort of average year somewhere in the neighborhood of 2 to 3 million square feet of vacant and renewals, I'm picking up occupancy in a meaningful way and that pattern will also move forward into 2027. That was my point of my sort of initial remarks.

And I show our next question comes from the line of Andrew Berger from Bank of America.

Hey, good morning. This is Andrew. I'm for Jeff. I appreciate all the detail. So Doug, you mentioned that Back Bay Boston and Midtown Manhattan are the strongest markets and obviously it sounds like there's a lot of great activity that's reflected by the volumes. You also mentioned though that concessions are flat and I'm just curious with all this activity, what does it take to really become more aggressive and start to reduce concessions?

So I'm going to give you a quick answer and then I'll ask Hilary and I'll ask Bryan to comment on it. So my quick answer is inflation is real in terms of what happened over the last five years. So the cost of building anything probably went up somewhere between 45% and 55%. So just assume 50%. So the cost for a one of our clients to move into new space or rebuild their space is materially higher. So the contribution that we are giving them on sort of a real basis is it makes up a smaller portion of what they actually have to spend. But Hilary and Bryan, why don't you sort of talk about the stickiness of concessions in your market. Hilary?

Sure. Yes. Hi, this is Hilary. I would say that in discrete instances in Midtown on the Park Avenue corridor, there are some reductions in concessions, but that is in a very defined geographic area more broadly, even on the margins of the Park Avenue sub-market, there is availability in buildings and folks have choices about where they want to go. And so the concessions are sticky because the availability levels are elevated outside of the Park Avenue sub-market. And so that's part of the reason that I think you've seen the overall statistics reflect sort of a flattening but not radical decline in concessions given in New York. Bryan?

Yes, I'd say that Doug was spot on with the inflation comment. And then also we are definitely feeling, let's say, some flattening on the concessions regarding TI in the Back Bay. However, our downtown market is not in that position and it can be used in negotiations. But it's definitely firmed on TI. Very noticeable. For Back Bay only, though.

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

Hey, good morning down there. So question for you guys, you've outlined a pretty solid outlook sort of tail end of this year into ‘26 and ‘27, as far as addressing a lot of leasing exposure. And it sounds like, I know you're not giving guidance for the next few years, but sounds like all else equal, we should see a meaningful pickup at FFO. What are the risks or offsets? Like, for example, acquisitions that maybe dilutive or taking buildings out of service for redevelopment like what would stop you guys from or what would stop FFO from really accelerating tail end of this year into next?

So let me, I’m going to give you half the answer and I'll let Mike give you the other half of the answer. So on my half of the answer, I believe if you look at our NOI from our same property portfolio in our development there will be meaningful increases in the contribution from those quote-unquote assets as we move into 2026 and 2027.

So I mean I think on the other side of things there's where interest rates going. So we're a short-term long-term interest rates going what does that mean for our interest expense based as we refinance bonds that are expiring every year and that is offset by what is likely to be somewhat lower floating rates on the 12% to 15% of our debt portfolio that's floating.

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

Thank you. Doug mentioned life science tenants looking for office space exclusively, and I'm wondering if you could provide any commentary on how widespread you think that is. Either by geography or stage of the companies. And if you believe this is a reflection of AI and its impact on the biotech sector.

Okay, so I'll try to give you a perspective on that, and then I'll let Rod give you a perspective as well. And Bryan, if you have anything else you want to add as well. So what I believe is going on right now is that there is a bunch of money that is being raised in the life science sector that are looking for opportunities to take advantage of trials that have already started and shown some efficacy. And they are instead of, quote unquote, starting with a brand new idea, looking sort of for that later stage, quote unquote, proven kind of a product to move forward. And there are management teams that have been able to figure out how to raise capital to do those things. And they are the companies that we are seeing right now, certainly in suburban Boston, as the preponderance of the, quote unquote, expansion and growth relative to life science. What we have not seen is significant numbers of incubator kinds of companies going to the point where they are now ready to move into a more permanent kind of a space because they have been given capital by their VCs in order to go to the next level in the same way that was happening in ‘18, ‘19 and ’20, right. That's where all of the demand was coming from. So I'd say there's sort of that shift. And Rod, you may want to comment on what you're seeing in the South San Francisco market.

