Paramount Group - Q2 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group Second Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference call is being recorded today, August 1st, 2024. I'll now turn the call over to Tom Hennessy, Vice President of Business Development and Investor Relations. Please go ahead, sir.

Tom Hennessy (VP of Investor Relations and Business Development)

Thank you, Operator, and good morning, everyone. Before we begin, I would like to point everyone to our Second Quarter 2024 earnings release and supplemental information, which were released yesterday. Both can be found under the heading "Financial Results" in the Investor Section of the Paramount Group website at www.pgre.com. Some of our comments will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are usually identified by the use of words such as "will," "expect," "should," or other similar phrases, are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our Second Quarter 2024 earnings release and our supplemental information. Hosting the call today, we have Mr. Albert Behler, Chairman, CEO, and President of the company; Wilbur Paes, Chief Operating Officer, Chief Financial Officer, and Treasurer; and Peter Brindley, Executive Vice President and Head of Real Estate. Management will provide some opening remarks, and we will then open the call to questions. With that, I will turn the call over to Albert.

Thank you, Tom, and thank you all for joining us today. Yesterday, we reported core FFO of $0.20 per share for the second quarter, in line with consensus. Operationally, we had another solid quarter of leasing activity. We executed leases of approximately 198,500 sq ft, bringing our year-to-date leasing volume to about 475,000 sq ft. This represents our strongest second quarter and first half of leasing since 2020, demonstrating the continued strength and appeal of our high-quality portfolio. We continue to make progress on our availability in New York, where leasing activity during the quarter totaled approximately 178,000 sq ft. We are particularly encouraged by the steady flow of inquiries and tours we are seeing, which we believe will continue to translate into further leasing success in the coming quarters. We are seeing strong demand from a diverse range of tenants, especially financial services and law firms.

The momentum we are experiencing across our New York portfolio reinforces our confidence in the enduring appeal of high-quality, well-located office spaces in prime submarkets. I can announce that we officially opened Paramount Club at 1301 Avenue of the Americas during the second quarter. This exclusive amenity offering has been extremely well received by our tenants and is proving to be a significant differentiator in the market. Paramount Club is not only enhancing the workplace experience for our existing tenants but is also playing a crucial role in attracting new tenants to our portfolio. Our ability to attract and retain top-tier tenants is a testament to the strength of our portfolio and our team's leasing expertise. I'm also thrilled to share that on July 18th, we celebrated the grand opening of the highly anticipated Michelin-star-rated Din Tai Fung restaurant.

Set under the iconic glass cube in the plaza of our headquarters at 1633 Broadway, Din Tai Fung adds a new layer of excitement to our curated offerings. The buzz surrounding the opening has been tremendous, and we couldn't be happier. We invite you to visit and experience the culinary sensation firsthand. The opening of these two unique and outstanding amenities will further enhance the tenant experience and elevate our portfolio in ways that are distinguishing it for both our current tenants and prospective tenants alike. These are the types of exclusive amenities that resonate with today's discerning tenants. As a flight to quality persists, we believe our portfolio is well positioned to capture a disproportionate share of demand, driving occupancy improvement and, at times, allowing us to push rents across our New York portfolio.

As in New York, the ongoing flight to quality in the office market continues to play to our strength in San Francisco. There we are seeing a clear preference for Class A, amenity-rich buildings in prime locations, precisely the type of assets in our portfolio. Our properties, with their state-of-the-art infrastructure, large and efficient floor plates, and desirable locations, are increasingly attractive to tenants seeking to upgrade their office space. The market in San Francisco remains tough and behind New York. During the quarter, we signed approximately 20,500 sq ft of leases in San Francisco, which resulted in total leases executed during the first half of the year of approximately 180,000 sq ft. While leasing velocity remains below long-term averages, we are seeing some encouraging signs that demand is picking up.

