Douglas T. Linde
President and Director at Boston Properties
Thanks, Owen. Good morning, everybody. Client demand across our portfolio has remained pretty stable over the last quarter. But final leasing decisions are taking longer, not -- pretty consistent with Owen's talking about -- relative to challenges with regards to the profitability of corporations. Our buildings continue to see the most activity from financial services, professional services, law firms, administrative services and asset management. Traditional technology demand continues to be absent from our markets and more times than not, renewing technology clients are reducing their lease premises. This is most prevalent in our West Coast properties, Pretty much the same picture that I pointed -- painted last quarter. Growth from the AI organizations in the city of San Francisco is real. More than 700,000 square feet of leasing has occurred in the past few weeks, and there have been billions of dollars of recent investment into this growing ecosystem. For now, that leasing is focused on large, well-built opportunities that are available at significant discounted terms relative to the rents being achieved in premier buildings. Reducing availability is a positive for the broader San Francisco market, but it's not going to impact leasing at Embarcadero Center in 2024. The concentration of strongest user demand, often with growth for our assets, is still broadly speaking, alternative asset managers, private equity, venture hedge funds, specialized fund managers.
These companies are growing their teams and capital under management. This pool of clients typically wants to occupy premier workplaces. To illustrate the point, during the third quarter, we completed a 15,000 square foot expansion for a hedge fund in Manhattan. A 52,000 square foot multi-floor lease with a private equity firm growing in our portfolio in Manhattan, a 70,000 square foot asset manager growing in our portfolio in Manhattan, and an expansion for a 21,000 square foot private equity firm in D.C. Our strongest activity remains in our Midtown Manhattan portfolio, 200 Clarendon and the Prudential Center in Boston, the Urban Core of Reston Town Center in Northern Virginia, and our Embarcadero Center assets in San Francisco. We don't have direct availability at Salesforce Tower, but we hear through the market that Salesforce has interest in their 150,000 square foot sublet opportunity. Law firms are also an active portion of our portfolio and important clients for BXP. We are in active lease negotiations or LOI discussions with seven distinct law firms in Manhattan, D.C. and San Francisco. Owen highlighted that just over one million square foot of signed leases during the third quarter. Last October, we provided the leasing expectations embedded in our 2023 guidance, between 500 million to one million square feet per quarter, aka, 750,000 square feet on average or three million for 2023. Through the first half of the year, we were at 1.56 million.
So to date, we're at 2.7 million square feet. We currently have an additional 1.2 million square feet of transactions in active lease documentation. I would say we have a high confidence that we will be beating our leasing target embedded in our 2023 guidance of three million square feet. This quarter, the executed leases included 52 transactions, 32 renewals, 20 new tenants. There were five contractions and five expansions among our existing clients, with a net reduction in that pool of about 33,000 square feet. There were no particular patterns relative to industry or size, given who was expanding and contracting. Breaking the volume down by market, we did about 439,000 in Boston. 240,000 square feet in New York, 100,000 square feet in D.C. and 278,000 square feet in the West Coast market. The mark-to-market of the leases that commenced this quarter was down 3% as reported in our supplemental. The mark-to-market of the leases executed this quarter was positive 4%. The starting cash rents on leases we signed this quarter on second-generation space, were up 16% in Boston, about 1% in New York and then down 13% in D.C., 9% in San Francisco, 14% in L.A. and 6% in Seattle. We ended the third quarter with an in-service occupancy of 88.8%, compared to 88.3% last quarter. As Owen said, during the third quarter, 140 Kendrick Street and 751 Gateway were added to the portfolio, and Net Square was taken out. If you remove Net Square from the second quarter, the comparative period occupancy went from 88.7% to 88.8%.