Thanks, Doug. So I think it's important to keep in mind that our office buildings in South San Francisco have always catered to the office component of the life science business that was around down there. And that's still the case. We actively are in negotiations now with a larger lab tenant that's specifically looking for more office space. So that is definitely part of it. I don't know if it's attributable to the AI piece as your question came through, John, but there's a mix of office users that are life science tenants. That's very typical in our market.

Bryan?

Yes. In Boston, I'd say we've seen a little bit of evidence, let's say three to four situations that are indicative of what Doug and we've discussed here, but not enough to say it's a big trend. And it's only in the urban edge market.

And I show our next question comes from the line of Nick Yulico from Scotiabank.

Good morning, Mike. I had a question on the occupancy guidance. So the midpoint assumes you're roughly flat from where you ended Q4. But that guidance doesn't include the developments being put into service. So I was hoping you can quantify how much the developments will drag occupancy this year. The reason I'm asking is I think you'll be reporting an in-service occupancy number through the year that actually includes those developments being added in. So it'd be helpful to know that. Thanks.

Sure. I'm happy to answer that, Nick. I think in our supplemental, what we provide is what the in-service occupancy is at the end of the year. And then we guide to what we expect the occupancy to be in those buildings for 2025 as a way to help you kind of determine where the same store is going, where the portfolio NOI is going. But you're right in 2024 we had some negative impacts because we brought 103 CityPoint online in the fourth quarter and we brought 180 CityPoint online in the third quarter and that was not part of our original kind of guidance for the in-service portfolio. At the end of the year we're at 87.5% occupied. We're going to remove Reston Corporate Center from service. It's fully leased. It's not a big impact. It's only down about 10 basis points so we'll start it at 87.4% net of that. If you look at the developments that are delivering as I mentioned on my notes 651 Gateways coming in Q1 and then 365 Park and Block D will come in Q3. Right now they're 21% occupied, if they don't achieve any more occupancy, it's going to have a negative impact of 70 basis points roughly on our occupancy. Now, as Doug mentioned, we've got some activity there, especially at 360 Park. So we do think we're going to have a little bit more occupancy there, but they're certainly not going to be fully leased. Doug also mentioned that we're going to remove some other buildings from service in the suburbs. So there's a couple of buildings in suburban Boston we're thinking about and suburban, in Princeton that we're thinking about. And if we were to do that, because we have a higher and best use for those assets to build residential developments, that actually goes the other direction and could help us by close to 90 basis points. So as Doug mentioned, kind of a net of these two things is not going to be that impactful. But at this point, we haven't determined, right, to take those buildings out of service.

Yes, let me just comment on our development pipeline and sort of what's going on in there and where I think you'll start to see some progress and where you won't see some progress. So the building that probably sees the most relative progress during the year in terms of its lease square footage is probably 360 Park Avenue South, knock on wood. However, you can sort of talk about the activity we're seeing there. And then we're actually seeing some leasing activity at 180 CityPoint. Again, it's a lab building where we're talking to lab tenants about office space. And therefore, we're going to likely be building out office space, not lab space. And then we're also not going to be building out a lab infrastructure in that space. So we're not going to be spending the same capital. And then Jake, you may want to comment on sort of what we're also doing and seeing at Reston Block B. So in all three of those particular situations, I believe you will see a meaningful increase in occupancy during 2000, sorry, lease percentage in 2025. The occupancy won't hit until 2026. Where we're going to have, I'd say a more of a challenge are at 651 Gateway, which is the building we have with ARE where there's very little activity right now. And then at 103 CityPoint, which is the second lab building that we have in the Waltham Submarket. But Jake, why don't we start with you and talk about Block D, and then Hilary can talk about 360 Park Avenue South, and Bryan can talk about 180 CityPoint.

