Earnings Call Transcript - BXP Q4 2021

Operator, Operator

Good day and thank you for standing by. Welcome to Boston Properties’ Fourth Quarter and 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Ms. Helen Han, Vice President, Investor Relations. Ma’am, please go ahead.

Helen Han, Vice President, Investor Relations

Thank you. Good morning, and welcome to Boston Properties’ Fourth Quarter and Full Year 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 Regulation G. If you did not receive a copy, these documents are available in the Investor Relations 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 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 our Q&A portion of our call, Ray Ritchey, 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.

Owen Thomas, Chief Executive Officer

Thank you, Helen, and good morning, everyone. I’d like to start by introducing Helen Han, who is our new Head of Investor Relations. Helen was formerly Head of Marketing for our western region, has been with BXP for over 15 years and has a deep wealth of knowledge about our company and people. Welcome, Helen; great to have you here. So today, I am going to cover BXP’s operating momentum, the economic conditions that serve as a backdrop for BXP’s operations as we enter 2022, the current private equity capital market conditions for office real estate as well as BXP’s capital allocation activities and growth potential. BXP’s financial results for the fourth quarter reflect the impact of the recovering U.S. economy and increasing needs for our clients for securing high quality office space. Our FFO per share this quarter was above market consensus and the midpoint of our guidance. We completed 1.8 million square feet of leasing, our third consecutive quarter of significantly higher leasing activity. It was 55% above the fourth quarter of 2020 and in line with our pre-pandemic leasing level. With an average term of 8.6 years on the leases signed this past quarter, lease commitments by our clients continue to be long-term in nature. 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 assets with great amenities and transit access, which are the hallmarks of BXP strategy and portfolio. Now turning to 2022, we believe the market and economic factors which impact BXP are on balance very favorable. Though the Omicron variant has been a setback in the course of the pandemic and has proven hard to forecast, most experts believe conditions will improve in 2022, resulting in more workers returning to the office and further improved space demand. The economic recovery in the U.S. continues with consensus GDP growth predicted to be 4% in 2022, and innovations in technology and life science remain promising and well funded, a key driver for office and lab space demand. Capital flows into the real estate sector will also likely grow further, as investors, one, rebalance their portfolios away from equities due to strong performance from the lows of the pandemic; and two, have a reluctance to allocate these funds to fixed income due to rising interest rates. New office supply is also slowed down given the demand uncertainties created by the pandemic — another long-term positive for the office business. Moving to the challenges, interest rates are rising, which will likely continue due to the Fed’s current focus on inflation and signaling it will raise the Fed funds rate multiple times in 2022. BXP had significant and well-timed refinancing activity in 2021, and therefore faces limited debt financing needs in the coming year. Inflation is a greater challenge and has several dimensions. Rising construction cost will require higher rental rates to make development feasible. However, over time, higher replacement costs should increase the value of our existing portfolio of buildings. The labor market is also very tight, which contributes to our clients’ hesitancy in bringing their employees back to an in-person work environment. As we have stated repeatedly, we believe this phenomenon will change over time given widespread corporate dissatisfaction with a decay of efficiency, retention and culture associated with remote work. Though challenges persist, we see 2022 market conditions as a favorable backdrop for BXP to continue to perform. So moving to the real estate capital markets: an all-time record of commercial real estate sales volume was achieved in the fourth quarter and private capital market activity for office assets was similarly robust. $39 billion of significant office assets were sold in the fourth quarter, up 35% from the previous quarter and up 90% from the fourth quarter a year ago. Cap rates are stable or declining for assets with limited lease rollover and anything life science related, and activity is increasing for assets facing near-term lease expirations. The Boston market was particularly active with two major life science recapitalization deals in Cambridge selling for around $2,200 a square foot and sub-4% cap rates. Three significant deals in the Seaport District sold for approximately $1,500 a foot on a fee simple basis with cap rates at or below 4%. And two CBD sales at $700 to $950 a square foot with cap rates in the low 4% range. Notably in New York City, two major assets in the Hudson Yards area sold in full or part for an average of approximately $1,400 a square foot and cap rates of 4.5% to 5% on a stabilized basis. In the District of Columbia, four transactions completed aggregating $750 million with pricing averaging approximately $550 to $600 a square foot on a fee simple basis and cap rates in the low 5% range. And pricing in Seattle continues to escalate with deals closed or announced in South Lake Union priced above $1,200 a square foot, a new local record and a sub-4% cap rate; in Fremont at over $1,000 a foot and a low 4% cap rate; and in the CBD at around $750 a square foot and mid-4% cap rate. Regarding BXP’s capital market activity and starting with acquisitions, we closed on the previously described 360 Park Avenue South acquisition in New York City in December and placed the project into our active development pipeline. Two of our strategic capital program partners will co-invest in the deal if capital is drawn for redevelopment, bringing our interest to 42% on a stabilized basis. We continue to have elevating dialogues with potential private equity partners, are pursuing an active pipeline of both on- and off-market deals in many of our markets and anticipate additional acquisition activity of value-add assets with capital partners in 2022. In 2021, we also completed non-core asset sales of $225 million and anticipate higher disposition volumes in 2022. We completed a very active quarter with our development pipeline: we delivered fully into service 100 Causeway Street in Boston, the Marriott headquarters at 7750 Wisconsin Avenue in Bethesda, and the lab conversion project at 200 West Street in Waltham. In the aggregate, BXP’s share of these projects represents 1.5 million square feet of development and $460 million of investment. The three assets are 98% leased, being delivered below budget and ahead of schedule at a projected stabilized cash yield in excess of 8% and are projected to add $41 million to our NOI on a stabilized basis. Given the market cap rates previously described for high quality office of 4% to 5%, we expect these projects in the aggregate will create approximately $380 million of value above our $460 million in cost for BXP shareholders. Also, we partially placed into service Reston Next in Reston. And we are continuously refreshing our development pipeline by adding just this past quarter 360 Park Avenue South and 103 CityPoint, a speculative ground up lab development aggregating 113,000 square feet in our CityPoint development in Waltham. We have a very active pipeline of office and lab developments and redevelopments ready to announce when they commence, expected later in 2022, and Doug will describe the strong leasing success we are achieving with our lab development. After all these movements, our current development pipeline aggregates 3.4 million square feet and $2.5 billion of investment, is already 59% leased, and projected to add approximately $190 million to our NOI over the next three years. So in summary, we had another active and successful quarter with strong leasing and financial returns, and are excited for our prospects for continued growth in 2022. We expect significant growth in our FFO per share this year driven by improving economic conditions and leasing activity, continued recovery of variable revenue streams, delivery of a well-leased development pipeline, completion of four new acquisitions in 2021, 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 well-timed refinancing activity in 2021 and lower capital costs. So with that, I’ll turn it over to Doug.