San Francisco remains a center for premier tech talent with high growth potential and is a clear global front-runner for VC funding to AI companies. Our high-quality portfolio is well positioned to capture outsized market share as the recovery persists. Turning to our balance sheet, we continue to maintain a strong liquidity position with approximately $409 million in cash and restricted cash at our share, excluding non-core assets, along with the full $750 million available on our revolving credit facility. While the broader transaction market remains subdued, we are beginning to see early signs of increased activity. The volume of potential deals in the pipeline is gradually expanding, suggesting a possible shift towards a more dynamic environment in the coming year. We anticipate that the wide bid-ask spreads, which have historically kept many market participants on the sidelines, may start to converge. This could potentially unlock more transaction opportunities.

Furthermore, the prolonged period of elevated interest rates may lead to an uptick in distressed assets coming to market, potentially creating attractive acquisition prospects. In this evolving landscape, we maintain our disciplined approach to capital allocation. We are strategically positioned to capitalize on external growth opportunities, particularly those in partnership with third parties, where we can leverage our extensive market knowledge and disciplined investment approach. Our strong balance sheet and ample liquidity position are well to act on attractive opportunities should they arise. In closing, we had a solid performance this quarter and remain confident in our strategy. Our high-quality assets in prime locations continue to outperform the broader market, and we are well positioned to capitalize on the ongoing flight to quality in our core markets. With that, I will turn the call over to Peter.

Peter Brindley (EVP and Head of Real Estate)

Thanks, Albert, and good morning. During the second quarter, we leased approximately 198,500 sq ft, with approximately 178,000 sq ft in New York and approximately 20,500 sq ft in San Francisco. The weighted average term of leases signed during the second quarter was 8.6 years. During the second quarter, three of the leases we completed occurred at 1301 Avenue of the Americas, totaling more than 92,000 sq ft, two of which were with new financial service-based companies, and the third was with a law firm that continues to expand in the building. Approximately 60% of this leasing activity was on vacant space, and the balance was on space that was otherwise scheduled to expire in 2025. Over the past 12 months, we have made substantial progress at 1301 Avenue of the Americas, with leased occupancy at the building improving from 79.8% leased to 89.5%, or 970 basis points.

In both New York and San Francisco, tenants continue to pursue premium, centrally located, amenity-rich buildings run by best-in-class, well-regarded, and well-capitalized owners. This accelerating trend endures to our benefit, enabling us to capitalize on these market dynamics and expand our leasing pipeline. Our priorities remain centered on maintaining exceptional tenant relationships, securing renewals for upcoming lease expirations, and leasing our vacant space. At quarter end, our same-store portfolio-wide leased occupancy rate at share, excluding non-core assets, was 86.3%, down 280 basis points from last quarter and down 440 basis points year-over-year, driven by the previously discussed and known move-out of our second-largest tenant at share, Clifford Chance, at 31 West 52nd Street. Turning to our markets, Midtown's second-quarter leasing activity of approximately 4 million sq ft, excluding renewals, surpassed the five-year quarterly average by 21%.

Leasing activity during the second quarter exceeded the five-year quarterly average for the third consecutive quarter, the first three-quarter streak since 2018. The steady improvement of the demand profile in Midtown has been most evident within Midtown's core submarkets, as tenants increasingly pursue the highest-quality real estate with close proximity to public transportation. Availability in Midtown remains elevated at 18.2%. However, the tightening of supply on upper floors has resulted in upward pressure on rents for view space, particularly in Midtown's core submarkets. The recently opened Paramount Club at 1301 Avenue of the Americas has proven to be a key differentiator in attracting and retaining tenants. Membership is offered to tenants in our New York portfolio, many of whom have offered rave reviews in the early going. Brokers and prospective tenants alike have offered similar feedback, referring to it as best-in-class, unlike anything else in the market.

The club is bustling, irrespective of the time of day, as members take full advantage and incorporate the club into their workday. Our New York portfolio is currently 86.9% leased on a same-store basis at share, down 320 basis points quarter-over-quarter and down 360 basis points year-over-year. Shifting our focus to San Francisco, San Francisco recorded more than 1.6 million sq ft of leasing during the second quarter, approximately one-third of which was made up of new-to-market tenants, primarily AI companies. Tenants in the market demand has grown to more than 6.5 million sq ft, the highest it has been since Q4 2019. This increase continues to be driven by the emergence of newly funded San Francisco-based AI companies, which have become an increasingly large percentage of the demand pipeline in San Francisco.