Yes, sure, thanks Doug. I will just say that we've seen a pretty meaningful uptick in activity across the Reston Town Center Market, and in particular the 75,000 square foot Block D development that we just delivered. And we have a few clients and proposals and prospects that we're discussing, taking the majority or all the space with. So very good activity, and hope to have better news to deliver here in the coming quarter or two.

Hilary?

Thanks Doug. At 360 Park Avenue South, as Doug mentioned earlier, we have one lease out for a full floor at that building. So that will be the fifth floor that we've leased there. And we have three or four other proposals that we're actively trading that are roughly the same size, one floor to two floors. That's really where the demand sweet spot seems to be in that sub-market. And as a reminder, the floor plates there are about 23,000 square feet. So call it 20,000 to 40,000 square foot tenants. The larger tenant demand has remained muted in Midtown South. And so if we continue to see 20 to 40s, we expect that we'll have very good leasing activity throughout the course of the year and that the building will continue to lease up a pace. But there is still the outside chance that we'll get a larger tenant; in which case I think that it could fill up quite quickly. So we'll just have to see how it plays out with regards to the tenant size demand. But we are in active discussions with several tenants and out to lease with one in particular for a full floor.

Bryan?

180 CityPoint has noted probably the highest probability of getting some lease up there. And we started seeing some pickup in the fourth quarter. And I'd say that they were from clients that had been in the market for over a year and really gain confidence in the fourth quarter that we're seeing. So that building is excellent. It's the best product in the market for life science and the description that we have about a couple deals looking at it for life science but office is hopeful. 103, a little bit more challenging, it's GMP building and that zone is a little bit more quiet although we're still optimistic about that for a possible lease this year.

And I show our next question comes from the line of Michael Goldsmith from UBS.

Good morning. Thanks a lot for taking my question. Doug, in the past you commented that 3 million square feet of leasing equates to flat occupancy. You talked a lot about if they've done a nice job of cutting back on some of the future exploration. So is there a nice, hard and fast rule, how we should think about going forward, or is it still 3 million equates to flat occupancy from here? Thanks.

Yes, so in 2025, 3 million is flat occupancy. 3 million in 2026 is a meaningful increase in occupancy. Again, our portfolio is 49 million square feet. So 490,000 square feet is 100 basis points. So if we have under 2 million square feet expiring and we do 3 million square feet of leasing on vacant and expirations, that would mean a pickup of a material amount. I'm doing the math for you. I'm not suggesting I'm giving you a projection for ‘26.

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

Hey, thanks, guys, for taking my question. Question on capital allocation. Owen as you think about where you're deploying your capital, obviously the transaction in DC at 725-12 was very interesting. How do you think about -- how many other types of transactions like that are in the markets? What kind of -- what markets are you looking at? Or which markets you think are going to be the most active for you in ‘25 and maybe also touch on the sellers or who you're getting this product from, if you could.

Yes. Okay, Floris, so I would break it first between development and acquisitions. So on development, the only market where development is really supported by current market rents is in Midtown, New York. And so we have, as I mentioned in my remarks, and you're aware of 343, Madison, which we have, which we expect to launch this year. We are speaking to several anchor clients for that. And given the yield that we project, we think it's a very appropriate and strong allocation capital decision for the firm. Also in DC, as I mentioned in my remarks, I think our team did a magnificent job of creating a very accretive new development opportunity, given the dynamics in DC. There’re clients that want to be in premier space, number one. Number two, they were able to identify a building where the loan was in default and buy the loan at an interesting price. So we got a good land basis and all the math worked and they were able to de-risk the project from a leasing standpoint, given all of their relationships in the market and the interest by clients there in premier workplaces. We also have a great site in the Back Bay of Boston. Right now, I don't think market rents support that development, but it's getting closer because again, as Doug said, the Back Bay of Boston and Midtown New York are the two strongest markets we're in. And my expectation is that's probably the next site that we control that will pencil from an office standpoint. And then just to finish the remarks on development, if other teams in other regions can replicate what our DC team did with the clients in the buildings that they created, we're going to want to do that. So that's the development answer. And then on the acquisitions answer, we continue to be in the market looking for buildings that are either currently premier workplaces or ones that we can make into premier workplaces. And again, we have looked at a lot of different deals and we continue to be out in the market. And as Mike said, he didn't put anything in his projections for next year about new acquisitions, but we're hoping that we're going to, this cycle, we're going to be able to identify accretive acquisition. That's certainly been our history. Anytime there's a down tick in real estate and specifically office real estate, BXP has been able to add great properties at accretive yield to its portfolio. And I fully expect that to happen again, this cycle. But there's nothing right now that's specific that we could point to that, I think we will get done in the near term. But that doesn't mean later in the year something that's of interest won't present itself.