Douglas Linde, President

Thanks, Owen. Good morning, everybody. Hope you all had a good new year. I’m going to focus my remarks this morning on our leasing activity. As was evident in the second press release we sent out last night, our leasing activity press release, we had a pretty strong fourth quarter with activity spread around Boston, New York, San Francisco and the metropolitan Washington DC regions. We ended the year with an occupancy pick up of about 40 basis points. As we sit here today at the end of January, we have signed leases for our in-service portfolio that have yet to commence, so they’re not in our occupancy figures, of more than 925,000 square feet; that 925,000 square feet represents an additional 180 basis points of potential occupancy increase, and includes about 115,000 square feet with 2023 commencements so the majority of it is 2022. We begin 2022 with over 1.4 million square feet of leases in negotiation on space in the in-service portfolio, more than 425,000 covers currently vacant space, and about 450,000 covers 2022 expirations. During 2022, we have about 2.8 million square feet of expirations in the in-service portfolio. Over the last decade, total leasing for this company has ranged between 3.7 million square feet in 2020 — that’s in the midst of the early pandemic and the economic shutdown — and over 7.7 million square feet in other years, where we’ve signed some pretty large build-to-suit leases. Now, it’s true some of the leasing we do each year encompasses early renewals, and we’ll talk about some of that today and leases on new developments. But a significant portion of this leasing we do each year is our near-term renewals in available space in the portfolio. So with 2.8 million square feet of exposure, 925,000 square feet of signed leases, 1.4 million in January of deals in the works — so for 2.35 million square feet — and with an annual expected leasing probably somewhere between 3.7 million and 7.7 million, we believe our occupancy is on an upward trajectory as we enter 2022. The second generation statistics this quarter merit a little granular explanation. San Francisco is flat and due to a 50,000 square foot lease down at our North First project, where we are doing short-term deals with kick-outs to allow us the flexibility to commence construction on the Station project. The Embarcadero Center leases, so our CBD portfolio had a roll up of 13%; if you take out that 50,000 square foot lease. In New York City, we terminated a lease with Citibank and went direct with their subtenant, which is operating in the conference center; the new rent for that floor is discounted. But Citi made us whole through a cash termination payment; excluding that New York City had a 5% roll up. Now there’s no question that Omicron and the way that hit us in November slowed some return-to-office dates. However, none of the leases that we have in negotiation have been delayed or impacted by a change in our customers’ need for space. While the month of December and the first two weeks of January were slow, our leasing teams have had a very busy few weeks with more signed LOIs and more active discussions. I would note that the vast majority of those conversations in our CBD locations have continued to be from the financial services and professional services sectors, and that very well may be due to the function of the space that we actually have available in our portfolio. The only area of our business where we’ve seen a slight Omicron blip is on parking revenue. Transient collections are down modestly from our forecast for the month of January. And we haven’t quite achieved the same anticipated pickup that we thought we would in monthly permits. But we believe that this will be short lived and we’ll start to see our projections turn in February. I want to provide a few observations about our regional activities. Let’s start with suburban Boston life sciences. We broke ground on our 880 Winter Street, 243,000 square foot lab conversion in July of 2021, seven months ago. We’ve signed leases for 165,000 square feet, and we are in negotiation for all of the remaining lab space. The first tenant is expected to occupy during the back half of 2022. Net rents are up 20% from our initial underwriting in March of 2021. At 180 CityPoint we are negotiating a lease for about 50% of the new 329,000 square foot building; steel erection hasn’t started yet, we’re expecting it’s going to start next month, and we’re hopeful to deliver the space in the fourth quarter of 2023, but the leasing success demonstrates what’s going on in the market. We are eagerly awaiting the November expiration of our leases in the Second Avenue buildings we purchased last June; we can offer 140,000 square feet of lab space and expect a significant roll up in rents with demand continuing to outpace supply. We will commence construction as Owen said on another 113,000 square feet at CityPoint, which is in our supplemental; we’re calling it 103 CityPoint. Construction drawings are complete, and we expect to break ground this quarter with a late 2024 delivery there. Now, our traditional Route 128 office leasing is also extremely busy. There is office demand out there. This quarter we agreed to recapture and re-lease 1265 Main Street, a 120,000 square foot office building at CityPoint in Waltham. We completed a 10-year lease as is with a 21% increase in the net rent. At 140 Kendrick Street in Needham, we’ve announced Wellington’s commitment to lease 105,000 square feet, and we found a way to reposition the building as a net zero installation, which was extremely important to both BXP and Wellington. In addition, we have commitments for two other tenants, so the remaining 80,000 square feet of this project which is currently under lease and expires in November of 2022. And finally, we’re working on another 73,000 square foot early recapture and backfill at our CityPoint complex. This totals 378,000 square feet of traditional suburban office leases. These transactions will have rent roll ups between 7% and 40% on a cash basis. Our CBD Boston activity this quarter was primarily small transactions. We completed 12 deals for 80,000 square feet. The average markup was 17% on a cash basis. At the moment, there are few large office requirements in the Boston CBD and there is going to be new construction deliveries in 2023. Our largest block of CBD space and exposure is at 100 Federal Street where we will be getting back 150,000 square feet in early 2023. In New York City during the quarter, we had activity across the portfolio. We executed a full floor lease at Dock 72. We completed a 108,000 square foot lease at Times Square Tower. We completed more than 180,000 square feet of leases at 601 Lexington Avenue, 42,000 square feet at 250 West 55th, 89,000 at the General Motors Building and over 120,000 square feet in Princeton. The individual mark to market in New York vary greatly. You’ll recall the single floor I called out last quarter which really retarded our statistics, where the rent went down by 50%. Well, we signed that 15-year lease extension for that floor and the rent is now up 71% on a cash basis. The leases we completed at the General Motors Building were flat, while the leases at 250 West 55th Street range from up 2% to down 19% on a cash basis. Our current activity in New York continues to be strong. We have multi-floor lease negotiations underway at GM, 601 Lex, and 510 Madison along with a number of smaller transactions in those buildings. Total activity is in excess of 525,000 square feet. As Owen discussed, we completed the purchase of 360 Park Avenue South; we are working to complete our base building system modification plans as well as our amenities program. And even though we haven’t formally begun to market the asset, we have been responding to inquiries and tours. Physical construction work will commence during the month of February. In the San Francisco CBD, large tech demand has largely been absent from the market other than companies upgrading their space through opportunistic sublets at buildings like our 680 Folsom, the Macy’s in the Riverbend subleases and at 350 Mission where Salesforce sublet. The bulk of the activity on a direct basis has been in the financial district, and it has been confined to the better buildings with professional services and financial firms. We went out this quarter and asked John Cecconi and his team from CBRE, who does work for us, to segment the premier buildings in the city. People can debate whether it’s the perfect list or not, but it totals 20 million square feet or about 23% of the market and includes our entire CBD portfolio. The current vacancy in this portfolio of 20 million square feet is 5.3%. And if you add sublet space it grows to about 8%. Now I’ve made the point before but you can’t simply look at the overall market availability statistics and make assumptions about where rents and concessions might be in this market. We completed 112,000 square feet of CBD deals this quarter, and our cash rents increased by 7% with an average starting rent of $103 a square foot. Similar to our lab success in Boston, our venture with ARE successfully executed a full building lab lease at 751 Gateway in South San Francisco. The venture intends to commence the conversion of 651 Gateway to a life science building over the next few months. The advantage for this project is time to delivery relative to a new building where we can save six months off versus ground up construction. Last quarter, I described our efforts to gauge pricing as we consider the restart of Platform 16 in San Jose. Our total base building construction costs increased just over 13% relative to the pricing we had 24 months ago. We continue to see meaningful cost increases and material availability issues across all trades in all of our markets. As an example, the lead time on base building mechanical systems once you have approved drawings has doubled from 20 weeks to 40 weeks, which means you have to make decisions much earlier in a construction schedule or risk delays. The Class A Silicon Valley leasing markets had a particularly strong 2021 with a very healthy net absorption. And just last week we got wind of another 500,000 square foot office expansion by one of the Tech Titans in the Northern Peninsula. And Platform 16, if we start, won't deliver until early 2025. I’m going to finish my remarks this morning on Greater Washington. During the fourth quarter, we completed 11 office leases in Reston totaling over 140,000 square feet. Every deal was on previously vacant space. Rents have held firm in the low-50s with 2.5% annual bumps to the low-60s with similar bumps for our new project at RTC Next. The first phase of RTC Next has been delivered to Fannie Mae as Owen described, and we completed our first non-anchor lease during the quarter. This project is 85% leased; it is transformative to the Reston skyline and it’s a five-minute walk to the heart of the town center retail where we completed over 60,000 square feet of retail leasing, again with new tenants on currently vacant space. In the District, we continue to chip away at our current availability with our JV assets with about 100,000 square feet of leasing. We’ve delivered 2100 Penn to our anchor tenant for their tenant improvements, and we’re working on filling the remainder of that building. In Boston, in New York and in the metropolitan DC area, we have seen a swift reduction in COVID-related cases. Our daily tenant activity is starting to rise again. Employers continue to search for new employees. To circle back to Owen’s comments about quality, 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 great 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 office, it’s even more important to have the right space and place when they are here. With that, I’ll turn the call over to Mike.

