Dylan Burzinski: Just curious if you can kind of provide your thoughts or expectations for net effective rents throughout the remainder of 2023? I know leasing costs have probably continued to remain elevated. And something that surprised us over the last several years is that base rents have held up surprisingly well. So I guess could 2023 be the year that we start to see pressure on base rents?
Ted Klinck: Dylan, it’s Ted. Look, I think — look, I think so, right? I mean, again, it’s an economic slowdown, just like any other slowdown in the office business. Right now we’ve got vacancy rates increasing. We got the sublease space increasing. So you got those headwinds. And they’ve got cost pressures, right? We keep thinking or maybe hoping that costs are going to come back in line and as development start to fall off, you may see some contractors that are getting a little bit more aggressive. But up to this point, the TIs, it’s still — there’s still cost pressures that continue to increase. Free rent is increasing. Again, making blanket statement. There are pockets in submarkets that they’re all different. But in general, there’s upward pressure on TIs, upward pressure on free rent.
Now the nice thing is since COVID, we’ve been able to maintain, if not increase, face rents. So when you throw all that into the mix, we’ve done a good job on net effectives, but just entering the slowdown we’re entering, it wouldn’t surprise me to see some downward pressure on net effective rents.
Brendan Maiorana: Dylan, it’s Brendan. Just to — just one thing I would add. We did do a lot of spec suite deals during the quarter. You saw that the average kind of sized lease that we did during the quarter was around 5,000 square feet. Those spec suite deals initially tend to carry a pretty low net effective because we spend a lot of capital upfront. As we relet those, then the net effectives are very high. So if we adjust for the spec suite deals in the quarter, the net effective looks a lot more comparable to previous quarters. So I think it had a negative drag by around $0.65 a square foot on our overall net effective. So I think we will do more of that during this year because we’ve been very successful and seen a lot of leasing traction there, but that will probably, from a headline perspective caused the initial net effectives as we sign those spec suites to be lower than they otherwise would be.
Brian Leary: Dylan. Brian. Just to add on, on this kind of counterintuitive face rates. As the new development is delivered and leases up, market face rates will actually drop because that higher-end top of the market face rate is no longer in the pool to “face rates.” So we’re actually seeing — we’re you have seen the market face rates drop is because some of the top stuff is leased up. And we’re seeing — to Ted’s point, we’ve done a pretty good job of folks who see space as a differentiating factor. That face rate is a smaller part of their equation when they’re talking about bringing their talent back.
Dylan Burzinski: Just one more quick one, if I may. Were you guys able to share sort of the underwritten LTV at Bank of America Tower in Charlotte?
Brendan Maiorana: Well, it depends on who you ask for the V, I guess. But it’s probably — I mean, I think the lender had a probably a more conservative outlook of value than we think it would garner if you were to market that asset for sale. But let’s call it, probably in round numbers, 50% is probably a pretty good benchmark in terms of with the LTV.
Operator: Next question from the line of Nick Hillman with Baird.
Daniel Leben: This is Daniel Leben on with Nick. I had a question. I know you were mentioning the mortgage. But given any potential slowdown in the market in the transaction market and your deals, would you look to equity then as a potential way of delevering those?
Brendan Maiorana: Daniel, it’s Brendan. I’m not sure I totally understand the question. But I mean, I guess, if would we consider a JV partner for assets, if that’s maybe the question, probably not the profile of kind of — Okay. Got it. Yes, I would say probably for the type of assets that Ted talked about, kind of those smaller buildings that we have out in the market, I would say that that’s not really kind of something that we’re contemplating on the assets that we have out in the market for potential sale.
Operator: Next question from the line of Peter Abramowitz with Jefferies.