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

Great. Doug, maybe going back to your assumptions around vacancy leasing for the year. As I look in the portfolio, kind of stands out from a vacancy perspective as still San Francisco. So, suffice it to say, do you really need to see demand accelerate in that market for vacant space and thinking about, 680 Folsom, 535 Mission, as two examples of high quality properties there that could see some leasing. Or do you have enough demand from your portfolios in New York, Boston, DC to be able to hit that vacancy leasing goal? Thanks.

Sure. So I'm going to let Rod talk about what's going on in San Francisco and sort of what our expectations are there. But we need all of our markets to perform from an increase in available space being leased to new clients, right? That's the mandate across the entire portfolio. And everybody has to, all the reasons have to pull their part. Obviously, we have lower expectations and higher expectations, depending upon the particular property, as well as the particular sort of environment of what the demand might be for that. In San Francisco, we've done a really good job, actually, of leasing available space at 535 Mission, because of, interestingly, the sort of demand that it is apt to capture end and the success that building has had in grabbing that demand. We need to do more of that. We also need to do more leasing at a market-era center, and we need to do more leasing at 680 Folsom. And Rod can talk about some of the things that we are doing to accelerate our activity in those properties. Rod?

Yes. Well, you hit on 535, which has had really great leasing experience in ‘24, and we've got a good pipeline of deals we're talking to there still. And our strategy, both at 535 and in Embarcadero and at 680 Folsom, is centered around an amenity-based offering first in a premier workplace environment. So we just finished this fantastic amenity center in Embarcadero center called The Mosaic. It's gotten great reviews, and it's a super great draw for bringing new clients in. It's something that not every other building is offering. I certainly don't think at the quality. So we're doing that at Embarcadero. We have a similar type of focused amenity offering under construction now at 680 Folsom. We've done some remodeling to the lobby, and we're going to add another portion on the ground floor, which will be a tenant amenity. So that's going to definitely get some traction. We're also going to enhance the roof deck. We have a capital plan in place that's going to be completed this year on the roof deck of 680 Folsom, which, again, is going to be a nice way to differentiate that building. So I think we're positioning all these buildings for success. We have a great spec suite program in all the buildings that we've used over the years, and it's when you go down a list of deals that we did last year, many of them are in those spec suites. So it's not the only focus, but it's certainly an important focus, and we're going to keep doing that. And I'll just close on the point that San Francisco had positive net absorption for the fourth quarter. That hasn't happened in a long time, so it's a good sign, and we feel it in our activity, and so we're optimistic we're at it, and we're going to have a good year.

And I show our next question comes from the line of Richard Anderson from Wedbush Securities.

Thanks. Good morning. So at the outset, you talked about your lack of exposure to the GSA leasing business, but perhaps defense contractors follow the Trump five-day RTO approach to government workers. Then you have Amazon, JP Morgan, Salesforce. I'm wondering how critical this is into your old leasing outlook for ‘26 and ‘27 in terms of return to office. Is it enough to be two or three days a week for you to have a successful negotiating platform, or do you need that to kind of ramp to a full week eventually over the course of the next few years, and whether or not you can comment on the conversations you're having with your tenants about what their plans are for return to office over the next few years? Thanks.