In fact, VC funding in San Francisco is on pace to reach 2022 levels, north of $30 billion, much of which is going toward AI companies. Despite challenges in the market, including a record-high availability of 37.1%, San Francisco remains a hotbed for top tech talent with high-growth potential. Our high-quality portfolio is well positioned to capture outsized market share as the recovery continues in San Francisco. At quarter end, our San Francisco portfolio was 84.2% leased on a same-store basis at share, down 130 basis points quarter-over-quarter and down 740 basis points year-over-year. We look forward to updating you on our progress. With that summary, I will turn the call over to Wilbur, who will discuss the financial results.

Wilbur Paes (COO and Treasurer)

Thank you, Peter, and good morning, everyone. Yesterday, we reported core FFO of $0.20 per share, which is in line with second-quarter Wall Street consensus estimates. Same-store growth in the quarter was essentially flat, up 0.1% on a cash basis and slightly negative at 1.3% on a GAAP basis. During the second quarter, we executed 15 leases totaling 198,505 sq ft at a weighted average starting rent of $74.55 per sq ft and for a weighted average lease term of 8.6 years. Mark-to-market on 98,862 sq ft of second-generation space was positive 1% on a cash basis and negative 3.4% on a GAAP basis. This mark-to-market data represents only our New York portfolio, as the 20,647 sq ft leased in our San Francisco portfolio represented leases executed within our non-core assets at Market Center and 111 Sutter Street.

Turning to our balance sheet, our liquidity position remains strong at over $1.1 billion. We ended the quarter with little over $409 million of cash and restricted cash and the full $750 million of undrawn capacity under our revolver. Our share of the $409 million of cash and restricted cash excludes amounts from non-core assets. During the quarter, we once again extended the mortgage loan on 111 Sutter Street and pushed out the maturity to December 2025. We did this on the same terms as the previous extension, namely that all interest shortfalls will continue to accrete to the principal balance of the loan, with the lender funding all capital needed to stabilize the asset, thereby protecting our balance sheet all while preserving optionality for our shareholders.

Outstanding debt at quarter end was $3.6 billion at a weighted average interest rate of 3.92% and a weighted average maturity of 3.1 years. 87% of our debt is fixed and has a weighted average interest rate of 3.31%, and the remaining 13% is floating and has a weighted average interest rate of 8.01%. These figures, of course, include the debt on the non-core assets. Excluding debt on non-core assets, our outstanding debt was $3.24 billion at a weighted average interest rate of 3.89% and a weighted average maturity of 3.4 years, and we have no debt maturities until 2026. Please refer to page 39 in our supplemental package for the impact of non-core debt on our capital structure for additional information.

Turning now to our 2024 guidance, based on our year-to-date results as well as our outlook for the remainder of the year, we have improved our same-store cash and GAAP NOI growth outlook by 100 basis points and 50 basis points, respectively. The improvement in our same-store results is offset by slightly higher interest and G&A expense. As such, we have maintained the midpoint of our core FFO guidance of $0.78 per share by narrowing the range to be between $0.76 and $0.80 per share. Please refer to page 6 of our supplemental package for additional information regarding the changes and assumptions underlying our guidance. With that, Operator, please open the lines for questions.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)

Thanks. Good morning. Either for Peter or Wilbur, I guess it's kind of a two-parter. Number one, can you just kind of remind us some of the large known vacates that you guys have maybe between now and the end of 2025? And if there are some things that are not necessarily resolved, maybe just remind us kind of what are some potential things that could become known vacates over the next 18 months. And I guess the corollary to that is, can you just help us think through the signed lease not commenced figure as we try and think about the occupancy bridge over the next 18 months?

