Jerry Sweeney: And I think just add on George comments, Camille, 401 is the top project in the market. Plymouth Meeting not that strong, not that large of a market. It combines with Blue Bell, which is a joining submarket. But the 401, as George mentioned, very high profile project at the interchange of really three interstates and the pipeline, the visibility there will be good. So if there was a building we had to get space back on, I’m saying we want space back that was probably the one that had the highest probability of near-term re-letting.
Operator: Our next question comes from the line of Anthony Paolone with J.P. Morgan.
Anthony Paolone: Thanks. Good morning. I guess first question, if I look at the development pipeline and call it yields around 7 and think about current debt costs, if this rate environment persists, do you think just as this stuff gets delivered, it could be an actual like earnings drag? Or how do you think about the levers you might have to kind of protect earnings for the company if that’s kind of a situation?
Jerry Sweeney: Yes, Tony, good question. Look, I think certainly with the increased rate of debt, it squeezes the return margins on those properties. We typically have done is we’ll build in 3-plus-percent rental rate increases into all of those leases. So the idea from our perspective is to get those projects to a stabilization point. Yet, the lease terms we’re doing there typically tend to be between 10 to 15 years, they tend to be with good credit tenants, with good collateral support. So the game plan would be as the lease — as the interest rate market still remains higher than any of us would like, execute the business plan for each of those assets, maintain yield equivalency or potentially higher yield equivalency than we have in the projections right now, and then learn or get those projects stabilized.
And then really focus on kind of the refinancing or sale options as the market conditions — as market conditions clarify. But certainly with debt costs going up to the extent that they have during the development cycle, the margin of contribution is lower than we were initially targeting when we started these projects. And we recognize that, which is why one of the reasons we’re focused on driving the net effective rents we can achieve not just on those projects, but across the entire portfolio.
Anthony Paolone: Okay. Thanks. And then just follow-up, if you look out to maybe 2024 or even perhaps 2025, you noted the limited exposure on leasing, but can you maybe address just where you think mark-to-markets may be right now, and/or perhaps if there’s any appreciable change in the capital that might be needed for that leasing?
Jerry Sweeney: Look, I think from a market — mark-to-market right now, the best evidence we give you is what we’ve been posting thus far. So we do expect to continue to see very good mark-to-markets in our CBD, University City, and particularly our Radnor submarket in Pennsylvania. I do think though, Tony, in all Canada will continue to have negative mark-to-markets coming out of Austin. That market’s in certainly a state of disequilibrium. And as you notice from that new page we put into the supplemental, some of our bigger vacancy exposures are in three of Austin complexes. So I think there the watchword will be accelerate activity, meet the market in terms of pricing, try and keep good annual rent bumps in, and control capital to the extent that we can.
But look, one of the interesting things that we are seeing is the competitive set is actually shrinking a little bit in some of these markets. Not every landlord has the quality product we have nor the financial resources to attract tenancy. So our focus remains on leasing every square foot through the portfolio, driving net effective rents as high as we possibly can, and really taking advantage of this continuing window we see of tenants really wanting to move into higher quality projects with landlord stability. Brokers want to show space in buildings where they can get their leasing commissions. Tenants want to move into buildings where they know that they’re certainty of getting their tenant improvement dollars funded. Brandywine resonates on both of those fronts incredibly well.
So we’ve increased our leasing teams and our talent at the ground level to make sure that we’re really focused on turning over every possible stone where we think there’s a leasing prospect.
Operator: Our next question comes from the line of Michael Griffin with Citi.
Michael Griffin: Great. Thanks. For the Skyway asset sale, do you have a sense of what the cap rate or buyer interest was on that property? And then, from assets you’re currently marketing similar question, where do you think you could sell these at and what’s the potential buyer pool?
Jerry Sweeney: Yes, great question, Michael. The cap rate on the Barton sale was in the high Texas and came in about $300 a foot, a little more $300 a foot. Look, I mean, the buyer pool is actually interesting right now. We have a number of properties in the marketplace. We have one or two properties waiting to go under firm agreement. And the — on the standard office product, we’re typically seeing the small institutions, the syndicators, the wealth, capitalized, private development, redevelopment companies in the marketplace. So cap rates are kind of in the, I’ll call it in the 8% to 10% range for some of those more workmen like products. The biggest challenge really is getting the financing in place. So we haven’t really seen as much pricing pressure as you would expect.
Unless it’s really driven by, hey, I need to get financing. So I think Brandywine being in a position where we can provide some bridge financing for several years and take that financing risk off the table, I think puts us in a pretty good position. But, for example, we have a couple of properties we have on the market in Northern Virginia. We’ve had in one case, over 40 investors sign the NDA with about 10 different tours. We have another project where we had 75 CA signed with tours occurring on almost a daily basis. So there seems to be still a fair amount of interest in buying properties. The major gating issue that I think we’re all facing is just how we can facilitate the debt side of their equity investment. And I think, really, depending upon how the interest rate climate goes and the commercial banks and life insurance companies that’ll dictate whether to get some of these sales done, we need to do some bridge financing.
Michael Griffin: Great. Thanks. And may be one on the leasing side. Can you maybe comment on sort of how concessions have been trending in your markets and kind of a sense of what tenants are out in the market right now and sort of what they’re looking for in terms of space requirements?
George Johnstone: Yes, sure. Michael, this is George. I’d be happy to take that one. I mean TIs have remained relatively constant. We’ve seen a little bit of pressure on unit costing but the overall package. And again, we look at the concession as a combination of both abatement and TI. So we have seen a little bit of a shift more towards abatement and we obviously try and limit that to just the fixed rent as opposed to the operating expense pass-throughs. Commissions have remained unchanged. And so overall net effective rents, we’ve continued to see growth, especially in Philadelphia, University City and in Radnor, more challenging given the dynamic in Austin on net effective rent growth.
Operator: Our next question comes from the line of Michael Lewis with Truist Securities.