Michael LaBelle, Chief Financial Officer

Great. Thank you, Doug. Good morning, everybody. So this morning, I plan to cover the details of our fourth quarter performance and the changes to our 2022 earnings guidance. For the fourth quarter we announced funds from operations of $1.55 per share, which exceeded the midpoint of our guidance range by $0.05 per share and was $0.03 per share above consensus estimates. The performance of our portfolio drove $0.04 of the improvement and higher than projected management and development fees added $0.01. I would place the portfolio outperformance in four buckets. First, income from earlier-than-anticipated leasing, particularly in San Francisco and Reston. In San Francisco we executed two 10-year renewals aggregating 65,000 square feet at a significant pickup in rent and several smaller new leases with immediate delivery. And in Reston, we signed a 90,000 square foot new lease with a technology company with space delivery on lease signing. We also collected payments from several tenants on receivables that we had written off in 2020. Second, we achieved higher service income due to an increase in utilization from better physical occupancy in New York City during the quarter. Just prior to the impact of the Omicron variant, our New York City portfolio census was running close to 70%, which represented a big pickup from the third quarter. Third, we experienced stronger parking revenue and hotel performance. Parking revenue totaled $23 million for the quarter, up 8% from the third quarter. It’s now running at 82% of its pre-pandemic rate. So that means there’s an incremental $20 million or $0.11 per share on an annual basis that we should be able to recapture to reach prior levels. Our hotel operated at 50% occupancy during the quarter; for the full year 2021, it operated just above breakeven, only contributing $600,000 to our FFO. This compares to its contribution in 2019 of $15 million, a difference of $0.08 per share that we should recover in the next couple of years. And fourth, we recognized income from the delivery of the 733,000 square foot Marriott World Headquarters development a month earlier than we anticipated. In addition to delivering it early, our cost came in well below budget, so its investment return profile is exceeding our expectations as well. The last item I would like to mention about the quarter is a reminder that as we guided last quarter we incurred a loss on extinguishment of debt of $0.25 per share for the redemption of our $1 billion of 3.85% senior notes that were due to expire in early 2023. We funded the redemption with an $850 million, 2.45% senior notes issuance in the third quarter. This was an opportunistic trade due to our views that interest rates were likely climbing. We feel good about our decision as rates have increased by about 50 basis points since we locked in at a 1.3% 10-year Treasury rate. We made a similar decision with our $1 billion mortgage refinancing on 601 Lexington Avenue that we closed this quarter at a 2.79% coupon for 10 years. The underlying loan carried an interest rate of 4.75% and was not expiring until April of 2022. But we had the opportunity to pay it off with no penalty starting in December of 2021. We closed it on the first day available and priced off a 1.48% 10-year Treasury rate, again significantly lower than current rates. Despite increasing the mortgage by approximately $400 million, we will see lower interest expense due to the 200 basis point reduction in the overall coupon. And as Owen mentioned we now have limited debt expirations over the next couple of years. Now, I’d like to turn to 2022. Doug described the leasing activity we are seeing heading into the year which adds to the confidence we have in our growth profile. As a result, we’re increasing our FFO guidance range to $7.30 to $7.45 per share for 2022. Our new midpoint is $7.38 per share, and it’s $0.03 higher than last quarter. The increase is coming from higher projected contribution from the in-service portfolio, as well as higher anticipated development fee income. You will notice that we brought down our same property NOI growth by 25 basis points this quarter, which might appear inconsistent with an increase in our guidance. The reduction is primarily due to the stronger performance we experienced in the fourth quarter of 2021, which increased our starting point. This includes the earlier-than-projected leasing in Q4 that is reflected in our higher occupancy, one-time cash receipts from our collections, and higher than expected service income, where our future projections are more conservative. In addition, Doug described two lease recaptures in our suburban Boston portfolio, where we have new tenants coming in at higher rents, but we will have some downtime between leases. The rent during the downtime is being covered by the exiting tenants, but that’s recognized as termination income, which is excluded from our same property income. All of these are positive results. We only brought down the top end of the range, so in effect the bottom end is actually higher. Our new assumption for 2022 same property NOI growth is 2% to 3% from 2021. We also reduced our assumption for 2022 cash same property NOI growth, and our new range is 5% to 6%, which represents strong growth year-over-year. The only other meaningful change to our guidance is an increase in our assumption for development fee revenue to $24 million to $30 million, an increase of $2 million. The improvement relates to additions to our development pipeline at 651 Gateway and 360 Park Avenue South. Overall, we continue to project strong FFO growth of more than 12% in 2022 from 2021 at the midpoint of our range. We expect our near-term growth to come primarily from delivering new office and life science developments and our 2021 acquisition program. These are expected to add an incremental $0.43 per share, or 6.5% to our 2022 FFO at the midpoint. Our guidance does not assume any new acquisitions in 2022. We also project benefit from our well-timed refinancing activity last year, resulting in $0.35 per share of lower interest expense and debt extinguishment costs in 2022 at the midpoint of our range. For the first quarter of 2022, we’re providing guidance for funds from operations of $1.72 to $1.74 per share. As a reminder, our first quarter results are always lower due to the timing associated with stock vesting and payroll taxes plus the seasonality of our hotel. In summary, we remain confident in the growth trajectory of our business. We’re seeing strong leasing activity in our portfolio that we expect to result in occupancy and income gains in 2022 and 2023. In addition to the $2.5 billion of existing development we have underway that we will deliver over the next two years, we have numerous sites under ownership where we’re working towards new starts in the coming months. That completes our formal remarks. Operator, can you open up the lines to questions?