Peter Brindley (EVP and Head of Real Estate)

Morning, Steve. This is Peter. I'll start by saying that Google and J.P. Morgan make up 40% of our 2025 lease expirations. And as we now know, Google will vacate the entirety of One Market, which is roughly 340,000 sq ft, 168,000 sq ft at share. And as it relates to J.P. Morgan at One Front Street, we are in discussions with them. We don't expect to keep them in the entirety of the 241,000 sq ft that expires in 2025. We do expect to keep them in a portion of it, but that is the largest block, if you will, when you think about our 2025 lease expiration. Beyond that, we are having constructive conversations with a number of tenants that have lease expirations in 2025 and working very hard, and we believe we will be successful to keep a good portion of the remaining 2025 lease expirations.

Wilbur Paes (COO and Treasurer)

Sure. And Steve, to the second part of your question as far as signed leases, you'll see there's a big delta, as I'm sure you've seen, between 1301 leased and occupied percentage and also at 31 West. That will start to narrow through the end of the year relative to those signed leases and start to hit really in the early part of 2025. At 1301, it's the big Citizens Bank deal that was done. At 1325, it was the large Wilson Sonsini expansion that was done there.

Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)

So is there just kind of a rough figure, Wilbur, or should we just kind of extrapolate between the occupancy and the leased and assume some of that, but not all of that will commence over the next, kind of say, 12 months?

Wilbur Paes (COO and Treasurer)

Yeah. I think you will need to extrapolate, Steve. I don't want to get into precise figures of what that contribution will be.

Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)

Okay. Thanks. And then maybe Albert, you mentioned still the dislocation in the capital markets, transaction market, but you're starting to see more potential things come to market. Excuse me, given where your kind of capital structure sits today and kind of where your stock price is, I'm sure you wouldn't want to issue equity to do deals, excuse me, at these levels. But how would you think about funding deals? And just, I guess, what would the economics of a deal sort of have to look like to kind of get you guys to jump in?

Albert Behler (Chairman, CEO and President)

Yeah. Steve, as said over the last couple of earnings calls, we are looking at potential opportunities very carefully. In the Class A, that's where we are interested in and Trophy. There are very few transactions happening so far. There's still a big gap, a bid-ask which seems to be narrowing. And we will not be using a lot of our equity, of our liquidity that we currently have on balance sheets. So we will invest asset light, as we call it, and use outside venture capital that seems to be more interested at this point in the cycle. There are a number of, I would say, especially foreign, but especially also private investors, less institutional ones, who are considering to get into the market. And we will use these relationships that we have developed over the last many years to look at investment opportunities.

It's at a lower point in San Francisco at this point, and you have to have the hope that San Francisco is coming back, which I think is behind in comparison to New York. So we are looking at both markets, but we will be very, very careful before we pull the trigger.

Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)

Okay. Thanks. That's it for me.

Peter Brindley (EVP and Head of Real Estate)

Thank you, Steve.

Operator (participant)

Thank you. Our next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.

Vikram Malhotra (Managing Director and Senior Equity Research Analyst)

Morning. Thanks for taking the question. I guess just first on two specific properties. I think at 1633, Showtime has a bunch of space on the sublet market. I'm just wondering if you've had any discussions on their plans. I know the lease doesn't come up for a while, but just curious given the size at 1633. And then any update on the retail block on Fifth Avenue? It's fairly large, but I know there are a few large blocks there. So any update would be helpful on leasing prospects.

Peter Brindley (EVP and Head of Real Estate)

Hi, Vikram. We have more activity on that retail space at 712 Fifth Avenue than at any point since we began marketing it. Certainly, there's been a lot of productive deals that have transpired on Upper Fifth, and there's not a whole lot of supply. Certainly, nothing like ours, as I think everybody would agree. So nothing to report just yet in this regard, but we feel like there's really very nice activity, and we may have an opportunity to convert with a really exciting couple of tenants. So more to come.

Albert Behler (Chairman, CEO and President)

Yeah. Vikram, as mentioned again a couple of times before, we leased a nice part of that retail after Henri Bendel moved out to Harry Winston, and the rent we got is nearly at the level that Henri Bendel had paid previously. We want to be very careful to find the right tenant. It's most probably in the luxury segment, and it has to fit the asset class of the rest of the office building. Peter and his team have very decent interest because there's not much of square footage available on Fifth Avenue of that kind of quality.