So again, modest relevant increase. I would also note that we terminated WeWork, on 44,000 square feet in the third quarter. We expect to have additional portfolio vacancy stemming from WeWork defaults as we move through the fourth quarter and into 2024. Just to remind everyone, WeWork leases 493,000 square feet as of 10/1/23. The BXP share of 2023 annualized revenue is $33 million. We don't expect we work to exit all the assets, nor do we expect them to remain in place in their current footprint. This will be a drag on 2024 occupancy and same-store contribution. The development portfolio now sits at 2.8 million square feet and it's 52% leased. We've recently signed a 70,000 square foot office lease with an asset manager at 360 Park Avenue South, bringing -- its 18% leased and another floor at 651 Gateway that is now 21% leased. Two 100% leased assets totaling 335,000 square feet were removed and put into service, which accounts for the change in our total leased in the supplemental. At the end of the quarter, we had signed leases that have yet to commence on our in-service vacancy, totaling approximately 750,000 square feet, with about 425,000 square feet anticipated to commence in the fourth quarter of 2023. For the remainder of 23, we have about 925,000 square feet of expirations. Much of this is uncovered, so we expect a drop of a few basis points of occupancy at year-end. In 2024, we have a very manageable 5.7% of our total portfolio expiration or 2.7 million square feet.
We believe our occupancy will be stable in 2024, defined as up or down 1% quarter-to-quarter, where we end the -- as relative to where we're going to end the year in 2023. We will provide a leasing volume outlook for 2024 along with guidance next quarter. From a broad market perspective, the office supply picture didn't really improve much in the third quarter with almost every market continuing to experience net negative absorption, manhattan being the one place, where there was some positive. The city-specific office brokerage reports are starting to characterize their markets in ways that acknowledge the bifurcation between the have and the have-nots, and the distinctive trends for premier assets, though they are not publishing their data broadly. The availability in the premier buildings that Owen described is depicting a more constructive picture and BXP relevant view of office supply. What's clear is that new speculative construction, which presumably would be Premier is nonexistent in the marketplace today. Any new construction starts are going to require economic rents, rent and concessions that are vastly different from the current transactions. The major inputs to a new building are construction hard costs, capital costs and leasing velocity. Construction costs saw dramatic increases over the past five years with annual increases in the high single digits. We've seen the rate of increases slowing down, but we have not seen any reduction of costs.
Construction financing could be found at SOFR plus 200, when SOFR was 25 to 50 basis points. Today, construction financing for office space is simply not available from traditional lenders. SOFR is at 5.25%, and nontraditional lenders might, and I use the word might, lend at double-digit current interest rates with additional points upfront and lower loan-to-cost caps. Speculative leasing assumptions also assume longer lease up. You put all this into a development pro forma and you need rents that are materially higher than what is supported by current market rents in every one of our cities. This quarter, we completed a 313,000 square foot 10-year renewal in the Back Bay of Boston, four years prior to expiration at a rent level that both parties found attractive. Our client is using all their space, believes that the critical component of their overall business strategy, and when they look down to the market did not believe that any new construction was likely to be built on a speculative basis. This meant they would need to pay replacement cost rents and sign a lease now using all the inputs I just outlined, to be in new construction in the Back Bay in four years, and there are no 300,000 square foot block of high-rise space available in premier buildings in the Back Bay today. New life science activity in the portfolio continues to be light. During the quarter, we completed our third lease at 651 Gateway for another floor. The property will open in 2024, and to date, each lease requires our partnership to complete turnkey spaces.
In Waltham, where we have our other life science new development availability, we are seeing some tour activity, but there is no urgency for these requirements. There are a few large requirements to the touring, but as I have discussed previously, the bulk of the immediate demand is from small private companies that are looking for fully built space. BXP's regional teams continue to lease space and outperformed the market because our portfolio is fundamentally comprised of premier workplaces, the majority of the demand, new and existing clients in the market want to be in these types of properties, and we're investing capital in our building infrastructures, amenities and client spaces, which allow our teams to meet client needs. We are all seeing the stress that many buildings are feeling due to their current capital structure, and the reality of the supply and demand fundamentals reflected in the leasing market activity. The transition or recapitalization or reequitization of these buildings is going to take an extended period of time. Many of these assets are not in a position to commit capital to existing or new tenants, which greatly impacts the leasing brokers interest in considering them for their clients and offers us for the opportunity to further increase our market share. I'll stop here and turn things over to Mike.