Operator, Operator

Thank you, sir. And we have our first question from Manny Korchman from Citi. You may ask your question.

Michael Bilerman, Analyst (Citi)

Great. It’s Michael Bilerman here with Manny. Owen, if I can get your opinion: Boston Properties has always been focused on the highest quality office space, the highest quality buildings in the top markets, which has been very good for the company over its history. As we think about going post-pandemic, you talked about the desire of companies to have great space to encourage and provide a reason for their employees to come back. How do you think this bifurcation in the marketplace is going to play out in terms of the types of spaces that you own today — the AA-plus arena — and then everything else, because that Class AA-plus is a minority of the entire office stock? How do you think all of that Class B and C office space will trend? Is it just going to be rent inducements, which may depress rents overall? Or are you just going to need a substantial amount of capital to redevelop those assets either into more modern office space, or into other property types? And how do you think all of that’s going to ultimately affect the broader office market?

Owen Thomas, Chief Executive Officer

Yeah. A lot there to unpack, Michael, but I’ll do my best. I agree with what you said at the outset: BXP’s strategy back to our founders is to have great buildings and great locations — we say it today more as great place and space. It’s always been a hallmark of the company strategy. It’s always worked, and it’s actually even more important because of the pandemic. Doug and I, in our remarks, articulated what you said, which is we do think companies are going to return to the office, we do think hybrid is here to stay, and we do think it’s going to be very important for CEOs and company leadership to have great offices that their employees want to work in. So having buildings that have great amenities and that are located near transit — all those things are going to be increasingly important to entice workers to come back to the office. So I think the bifurcation between the top of the market and the rest of the market is growing right now, and it’s going to grow further. Doug gave you the very interesting stat on San Francisco: the aggregate availability stats on San Francisco are 27%, and he gave you the data on the top 20% of the market, which is actually 5% vacant. That’s incredible, if you think about it. So the bifurcation is increasing. Now, coming to your question, what’s going to happen with the more modest quality buildings? I think it’s very case-by-case, building by building, city by city, and neighborhood by neighborhood. I do think the office markets will recover, the economy will grow, some of those buildings will get leased as office. I do think it’s going to be very competitive, and probably harder to push rents. Land in places like Manhattan is incredibly valuable, so there could be a reuse of a lot of these properties. Many offices that were created for large corporate users have large floor plates and they’re not very well suited for conversion to residential because of the bay depth, but there are exceptions to that. I’m sure we’ll see creative developers change some of these buildings to residential; some may get torn down and made into something else. Some have been renovated where setbacks were put into an older building and floors are added to the top. So there’ll be a lot of creativity that goes into it. I think slowly over time you’ll see some conversion of this stock, and between the economy growing and some stock being taken offline, I think the markets will ultimately firm up. But this bifurcation between quality and commodity is going to continue and widen.

Emmanuel (Manny) Korchman, Analyst (Citi)

Hey, guys, it’s Manny here. Mike, I have a question for you: if I think about your guidance in totality, I think everything you mentioned on the call today was a positive and a lift to guidance, notwithstanding the ranges given a better 2021. Now, what are the negatives offsetting some of that? Because if I add together all the positives, I’m getting more lift than the lift to your midpoint. So are there negatives we need to think about? Is it something else within the range that’s keeping you from raising more? Or is it just conservatism — how do we think about that? Thanks.

Michael LaBelle, Chief Financial Officer

Look, sure, there’s conservatism in this environment. We’re delighted to see the increase in the leasing activity. That leasing activity that Doug is talking about will result in signed leases, but the question for us is: when did those leases go into occupancy? How much of that goes into 2022 and how much of it is a little bit later? Because in many cases, we have to wait until the tenants build out the space to start recognizing revenue on these spaces. So we have to judge how long that is going to take. So I think our trends are very positive. But the sales cycle and the build-out cycle is not immediate in all cases. So we have to judge that into our guidance. We brought up the low end of our guidance pretty significantly. The reason we’re doing that is some of the activity that we’re seeing — getting leads us to the conclusion that we don’t believe it’s possible to be at that low end that we had before, because we’ve gotten some of the stuff. We haven’t gotten enough at this point to feel like we should be increasing the high end, so we’ve kept the high end where it is. And so that’s how we build our guidance ranges. There really hasn’t been any kind of meaningful negative occurrences that are in our guidance. We talked a little bit about the same store, which is mostly due to positive things that happened. So there’s really no negative occurrences that we put in any of the items that we put in our guidance that were at all meaningful.