Vikram Malhotra (Managing Director and Senior Equity Research Analyst)

Thanks so much. Maybe just one more. Peter, you alluded to maybe some early signs of improvement in San Francisco in particular, and just generally from your peers, things seem very slow pipeline-wise, leasing velocity-wise. I'm just wondering, can you elaborate on whether it's AI or traditional tech? What are you looking for? What green shoots may you be seeing? Thanks.

Peter Brindley (EVP and Head of Real Estate)

The green shoots, Vikram, are that the demand pipeline, the tenants in the market, continues to increase. Venture capital funding continues to find its way to San Francisco-based companies. There are new companies entering the market. In fact, a third of the leasing activity in the second quarter was made up of new tenants to the market. AI-based companies, of course, we're all talking about. I think the most important thing is that they acknowledge the importance of the office. They are, in fact, looking to secure office space to allow for collaboration in order to execute on their lofty plans, of course. So I think that is all trending very nicely. We, of course, are working our way through a lot of availability in this market to return it to healthier fundamentals.

But directionally, what I am experiencing, what we as a team are experiencing in our properties is increased tour activity, increased proposals. We have nice activity on the Google block of floors that we'll be getting back next year. And so for those reasons, we feel more optimistic today than we did going back, call it, six months. And so directionally, San Francisco seems to be moving in a better direction.

Operator (participant)

Thank you. Our next question comes from the line of Camille Bonnel with Bank of America. Please proceed with your question.

Camille Bonnel (Equity Research Analyst)

Good morning, everyone. I saw you kept the leasing target for the year, and momentum seems to be picking up in New York City, but your signed activity is still tracking below the low end of guidance so far. So I was wondering if you could provide more details on how much San Francisco leasing was factored into your guidance and if you feel anything on the demand front into July has really changed versus your expectations at the beginning of the year.

Wilbur Paes (COO and Treasurer)

Camille, maybe I'll just start. I don't think your statement about it trending at the low end of the guidance is true. We have leased 475,000 sq ft Year to Date. To get to the midpoint, you need to lease 168,000 sq ft per quarter if it was linear. And obviously, both the first and the second quarter were well ahead of those figures.

Camille Bonnel (Equity Research Analyst)

Okay. Thanks for clarifying, Wilbur. And Wilbur, while I have you, can you provide an update on what assumptions are factored into your interest expense guidance following the increase in this quarter? Because statements from the Fed yesterday seem to be increasing the odds of a September cut. So are you baking any of this in?

Wilbur Paes (COO and Treasurer)

Yes. So just to put this in perspective, obviously, when we did come up with interest expense guidance, that was in February. As you can imagine, at that point, there was a lot of chatter between 4-5 cuts in the year. That did not come to fruition. Hence, we're tweaking assumptions based on where the Fed speak is now based on the expectation of rate cuts for the duration of the year, but it is incrementally higher relative to what we provided in the guidance. You also know the rate cap and the swap at 1301 expires in August, and that was factored into that equation as well.

Camille Bonnel (Equity Research Analyst)

Okay. Thanks for walking through that. We ran a bottoms-up analysis of office assets across New York City to see how the rates rank relative to each other. Your portfolio comes up as one of the top three platforms. But we see when demand pulls back, you can really see how the high concentration in buildings and large tenants can have a large impact to your operations. As we look forward, can you talk about how you think about balancing this risk versus the benefits of diversification? Is there anything the team's doing to mitigate this risk?

Albert Behler (Chairman, CEO and President)

Well, I think our portfolio is pretty diversified. If you look at the New York market historically, it has been more and more diversified over the years. You might not remember not being around. Many years ago, New York didn't have entertainment. It was depending mainly on financial tenants. And today, that means mainly finance and insurance. Today, it's a very, very diversified tenant mix. We have tech included as well. So I think our portfolio is also quite diversified across the board. Each building is different. We like it that way. That's typical for office buildings in this market. If you have smaller floor plans, it's catering to a different demand or a different tenancy than larger buildings. I think we manage it pretty well.