Yes. The return to office is clearly accelerating, and it's helping our leasing activity. I think it's varied a bit by industry, and therefore we see it a little bit differently by region, because different industries have different concentrations in different regions. So it's a big plus. Look, we have always said return to office is important to leasing. But also corporate earnings growth as a proxy for corporate health is actually even more important. And that's also a positive. So I would put both of those in the same category when you think about the health of the client base that we serve. In terms of number of days in the week, I mean, look, I think even for clients that are only coming in two or three days a week, they want everybody in the office on the same days because that's why they're there is to collaborate. So it's hard to save space. People aren't allocating, okay, you come in Monday, Tuesday, and this group comes in Thursday, Friday. So I don't think necessarily going from four days to five days increases space demand under that logic.

Our next question comes from the line of Blaine Heck from Wells Fargo.

Hey, thanks. Good morning. Related to the earlier question on concessions and increasing costs, I'm wondering whether you've noticed a change in tenants' willingness to move and upgrade their space, given the higher costs to move and higher costs to build out their space over and above what you've given them in TIs, and whether that's driven more of a preference to renew in place because of those cost pressures, maybe even slowing the flight to quality. And if so, how does that factor into your leasing strategy?

Yes, so I'm going to give you a response on that, and then I'll let the region's going to sort of chime in. My sense from what I have been seeing is that most of our clients have said, we have to rebuild our space because we have to be competitive with our offering to our employees. And interestingly, if you have older space, call it 10-plus-year-old space, the brain damage associated with staying in place and renovating it is not something that is very attractive to many of our clients. And unless they are forced to do that, they would prefer to move. In many cases, they would prefer to move within our buildings if we had space available to them. But in many cases, we can't do that. And so they are going ahead and spending the money. And right now, again, and as Owen sort of talked about earlier, the confidence that our clients have based upon the economy is giving them, I'd say, the conviction that it's a good time to be making that capital allocation to their space. So, maybe Hilary and Rod, you can start. And then Bryan talked about sort of the CBD location and then perhaps Jake, you talk about what's going on in Reston. Rod?

This is Hilary. I would entirely agree with the comment around the difficulty regarding renovating in place. We've seen clients be very reluctant to do that. I think that there is a lot of confidence in the New York market around the direction of the economy, and for the client base in BXP's New York portfolio around their business models and their future, and so what we are seeing a lot of is clients expanding in our buildings, taking new space and building that space out. We're also seeing new demand coming into the portfolio, and of course that tendency is generally always a full new build. So I think it's much more of a case where the demand drivers are expansion of the economy and expansion of the business units, and they want fresh new space that will help them compete for employees and will help them compete for clientele. So that's the trend that I see in New York.

Rod?

I would just add that I think what we are not seeing is the short-term renewals that we saw early in emerging out of the pandemic. Most of our clients are confident in what the future looks like and are not asking for short-term renewals. I mean, I think in those cases, it's tough. If somebody is willing to just do a one- or two-year extension or three-year even, then it's hard to pull a tenant like that out of a building, but most of the people we're talking to are willing to make long-term commitments 10-plus years. So I think that they're doing exactly what you said, Doug, which is they're looking to build a better offering for their employees to come back and entice them back. And we're seeing that across all of our existing tenants and then the ones that we're trying to pull out of other buildings, definitely.

And, Jake, comment on sort of the opportunities that the two tenants that we're talking to about Reston next have to stay where they want, where they are, and what they're doing.

Yes, sure. I mean, again, we are having very interesting and productive conversations with lots of clients in the Northern Virginia market. Over half of our holdings in the D.C. region are in Reston Town Center, which is what I would say is the home to the who's who of the defense and cybersecurity community. And these are groups that can pay market-leading rents and are seeking trophy quality product in a mixed-use environment. And a lot of that is just because they want to attract and retain and motivate their employee base. So we're seeing lots of inbounds in that regard, and so it's exciting for the future of Reston Town Center.

But, again, just to sort of keep going on this, Jake, the two tenets that we're actually talking to you about Reston Next, have the ability to stay where they are and pay rent that is significantly lower than what we're charging at Block B, correct?