Operator, Operator

And we have our next question from Nick Yulico of Scotiabank. You may ask your question.

Nicholas Yulico, Analyst (Scotiabank)

Thanks. I just had first a question: maybe you can give us a feel for what the rent spreads were on new signings, not just the commenced statistics that you give for the fourth quarter?

Douglas Linde, President

Okay. I thought I did that all the way along. If you just sort of go back and look at my remarks, I basically said that leases that we signed this quarter were, I think I said, in some markets between 7% and 14%. In the greater suburban Boston market, it was up 5% plus or minus in certain assets. In New York City some were flat and other assets varied — in Embarcadero Center the CBD had a roll-up that, removing the special lease, was positive. The Washington DC leases were positive, and the asset-by-asset results vary dramatically. In general, the net trend was positive.

Nicholas Yulico, Analyst (Scotiabank)

Okay. Thanks, Doug. Second question is just going back to San Francisco. You kind of have this interesting dynamic going on there where your rents are up at Embarcadero Center; it looks like they’re up versus the end of 2019, yet occupancy is down materially for those buildings. I’m trying to understand what’s going on with those buildings versus the market out there?

Douglas Linde, President

So just to refresh what I said: the top call it 20 million square feet of premier buildings includes the vacancy at Embarcadero Center, so that’s in that statistic of about 5% overall for that portfolio of premier buildings. The vast majority of our availability at Embarcadero Center is in the low-rise EC1 and EC2. Unfortunately, we don’t have very much in the way of blocks of space, so it’s a floor here and a floor there. We have activity on some of that space; some of that space needs to be fully demolished because it had the best in the original user’s layout 25 years ago, and when the tenant moved out some of it is a space with an installation that doesn’t make sense anymore. We will make hay on some of that space during 2022. We don’t have ROCE projections for getting to 5% availability in those buildings during the year, but we’re pretty confident that the space is going to lease at healthy rent. Obviously, low-rise Embarcadero Center 1 is different than the top of EC4, so there’s a rent differential between those kinds of space.

Operator, Operator

And our next question from Craig Mailman of KeyBanc Capital Markets. You may ask your question.

Craig Mailman, Analyst (KeyBanc Capital Markets)

Thanks. Mike, maybe just a follow-up. How much of that $0.04 upside in the quarter was from the collection of payments? And how big is that bucket as we head into 2022?

Michael LaBelle, Chief Financial Officer

I would say it was close to $0.01 for the quarter. I don’t think I can tell you right now exactly how big that is going forward; we’re not assuming that we’re going to be really collecting anything more. So I’m not looking at anything that I think is significant that would be coming in 2022 on collections. One thing that could happen in 2022 is the return to accrual of some of the tenants that are non-accrual. We’re not projecting any of that either, but we’re watching these tenants — some retail tenants and other tenants that we have that we’re not accruing rent for right now. As they continue to be successful and pay rent and generate sales, there’s the ability for us to bring those tenants back to accrual, which in certain cases will have an impact on our earnings, although be a non-cash impact on our earnings; it’s just bringing back former straight-line revenue. So that’s another impact that could come from things that happened in the last few years.

Douglas Linde, President

I think Mike talked about it in the past that there are sort of three primary buckets of tenants that are in non-accrual: co-working is one — it’s the largest. Then what I’d refer to as entertainment retail, so we have a number of cinema operators in all of our markets that we’re on non-accrual with. And then we have a number of local operators, mostly in food and beverage, that are still struggling relative to where they were in 2019 because of the lack of foot traffic in certain parts of the country.

Operator, Operator

And our next question from Steve Sakwa of Evercore ISI. You may ask your question.

Steve Sakwa, Analyst (Evercore ISI)

Thanks. Good morning. Maybe the first question just broadly on San Francisco — it’s been one of the biggest urban cities struggling to bring people back; crime and homelessness have really deteriorated conditions in the city. I’m curious what your conversations are with the mayor and other business leaders about how to right the ship in San Francisco. What do you think that timeline looks like for that?

Douglas Linde, President

Good morning, Steve. I think I would acknowledge what you’re saying. I’ve said it on previous earnings calls: San Francisco and the Bay Area has been hit the hardest of all of our markets because of the pandemic. I think it’s related to technology companies being, frankly, behind other sectors in terms of returning people to office. There have also been very restrictive COVID regulations in San Francisco. I think there’s an increasing voice in San Francisco that is concerned about the issues you raised around homelessness and crime and getting the city open. It is our hope over time that those voices will be heard and San Francisco will be able to recover. We look at the Bay Area as the leading computer science knowledge cluster in the world and we do think that bodes well for the city, but we acknowledge those factors need to be addressed. Bob, do you want to add?

Robert Pester, Regional Head, San Francisco

Yeah, the mayor has publicly stated that things have to change. She’s working on a plan right now to get more policing and more officers out on the street. I think you will see a change. Owen and I were on a call with other business leaders in San Francisco yesterday, and there’s clearly an outcry from the business community that things have changed. So I think given some time, you will see a change. Hopefully the DA gets recalled and we get somebody in there that will start enforcing the laws.

Owen Thomas, Chief Executive Officer

I’d also add that there’s a circular logic around the crime and homelessness situation and return to office. The streets need to be safe for people to return, but the more people you have on the streets going into the office, that creates safety as well. Policing is important, but having people return to the office also contributes to street-level safety. Both need to happen in tandem.

Steve Sakwa, Analyst (Evercore ISI)

Okay, thanks. Second question: you talked about a large pipeline of deals. When you think about space needs and how people are planning, whether they’re downsizing or upsizing, what’s the general discussion you’re seeing with the deals in progress today? What changes do you expect from a design perspective and space utilization?

Douglas Linde, President

I would say categorically that 80% of the tenants we are having conversations with today are growing, not shrinking. Most of those customers are in finance, asset management, VC, private equity in New York, San Francisco and Boston, and some professional services. Professional services firms are probably the 20% that might consider modest reductions. The architectural decisions associated with planning for 2022 and beyond are, believe it or not, very consistent with what they were in 2019. On the margin, architects are talking to clients about creating better common areas or gathering spaces and more interesting community areas or conference rooms, but the physical space utilized by companies that are growing now isn’t materially different from what was built in 2019. It’s a bit of a surprise. Many firms still don’t fully understand the cadence of their teams as they come back to the office, and it’s hard to make monumental changes until they understand the impacts of that cadence. People truly don’t know how productive and how accepting hybrid or partial in-person work will be until they encourage and get their folks back. We’ve been delayed in doing that, so I wouldn’t be surprised to see changes in the next cycle, but it’s not there yet.