Camille Bonnel (Equity Research Analyst)

Thank you for your thoughts.

Albert Behler (Chairman, CEO and President)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Blaine Heck (Senior Equity Research Analyst)

Great. Thanks. Good morning. I was hoping to get some color on the drivers of the increase in same-store NOI expectations, given that the lease percentage outlook didn't change. Any details there would be helpful.

Wilbur Paes (COO and Treasurer)

Sure. Blaine, as you point out, we bumped same-store cash and GAAP NOI guidance 100 basis points and 50 basis points respectively at the midpoint. You saw the results in the second quarter that aided in that and the expectation of reduced operating expenses in the second half of the year. That's really what drove the NOI increase. But recognize.

Blaine Heck (Senior Equity Research Analyst)

Very helpful.

Wilbur Paes (COO and Treasurer)

Where we're trending relative to the Year to Date, Blaine, it will be negative in the second half of the year. That comes as no surprise to everybody because Clifford Chance vacated in May of this year. You're losing that. That was your second largest tenant. New York will be more negative in the second half of the year because of that. Then you have the impending lease expiration of Leerink at 1301.

Blaine Heck (Senior Equity Research Analyst)

Right. Okay. That's helpful. Thanks, Wilbur. And then on the lease rate guidance itself, it looks like that implies about 80 basis points of improvement between June 30th and the end of the year. I guess how much of that do you have strong visibility on? And how much would you say is more kind of speculative at this point?

Wilbur Paes (COO and Treasurer)

So if you look at the lease rate, I mean, if you look at how much expirations we have throughout the rest of the year, it's about 170,000. In order to get to the midpoint of our guidance, you're talking about leasing in excess of 200,000 sq ft on vacant space or about to expire space to be able to get that. I think Peter can dimension the pipeline and how much of that pipeline is on vacancy. But the reason we left that unchanged is because we feel good about reaching that level based on what we're seeing in the pipeline.

Peter Brindley (EVP and Head of Real Estate)

Yeah. I would dimension our pipeline as remaining very, very strong. Blaine, we have leases in negotiation and proposals in advanced stages for more than 300,000 sq ft, a good portion of which, getting to your question, is on vacant space or soon-to-be vacant space. And given that we need to lease in excess of 200,000 sq ft and what we refer to as occupancy-increasing transactions, we believe we will get to the midpoint based on what we're currently seeing in the pipeline.

Blaine Heck (Senior Equity Research Analyst)

Great. That's really helpful. And then last one, Albert, with respect to external growth through acquisitions, you talked about partnering with other investors for transactions. Can you just talk about the amount of demand you're seeing to co-invest on office investments? It sounds like these opportunities are a little bit more tangible at this point than maybe I perceived on past calls and in past meetings. Has that level of interest from institutional capital increased recently?

Albert Behler (Chairman, CEO and President)

Well, institutional capital is clearly not the front runner here. The capital that is looking more intensively to get into the market is private capital. You have to think about family offices, ultra-high net worth individuals, and especially office investors who have not been in office so far because many others are dealing with the issues that they have themselves. They just see the opportunity. They see the tremendous pricing advantage you have currently if you take an asset. So that is getting more and more active because they have been on the sidelines for a while because the phenomenon in America of work from home has been very consistent for a while and surprisingly long. But it seems to be that the office attendance is improving, definitely in New York, but also in San Francisco.

I think that's something that many, especially foreign investors, were surprised by for a long time, how long that persisted. Because if you travel to other countries, especially in Asia, everybody is back to the office. And here, it's taking a while. So that was, I think, the biggest negative that was shunning investors away from this market.

Blaine Heck (Senior Equity Research Analyst)

Great. Thank you.

Albert Behler (Chairman, CEO and President)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Ron Kamdem with Morgan Stanley. Please proceed with your question.