Absolutely. And in each case, the landlords would happily accept renewals with these clients. But these clients want change. They want to motivate their employees to continue to come to work and do the important work that they do to generate revenue forms. So they're looking to change up their environments and move to these mixed use environments that are more exciting and provide a better ground floor plan for their employees and more excitement and more amenities. And we're seeing that in spades in Reston.

Bryan?

Yes, ours is a little bit more varied. I'd say in at least two to three significant renewals, we had situations where we had clients that their initial space was well ahead of its time and how they work today isn't that much different than how it was when they did the original lease. But I would say that's just an example of three extraordinarily good, thoughtful plans from previously. And in those cases, they did some fresh up, they did some adding of some amenities, but nothing significant. But they're exceptional spaces to begin with and really thoughtful. On the new side, we're definitely seeing the willingness of the clients to add additional dollars of their own on top of tenant finish that we may provide to really create a great space. And I would also say that the amount of interest in seeing new space and examples of it is far more than I've ever seen. We just redid our own space on low 16. And it's incredible the response we've had from our own people, but we have probably at least a tour a day of clients coming to see it. I've never seen a situation where the clients want to talk to us this much about how we see trends and how we see future layouts.

Yes, I would just add to this conversation from BXP standpoint, we're eating our own cooking. The Boston region and the San Francisco region were in space they had been in for well over a decade. And in the last six months, they've both moved. Here in Boston, it proved tower to a lower floor and in Embarcadero Center to a lower floor. And there is no doubt that the new build out has created a lot of energy and enthusiasm for our teams. And so we're experiencing this phenomena that you're hearing about firsthand.

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

Hi, everyone. You mentioned earlier that the negative absorption spigots seem to have stopped in a few markets. And you did mention positive absorption in San Francisco in 4Q. But then you also mentioned that law firms in San Francisco are still reducing their footprint and others are rationalizing space. So it just makes it seem difficult that absorption would consistently increase, if that's what you're seeing from the tenants. So I'm wondering if you can give some details on what gives you confidence that absorption will continue to be positive in San Francisco. And is the demand there to then take advantage of the amenities that you're creating that you went through before?

Rod, you want to take that?

Yes, I mean there's no question that some of the existing, I would say, traditional tenants are still, in some cases, rightsizing. We've experienced it with some of our own law firm clients. I think you have to just add into that, the growing demand that is coming from these new technology companies. You can say it's AI, or you can just say it's the new wave of technology companies, which has traditionally brought the Bay Area and San Francisco in particular out of these down cycles. So we're seeing it. We're seeing lists of companies, names I've never even heard of, that are out in the market. And I think you can point to, obviously, the bigger AI deals with open AI and anthropic and scale AI and some of these others that have done deals as examples of tenants that are going to use space. And so we're going the right direction, and I think it finally showed up in another. So we'll see what happens, but it feels different than it did a year ago. I can tell you that much, Caitlin, for sure.

Our next question. It comes from the line of Upal Rana from KeyBanc.

Great. Thank you. So the Biogen announced some layoffs to their research department last week, and they are your third largest tenant, and I was wondering if there was any potential impact for BXP, given they do only have about two and a half years left on their term, and is there any read-through on life science broadly on this announcement? Thanks.

So I think, look, Biogen is a company that has gone through many fits and starts over the decades that it has been in Kendall Square. We have one building with them, which is a lab building, that least expires in the middle of 2028, and that's basically in the midst of the next election cycle. There's so much that's going to happen between now and then. I can't even contemplate what the world will look like for lab space in Kendall Square, but it's the one location on the globe that I would rather have more than less lab space. And so to the extent that Biogen makes a decision to downsize or they grow, we'll be ready to capture whatever the opportunity is in that building. And again, it's the only building that we have with Biogen. The other building that we have is already been basically master leased to another organization and Biogen has not been in that building for the last 15 years.

Our next question comes from the line of Dylan Burzinski from Green Street.