Operator, Operator

And our next question from John Kim from BMO Capital Markets. You may ask your question.

John Kim, Analyst (BMO Capital Markets)

Thank you. Owen, you mentioned in your prepared remarks the widespread corporate dissatisfaction with reduced efficiency and employee retention. Could you elaborate on that? Is this purely anecdotal? Does that include tech companies who have been pressing pause on returning to work?

Owen Thomas, Chief Executive Officer

By definition, it’s anecdotal, although there are surveys done by various service providers and real estate firms. We have 53 million square feet with many leading companies across the country; we speak to our clients and potential clients and have a good handle on this. I have not spoken to a business leader who thinks working fully remote is good for their company and wants to continue it indefinitely. The pandemic has made change harder: variants like Delta and Omicron have delayed returns, and a tight labor market makes leaders hesitant to push too hard on return-to-office policies. That said, I hear concerns about retention, difficulty training new employees, and higher turnover for employees hired post-pandemic versus pre-pandemic. On the technology side, many companies had a remote-enabled workforce before the pandemic and were already offering collaborative amenities and food service; the pandemic accelerated or reinforced those strategies in other industries. So the trend toward high-quality offices with amenities is spreading across industries.

Bryan Koop, Regional Head, Boston (Leasing)

A trend we’re definitely seeing that started about 90 days ago and accelerated in the last 30 days: every time our team comes back from a tour, there’s a noticeable change in who’s on the tour. There is a tremendous amount of C-suite players, many leaders of all departments. We’ve done tours with as many as 10 to 15 people, highly unusual in the past where leaders would come in later. They’re coming in much earlier and are far more proactive about the design of the space, what the goals are and what their intentions are. There’s a real realization by these leaders that going to work is no longer an obligation but a destination, and they want to make this destination as compelling as possible. It’s been refreshing to see this proactivity from leaders.

John Kim, Analyst (BMO Capital Markets)

That’s great. Thank you. My second question is a follow-up on the embedded occupancy uplift: you mentioned 180 basis points of embedded occupancy uplift from signed leases not commenced, which I think increased a little from the prior quarter. But you kept your occupancy guidance basically flat from current levels at the midpoint. Is that purely due to timing of lease commencements? Or do you also expect lease terminations to increase as well?

Douglas Linde, President

It’s 100% based on the timing of when the actual rent commencement is going to be. Let me give you an example: we have a lease expiring at 601 Lexington in the latter half of 2022. We are already in discussions and negotiations with a tenant on 150 out of 200,000 square feet of expiring space. I don’t know how that will shake out as to whether we demo the space and deliver it later or they’ll take it as-is. The difference could be 18 months in terms of when we recognize revenue. We have many of those quirky transactions, so you’ll hear me talking about larger amounts of leased-but-not-occupied space as we move into the year. That’s a great thing because the revenue is contractual and long-term, but it’s hard in the short-term to gauge how it impacts occupancy numbers.

Operator, Operator

And our next question from Jamie Feldman from Bank of America. You may ask your question.

Jamie Feldman, Analyst (Bank of America)

Great, thank you and good morning. I’ll ask about CapEx and improving assets. How are you thinking about the cost to run your business and the CapEx load versus history? Is it going to cost a lot more to stay competitive in this new environment, or is it similar to what it’s always been?

Michael LaBelle, Chief Financial Officer

For our portfolio it’s probably similar to what it’s been because we’ve done so much already. If you look at our major CBD assets, the new projects have occurred. For example, we spent a lot to rebuild lobbies at Embarcadero Center buildings. At 100 Federal Street we rebuilt and created a really unusual place at the base of the building. In New York, we redid the lobby at 601 Lexington and other significant investments. We’ve been doing this work on a consistent basis. So I don’t think you’ll see a major change in CapEx; it will be consistent. You have to refresh buildings, upgrade mechanical systems, elevator systems, lobbies, and add amenities. We’ve discussed the work at the General Motors Building, with a major amenity center that should open later this year. It’s ongoing everywhere. So I don’t think it’s going to stop, but I don’t think it’s going to meaningfully increase either.

Jamie Feldman, Analyst (Bank of America)

And in terms of tenant improvements (TIs), is the cost going up because of more common space or because of general construction inflation?

Michael LaBelle, Chief Financial Officer

TIs are going up for two reasons. First, the market is more competitive, and second, it’s a lot more expensive to build out space today. The escalation in TI costs for installations is very significant. Our contribution is not making up for what the tenant ultimately puts in their space. It all ties back to supply chain issues and the number of people working across trades and labor.

Douglas Linde, President

On hoteling and desk-sharing decisions: some companies predict they’ll have shared spaces not available to every person every day. For certain roles — portfolio managers, for example — they’ll have dedicated offices. For other groups, especially technology teams, they may not have a permanent seat but a place to go when they want to work. We’ve seen very little among large companies indicating they no longer allow permanent assigned desks for everyone. Large tech companies, for instance, still want groups together, and many want their people to be encouraged to come to work. If you’re trying to encourage return-to-office, you likely still want a physical place for employees when they are there.

Operator, Operator

And our next question from Alexander Goldfarb from Piper Sandler. You may ask your question.

Alexander Goldfarb, Analyst (Piper Sandler)

Good morning and thank you. Two questions: big picture for Owen and then Mike on guidance. Owen, I understand the need for companies to get people back to the office for culture and training. But we’re now going on the third year of this new normal. Absent a weaker economy that weakens the labor market and gives managers more leverage, at what point do tenants say this new normal is the new normal and adjust how they lease and use space? We’re three years in — thoughts?

Owen Thomas, Chief Executive Officer

Good morning, Alex. I think many clients are predicting a new normal — more hybrid work — but that hasn’t translated into companies saying they don’t need an office. The leasing statistic for the fourth quarter of 1.8 million square feet is consistent with pre-pandemic levels; if people weren’t going to use offices, why are they signing these multi-year leases? I think the Omicron variant and other health factors have delayed returns, but surveys and anecdotal feedback show many employees have pandemic fatigue and want to come back for camaraderie, training and learning. I expect improvements as the winter and spring progress in 2022.