Ron Kamdem (Analyst)

Hey, just two quick ones for me. The commentary on the 2025 expiration for San Francisco was super helpful. Can you sort of do the same thing for New York, though, whether it's Charter or Wilson Sonsini or Värde or any of those sort of known vacates or still in negotiations? Or what's the thinking there?

Peter Brindley (EVP and Head of Real Estate)

Sure, Ron. So we have what equates to about 450,000 sq ft or 6.8% expiring at share in New York in 2025. I don't want to give away too much by way of specifics, but Charter is a very important tenant of ours, long-standing relationship. They expire for about 100,000 feet in 2025. We're having constructive conversations with them. Wilson Sonsini, as you may know, relocated to 31 West 52nd Street, which helped de-risk the known move-out of Clifford Chance. But I can tell you that those two floors that they have vacated at 1301 are highly coveted given that a lot of the availability in Midtown is disproportionately located on lower floors. There's just not a whole lot of great space high up like those floors are. Värde is now a tenant at 1301 Avenue of the Americas.

So we will get those two floors back at 31 West. But they have chosen to remain with Paramount and have most recently transacted at 1301. Those floors will be contiguous to the block of space that we're getting back from Clifford Chance. And because of the quality of 31 West, we have a lot of confidence that we'll have success leasing up that block of space to credit tenants. And we're excited about the offering and excited about the current level of activity. But you really called them out. Those are the biggest moving parts of the 450,000 sq ft that we have coming back to us in 2025.

Ron Kamdem (Analyst)

Okay. Great. Super helpful. And then just on the non-core assets at 111 Market Center, when should we expect those to actually be off the books? Is that like 2025, or are there still negotiations? Just trying to figure out when can you actually take them off the books.

Albert Behler (Chairman, CEO and President)

Well, there's still negotiations. So I don't think we want to predict at this point what's happening there. And the loan at 111 Sutter got extended for 18 months. So that's still open what's happening there.

Wilbur Paes (COO and Treasurer)

Yeah. Albert's right. Obviously, 111 Sutter, that got extended to December 2025, Ron. Market Center, we are in negotiations. These things can take a while. You have multiple banks in these processes. And you have to first be in default, and then the banks have to notify that you're in default and reserve their rights and go through the process, so.

Ron Kamdem (Analyst)

Okay. Makes sense. That's it for me. Thank you so much.

Albert Behler (Chairman, CEO and President)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Dylan Burzinski with Green Street. Please proceed with your question.

Dylan Brzezinski (Senior Analyst)

Thanks for taking the question, all. Just trying to look at sort of expectations for net effective rents over the next 12 months, 2 years. I mean, is it your expectation that we'll continue to see pressure on this front? I guess it probably differs by whether it's in New York or San Francisco. Just sort of trying to get a sense for where your guys' expectations for net effective rents are across your portfolio.

Albert Behler (Chairman, CEO and President)

So I would think that we are pretty close to maybe the bottom. And New York already improving, especially for, and you have to differentiate between Class A and Class B and then Trophy. And so the better and the difficult buildings. I think for the worst buildings, this will be still a struggle for longer to come. In San Francisco, we might be a little bit behind. And that will take a little longer because also the vacancy for the entire market is at a higher level. But even there, for Class A assets, it might be close to the bottom in San Francisco as well.

Dylan Brzezinski (Senior Analyst)

Appreciate that color. And then going back to J.P. Morgan's lease, realize that you guys are still in discussions with them. But I mean, do you sense that they'll give back more than 50% of their space, or?

Peter Brindley (EVP and Head of Real Estate)

Dylan, I think we at this point assume that it will be more than 50% of their 2025 space expiring, which is the 241,000 sq ft. I do think it'll be probably more than 50%. But as I said, they will keep some component, we believe. And those are the discussions that we're having.

Dylan Brzezinski (Senior Analyst)

Great. Thanks, guys.

Albert Behler (Chairman, CEO and President)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Behler for any final comments.

Albert Behler (Chairman, CEO and President)

Thank you all for joining us today. We really look forward to providing an update on our continuous progress when we report our third quarter 2024 results. Goodbye.

Operator (participant)

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.