Appreciate you taking the question, guys. Just going back to some of your comments on sort of the concessionary environment remaining elevated to what it once was. I guess in some of your tighter markets, at least within your portfolio, such as Boston and New York, are you guys starting to be able to push face rent so that on a net effective basis, we're starting to see incremental improvement? And then I guess as you sort of think about the next two years, right, going in ‘26 and ‘27, you guys mentioned being able to likely pick up significant occupancy. I mean, should we also expect you guys to be able to push net effective rent growth quite significantly in those years? Or can you sort of put some guardrails around that for us?

So unequivocally in the Midtown market and in the greater Boston Back Bay market, we, our rents are higher in 2024 than they were in 2023. And for the modest amount of space that we have available, they will be higher in 2025. In the Midtown Park Avenue market, same phenomenon, except the increase has been much larger. I mean, the increases are double digit in terms of what we have seen between ‘23 and ‘24 and what we probably will see in ‘25 to ‘26. I do not want to make a suggestion that we're going to see a groundswell of rental rate increases across all of our markets in the entire portfolio. I think those particular markets are unusual because of what we discussed earlier in the call relative to the minimus amount of large block availability and the fact that we're getting closer and closer to new construction pricing in Boston. We're not quite there yet and then obviously and we are where we are in Midtown Manhattan. But it's a very constructive environment in those marketplaces. It's not as constructed elsewhere.

I just think the one thing I would add Doug is that there's no new development because it's going to be coming in ‘26 and ‘27 in these markets. So from a supply perspective there's nothing to for those clients to look at so that will benefit us.

Our next question comes from the line of Michael Lewis from Truist Securities.

Thank you. So you hit this topic of concessions and CapEx from a few different angles. When we put together the increased leasing volume as we get the occupancy back up and the higher cost, I don't think you give guidance for FAD but should we expect FAD and cash flow to be under pressure in the near term at least until you kind of stabilize the occupancy or is that not the case?

I'm not going to give a projection for ‘26 and ‘27 for FAD. I think for 2025 I feel pretty good about it. I think it will probably be a little bit lower than this year in line with kind of the FFO drop that we had this year. We do have free rent that is burning off so as I mentioned the cash flow from the portfolio is increasing. I don't expect our CapEx and TI to be significantly different than they were in ‘24, TI could be a little bit higher than it was in 2024, but I don't expect a meaningful change.

Our next question comes from the line of Omotayo Okusanya from Deutsche Bank.

Yes, good morning. Just a very quick one, in regards to all the leasing activity kind of leasing up on the early renewals of leases that are going to be expiring in next year or a year or two and reducing leasing risk in ‘25 and ‘26, just curious how you think about balancing the certainty of renewal today versus maybe, again, waiting six to nine months where the leasing environment may feel a little bit better. And maybe we can kind of get better economics from a renewal. I am just kind of curios how you think through those two things to make the ultimate decision to kind of renew a little bit earlier.

So the BXP mentality is that we are not market timers. We would never have been, and we never will be. And if we have a client that wants to engage, we will constructively attempt to do a renewal with that client. I mean, the fact of the matter is, and everyone understands this, downtime is a cost of any transaction. And to the extent that you can eliminate downtime between a lease if the tenant were to leave or the tenant were to stay, that's a value, and that value can be split in a way with the renewal that it cannot be split with waiting for the next best tenant. And so from our perspective, we try and be commercial and thoughtful, and we try and work with our clients. And if our clients are interested in renewing, we do everything we can to renew them. Obviously, we have to be cognizant of what we think the market conditions are and where we think market rents are and where they might be going, but we never are going to be greedy, and we are never going to try in a market time.

And I show a last question in the queue comes from the line of Jamie Feldman from Wells Fargo.

Great, thanks for taking a follow-up from our team. So we want to get your thoughts on how the rest of this office recovery may play out. The Park Avenue recovery was pretty unique this cycle with JP Morgan and Citadel's investments in leasing there. It's also encouraging to hear you say the Back Bay is tightening also. But do you think other sub-markets across your portfolio are structured to tighten up in the same way as the cycle continues, or do you think it will be more about filling specific buildings rather than sub-markets tightening in the future? And against that backdrop, can you also comment on the impairments taken in the quarter? Are these signals you don't expect these sub-markets to get better? Are they building specific, or are they a function of JV accounting rules? We found the Santa Monica impairment particularly interesting since our local market contacts indicate local schools are looking at the office campuses there as potential relocation options.