Alexander Goldfarb, Analyst (Piper Sandler)

Mike, a guidance question: you mentioned an $11 million missing parking amount — is that quarterly or annual? And on the third quarter call you mentioned $52 million to go on the COVID recovery — how much of that is in your 2022 guidance?

Michael LaBelle, Chief Financial Officer

There’s no dispositions in the guidance; we don’t guide to dispositions or acquisitions. With respect to parking, it’s $20 million annually and about $0.11 per share that we’re still short; we’ve been seeing an improvement of a couple of million dollars a quarter. In January there was a step back, but our expectation is that later in the first quarter we’ll see that start to improve again. Regarding the $52 million COVID recovery: we’re about at $45 million now. Parking is $20 million. Hotel is the difference between its current run rate and 2019 — about $11 million. The remainder is retail — about $14 million. I don’t think much of that retail is in 2022 guidance; it’s more likely to come in 2023.

Operator, Operator

And our next question from Rich Anderson from SMBC. You may ask your question.

Richard Anderson, Analyst (SMBC)

Thanks. A lot of talk about the future for office and uncertainty. If you get clarity on where office is going, can BXP make strategic shifts, like entering new Sunbelt markets or expanding multifamily, similar to some peers? Or will you stick to your gateway-market strategy?

Douglas Linde, President

We have a well-thought-out perimeter of our business: gateway markets. We entered Seattle because it fits that category. In our strategy, we have businesses with strong growth potential — Seattle, LA, life sciences — and we have a growing multifamily business, primarily off sites under our control. We’d be interested in additional multifamily, but we’re going to devote investment capital to opportunities in our current markets where we have a wealth of owned sites and embedded opportunities.

Richard Anderson, Analyst (SMBC)

When you look at the portfolio, what do you estimate the mark-to-market is today, and can you comment on aggregate market rent growth?

Michael LaBelle, Chief Financial Officer

It’s somewhere around 5% across the overall portfolio.

Owen Thomas, Chief Executive Officer

We are not projecting broad rent increases across our markets in 2022, other than life sciences. There’s enough supply in many markets that pressure remains. That doesn’t mean rents are falling across the board — concessions probably won’t rise much further. In New York, where vacancy is high in some pockets, concessions and rent dynamics vary by building; we’re not yet at a market-tightness point that will drive broad rent increases. We’re seeing embedded growth in life sciences and some pockets of California and Boston, but not a broad market rent recovery in the next year.

Operator, Operator

And our next question from Caitlin Burrows from Goldman Sachs. You may ask your question.

Caitlin Burrows, Analyst (Goldman Sachs)

Hi, good morning. Question on value-add development: how big of an opportunity is the obsolescence in lower-quality office stock for BXP — for example, deals like 360 Park Avenue? And how do you balance that opportunity with the risk of re-tenanting buildings or converting them into effective development projects?

Owen Thomas, Chief Executive Officer

It’s case-by-case. Our regions are tasked with finding opportunities like 360 Park. We pursue deals where we think we can create one of the top 20% buildings I described earlier. Sometimes all the stars align and we get deals like 360; sometimes they don’t. We’ll continue to chase them and expect to do more deals this year as opportunities arise.

Douglas Linde, President

Some opportunities aren’t empty buildings like 360; Safeco Plaza is another example that’s value-add and 90% leased — the opportunity there is to improve the asset and raise rents over time. We underwrite and look for ways to invest capital and generate disciplined returns.

Caitlin Burrows, Analyst (Goldman Sachs)

Thanks. On same-store occupancy: you’ve had encouraging leasing progress, but same-store occupancy is down, suggesting move-outs outpaced leasing. Can you explain what’s driven that and how you expect it to change?

Douglas Linde, President

During 2020, leasing velocity slowed in the pandemic and tenants that had decided to move did so, causing same-store occupancy to slip. Now we’re seeing acceleration in leasing velocity. The cycle from signing to occupancy can be six to 18 months, so the slower velocity in 2020 shows up in our occupancy in 2021, and the acceleration we saw in 2021 will show up in occupancy in 2022 and 2023. Our expectation is that same-store occupancy will start to increase as those leases complete.

Operator, Operator

And our next question from Vikram Malhotra from Mizuho. You may ask your question.

Vikram Malhotra, Analyst (Mizuho)

Thanks. In the past you commented San Francisco is more cyclical with potentially faster ups and downs relative to New York. Is that still the case given what you’re seeing in both markets?

Douglas Linde, President

Yes. San Francisco can increase much more rapidly. About 40% of the embedded occupancy in CBD San Francisco are technology companies. Historically there’s been a strong correlation between tech activity and utilization. As tech companies return, demand can be very significant and dramatic in short periods. New York has a growing tech base but remains led by financial and professional services, so its recovery will be more granular. That’s how we think about both markets.

Vikram Malhotra, Analyst (Mizuho)

Where does Flex by BXP go from here? Will it be a bigger piece of the equation? Would you partner with other flex providers? Would you put more capital in it?

Owen Thomas, Chief Executive Officer

We believe in flexible workspace. It’s a market created pre-pandemic and is here to stay for small companies and larger users. It will be a single-digit percentage of the market but an important product. Right now, most flexible-workspace operators’ occupancy declined during the pandemic. We are not investing additional capital in Flex by BXP today; we will watch how the market recovers and revisit that decision in future quarters.

Michael LaBelle, Chief Financial Officer

Most flexible-space operators have moved from a model of taking a lease and putting capital in to asking landlords to put the capital in while they manage the space. Many landlords won’t do new installations; instead, they may have management deals where third parties operate the space for them. You’ll likely see more landlords engage managers rather than fund new flexible-space builds.

Vikram Malhotra, Analyst (Mizuho)

Thanks. Mike, when you said 5% mark-to-market earlier, was that a cash mark-to-market?

Michael LaBelle, Chief Financial Officer

That’s the mark-to-market if you took the whole portfolio and compared current contractual rents to market rents today for spaces currently leased; it’s about 5% and excludes vacant space.

Operator, Operator

And our next question from Ronald Kamdem from Morgan Stanley. You may ask your question.

Ronald Kamdem, Analyst (Morgan Stanley)

Quick question: on DC concessions, any update on trends and how they’re trending?

Douglas Linde, President

Concessions remain elevated, but we’re seeing lease terms extend. At the peak we saw over $300 a foot in concessions, but many of those leases have terms in excess of 15 years. Also note that much of the concessions are not cash — they’re downtime associated with tenant build-out and commencement timing.