I'll take the first part of that Jamie and I'll turn it over to Mike for the impairments. Look, the office market is recovering. It's recovering because of what we've been talking about on this call which is increased corporate confidence as well as return to office behavior. It's certainly the most acute in our portfolio in Midtown and in the Back Bay, but there's clearly spillover benefits. I mean Doug talked about the action that we have at 599 Lex. That's a spillover from Park Avenue. There's leasing going on Third Avenue. There's leasing going on Sixth Avenue. So it depends on the strength of the market, but there's clearly benefits away from these two markets that we're talking about. So look, how does it all shake out at the end of the day? It's hard to actually forecast. I do think there's probably some reduction in overall office demand because of the remote work phenomena. What percentage that is? I don't know, but don't forget you have that impact, but you also have a growing economy. So all these companies are growing. They're adding employees and at some point, the growth will make up for all of that. So I think those are the forces that you have at work and as we've been talking about over and over again, BXP is positioned as the premium office provider in the market and we're seeking to have clients that are leaders in their industries that will pay the premium rent that we're seeking and that segment of the office industry is outperforming materially the rest and that's one of the keys to our stability that we've experienced about this whole office phenomena.

Yes. And before Mike talks about the impairment, Rod, you can just -- you should comment on sort of what the activity level is for these schools and also whether they're really able to take space in the current configurations and for how long they're looking to sort of do these transactions and how that's sort of playing out in the West Valley market.

Yes, okay. So it's true there are schools that are in the market that are looking for some temporary space. We're talking with one of them. We've actually got a space in one of our buildings that is a sub lease space that this particular school is going to be occupying. So it's a temporary deal until they can figure out what they're going to do with a rebuild. Obviously, this is all pretty fresh and there's been just a lot of chaos down there and so we're doing our best possible to help the community. We've done it with this effort with the school. We also housed over 450 firefighters from Oregon and Utah at our Santa Monica Business Park. They just recently left. But they had been there, and they had all their trucks, and they were sleeping there, and it was, we've been very much engaged in trying to help support the community. But these schools, I mean, there's a few other ones that are out looking. We've heard there's a few other buildings in town that are talking to them. So that will absorb some portion of space, at least in the short term.

Congratulations, Jamie, for getting three questions in on one question. But we will. I will touch on the impairments. So impairments for consolidated assets are unusual because of the way the GAAP rules govern assets and the way that you value those if you're going to have a long-term hold on an effectively and undiscounted basis. Where we have unconsolidated joint ventures, there's different accounting rules that we have to abide by. So every quarter, we have to look at the valuations of our unconsolidated joint ventures and determine whether there's a change that has impacted what we think might be other than temporary in a change. And so on these West Coast assets, there's a combination of things where we haven't completed additional leasing in the vacant space at Colorado Center. We talked about the life science market at South San Francisco being slow. And in Seattle, we've talked about, we didn't talk about it on this call, but the market is slower and we haven't achieved positive absorption at Safeco Plaza. So every quarter, we evaluate this and look at the cash flows and value the assets. And it tripped our test this quarter. And so when it trips the other than temporary test, you basically have to bring it down to the fair market value, which is using a more kind of distressed discount and cap rate environment, which is why the numbers are bigger than they were. So it is an accounting issue. It is non-cash. It does not reflect any change in our outlook for these assets or any change in kind of what is going on in these assets right now.

And just one last point on this, Jamie. So obviously, our joint venture partner had their call yesterday on, and they, as I understand it, didn't mention anything on their Gateway investment. So it's consolidated on their books. It's unconsolidated on ours. So same asset. Our plans and their plans are the same. And we were in a position where we felt we had taken impairment. And obviously, they didn't. So again, these are accounting rules that we have to follow.

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

We have no closing remarks. We've gone an hour and a half. And we want to wish all of you a happy New Year. And thank you for your interest in BXP.

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