Ronald Kamdem, Analyst (Morgan Stanley)

For the first quarter guidance, you mentioned a seasonal drop. From the $1.55 in Q4 to $1.72 to $1.74 guidance in Q1, was there anything else baked in besides G&A and hotel seasonality that you called out?

Michael LaBelle, Chief Financial Officer

G&A and hotel are meaningful drivers. First quarter results are typically lower due to stock vesting timing and payroll taxes plus the seasonality of the hotel. There are some portfolio positives and a little lower interest expense, but the G&A and hotel negatives are greater, which explains the guidance differential.

Operator, Operator

And our next question from Derek Johnston from Deutsche Bank. You may ask your question.

Derek Johnston, Analyst (Deutsche Bank)

Hi. We’re intrigued by the 360 Park Avenue South acquisition and JV. Can you discuss the strategic rationale to expand in this Midtown South submarket? And how has the repositioning of the asset, the design and amenities, evolved versus pre-pandemic projects?

Douglas Linde, President

New York is very large and contains many submarkets. Midtown South is effectively a new market for Boston Properties given its scale. Midtown South has been attractive to technology and media, which have driven office growth since the global financial crisis; we think it’s important to participate in that submarket. We were delighted to complete the 360 deal in December. Hilary, do you want to talk about plans for the building?

Hilary Spann, Regional Head, New York

Sure. We will undertake a complete repositioning of the asset both in building systems and in common areas and tenant spaces. It will be designed to attract tech and media tenants who prefer Midtown South. We’re already seeing interest from tenants. When finished, the building will be, for all intents and purposes, a new building in terms of systems and finishes. The distinction is the submarket and the types of tenants that prefer it.

Derek Johnston, Analyst (Deutsche Bank)

Thank you. One more: what will it take to get office utilization back to 60% or 70%? Do you see that happening in 2022? If hybrid is here to stay, and someone works from home two days a week and the office three days, is utilization 60% or 100% depending on how you count it?

Douglas Linde, President

More people coming to work will drive utilization — that’s the simple answer. Utilization metrics depend on definitions. If seats are assigned and only a subset of employees are present on a given day, you might see 60% seat utilization, but if more access cards exist than seats, utilization math can be higher or lower. How companies define utilization depends on their technology and policies. We could see 60% utilization under certain scenarios; it’s hard to generalize until firms decide their philosophies on space usage.

Owen Thomas, Chief Executive Officer

To add: we’re seeing clients asking employees to be in on certain days — Tuesdays or Wednesdays — to maximize collaboration. Census trends often show lower activity on Mondays and Fridays and higher midweek, consistent with this approach.

Operator, Operator

And our next question from Michael Lewis from Truist Securities. You may ask your question.

Michael Lewis, Analyst (Truist Securities)

Thank you. Every time I see headlines that companies are pushing back return-to-office, the implication is negative. At this point, when returns get pushed back, is that simply a timing issue, or is there a risk it causes more tenants to cut or leave their office space? In other words, are we losing demand as the duration wears on longer?

Douglas Linde, President

I think it’s less relevant to long-term demand. It becomes more challenging depending on labor movements. If companies can’t fill roles in a market, they may hire remote employees elsewhere and that impacts space usage in the short term. Those labor dynamics have a more pressing implication on utilization than the calendar date of the return itself. The delay affects hiring and business models, which in turn impacts space demand in the short term.

Operator, Operator

And our next question from Anthony Powell from Barclays. You may ask your question.

Anthony Powell, Analyst (Barclays)

Hi, thank you. You talked about increasing demand for prime office buildings. Could that lead to another cycle of new construction of that type? Or is that limited given rent dynamics? If development does start, when might it come online?

Owen Thomas, Chief Executive Officer

Given the pandemic uncertainties, development has slowed. That said, I do think there will be demand for new office space in the future, particularly as technology and life science companies grow and prefer new buildings. We’ll do some of it ourselves, but I don’t see a broad wave of speculative development across markets immediately.

Anthony Powell, Analyst (Barclays)

When you negotiate new leases, do tenants ask for discounts given uncertainty, or do they accept market rents?

Owen Thomas, Chief Executive Officer

Every deal is different. Most clients transact when they feel they’re getting a market transaction. There’s a range across buildings — some space commands a premium and some a discount. Because we have transaction volume, we know where the market is at any one time and price accordingly. Whether it gets better or worse in 2022 remains to be seen.

Operator, Operator

And our last question from Daniel Ismail from Green Street. You may ask your question.

Daniel Ismail, Analyst (Green Street)

Thanks. How much does tenant mobility increase demand for quality space within a market? Are tenants more likely today to move around the city or leave a submarket for better space?

Douglas Linde, President

In San Francisco, the market has contracted from a geographic perspective; peripheral areas that were transitional are less attractive than the core. Demand tends to concentrate in core markets with transit and amenities. Similar constructs apply in New York: Park Avenue is more attractive in hot markets than other corridors. As markets soften, tenants migrate to better buildings and core locations. We’ve seen this in Reston, for example, where our portfolio outperforms on occupancy and rents as tenants move to an urban core environment.

Daniel Ismail, Analyst (Green Street)

How does that impact capital deployment near term, say 3 Hudson versus 343 Madison? Does it make you more or less likely to move forward with projects?

Owen Thomas, Chief Executive Officer

It depends on the facts at the time. 3 Hudson is large at 1.8 million square feet and we want an anchor tenant to proceed. We’ll evaluate the economics at the time. New development can be attractive in New York and elsewhere, but costs are up and we’ll assess economics as decisions come due. For 343 Madison, there’s demolition and approvals work to do to enable a construction start; the decision is near to medium term but not immediate.

Michael LaBelle, Chief Financial Officer

On utilization: in the fall before Omicron, New York City was running in the high-60s for census. Utilization dropped in early January to low levels — we were struggling to get to 25% in some markets the first weeks of January — but it’s rebounding. On a sequential basis, card swipes are up roughly 10% to 15% each week, but not back to October-November levels yet.

Operator, Operator

There are no further questions at this time. I will now turn the call over back to Owen Thomas for closing comments.

Owen Thomas, Chief Executive Officer

I think we’ve said enough, operator. There will be no closing comments. I thank all of you for your questions and your interest in Boston Properties. Thank you.

Operator, Operator

Thank you. This concludes Boston Properties' conference call. Thank you all for participating. You may now disconnect.