Jul 29, 2020
Operator
Welcome to Washington Real Estate Investment Trust Second Quarter Earnings Conference Call. As a reminder, today's call is being recorded.
Before turning the call over to the company's President and Chief Executive Officer, Paul McDermott; Amy Hopkins, Vice President of Investor Relations, will provide some introductory information. Amy, please go ahead.
Amy Hopkins
Thank you and good morning, everyone. Before we begin, please note that forward-looking statements may be made during this discussion.
Such statements involve known and unknown risks and uncertainties, including those related to the effects of the ongoing COVID-19 pandemic which may cause actual results to differ materially, and we undertake no duty to update them as actual events unfold. We refer to certain of these risks in our SEC filings.
Reconciliations of the GAAP and non-GAAP financial measures discussed in this call are available in our most recent earnings press release and financial supplement, which were distributed yesterday and can be found on the Investor Relations page of our website. Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Taryn Fielder, Senior Vice President and General Counsel; Drew Hammond, Vice President, Chief Accounting Officer and Treasurer; and Grant Montgomery, Vice President and Head of Research.
Now, I'd like to turn the call over to Paul.
Paul McDermott
Thank you, Amy and good morning everyone. Thanks for joining us on our second quarter earnings call.
We delivered strong second quarter financial performance against the backdrop of the ongoing economic disruption, highlighting the resilience of our portfolio. As the local economy gradually reopen, our primary focus continues to center around the health and safety of our residents, tenants, employees and their families.
Over the past several months WashREIT created and implemented a comprehensive reentry plan to mitigate the spread of COVID-19 at our properties. We connected with our office tenants through personalized outreach to understand their needs and discuss our approach, make sure that they are comfortable with the protocols that we have implemented.
We are fortunate to have not experienced material bad debts to date in alongside reentry planning, we've been diligently working with tenants who have been financially impacted by the economic shutdown to discuss and finalize deferral arrangements. As of today, we are pleased to report that we have substantially completed that effort.
There was no doubt that these are trying time. However, we have adjusted to the new demands of today's operating environment, and have taken swift and deliberate action to protect and support our residents and tenants.
I could not be more proud of the dedication shown by the WashREIT team during this challenging period. Furthermore, these times have highlighted the importance of social fairness, equity and justice.
And our company has responded with a refocused commitment to improving diversity, inclusion and belonging within our company and our community and creating long lasting, positive change. As we enter the second half of the year, we are increasingly confident in the resilience of our region and likewise, our portfolio.
Our Washington metro focus provides economic stability compared to other major metropolitan areas. This is true both historically and during the current downturn.
As the Washington Metro Area continues to experience fewer job losses since the pandemic hit, then other large metro areas in the US overall. Washington Metro employment declined 9% during the second quarter compared to over 11% for the US overall.
A recent analysis was completed by Delta Associates determined that the Washington multifamily market is better positioned to weather a down cycle than nearly all of the nation's other large metropolitan areas. This is due in large part to the presence of the federal government and the corresponding stability of the professional business services sector, which together comprised 46% of the DC metro economy, compared to 25% to the 30 largest metro areas.
Furthermore, our professional business services sector is more heavily weighted towards the professional, scientific and technical sub sector, which has fared very well during this crisis and generated year-over-year job growth of 1.6% in June. This sector was expected to bounce back much quicker than other sectors and continues to be the primary private job creation source in the region over the long-term, according to Delta Associates.
Unsurprisingly, the federal government sector has been the least negatively impacted by the pandemic thus far. Many federal agencies actually received a funding boost, which could lead to additional hiring, especially at critical ages – agencies such as the FDA, NIH and FDA.
Government contractors have seen $1.2 billion in contracts awarded year-to-date that are directly tied to the COVID-19 response according to JLL. Employment trends for the regional information sector reflect limited disruption and major tech industry investments, including Amazon's HQ2 campus construction and Virginia Tech's Potomac Yard campus continue without disruption.
The Washington Metro Area led the country in Q2 leasing activity, driven by 1.6 million square feet of positive net absorption in Northern Virginia. Despite the stay at home orders, office leasing activity in Northern Virginia declined only 12% in the second quarter compared to the five-year trailing quarterly average according to CBRE.
Over half of the leasing activity in Northern Virginia was driven by government contracting services. Government contractor awards are up 4% year-over-year due to the government's response to COVID-19.
Tech and government contracting drove 60% of our office leasing volume in Northern Virginia last year, and looking forward, we expect demand from these sectors to continue to grow. Unsurprisingly, Washington DC office leasing activity has slowed more than it did in Northern Virginia, due to lower momentum leading into this downturn.
However, the impact of local job losses for office using sectors in DC has been limited with no office using sector was more than 5% of the total workforce during the second quarter according to BLS data. Additionally, the number of tours increased substantially in July.
We expect our DC office portfolio to act defensively against this backdrop. Maryland, Virginia and DC each took a phased approach to reentry beginning at the end of May.
DC and Maryland are currently in phase two with limited re-openings of shops and restaurants and Virginia is in phase three, which has allowed all retail and public services to resume with social distancing measures in place. With The implementation of phased reentry protocol, we are seeing increased activity across all of our asset classes.
Multifamily touring and application volumes have increased threefold from early April for both our same-store and non-same-store assets and same-store applications are trending above prior year levels. Following the closure of our leasing office, we took advantage of our virtual touring capabilities and continued leasing in April and May, and once social distancing requirements were eased locally, we began offering self-guided tours in June.
Just recently we have opened our multifamily amenities in common areas and started offering in person tours with additional safety precautions. Lease-up of Trove continues to progress and is expected to reach stabilized occupancy in the fourth quarter of 2021.
While the economic shutdown has impacted the original expected pace of lease-up, we averaged approximately 16 leases per month during the second quarter, and expect to reach break-even levels of occupancy by year end, followed by steady quarterly NOI growth thereafter. Our total lease rate growth for the quarter was a positive 40 basis points, which combined with our sequential decline in ending occupancy of less than 80 basis points for our stabilized properties demonstrates the resilience of our value oriented multifamily portfolio.
Lease rates for our non-same-store portfolio, which includes strong performance from our Class B suburban communities grew over 2% during the quarter on a blended basis, comprised of 2.6% of renewal lease rate growth and 1% of new lease rate growth. Both our suburban garden style apartments offer larger unit sizes, open air hallways, and less density compared to mid or high rise buildings, allowing us to participate in the increasing demands for these qualities over the near term in the wake of the pandemic.
Over the long term, the expansion of our multifamily portfolio to growing suburban markets in the DC metro suburbs positions us to capture an increasing share of regional household formation and job growth. We began to experience an uptick in utilization at all of our office properties towards the end of the quarter, although most notably at our northern Virginia office assets, as Northern Virginia is now on phase three of reopening.
In preparation for the repopulation of our properties, we prepared a detailed property reentry plan that emphasizes employee and tenant health and well-being as top priority. We have reached out to our tenants to discuss the plans and protocols that we have put in place.
The feedback regarding our collaborative approach has been very positive. And in many cases, we've strengthened our relationships with our tenants.
We've upgraded our office buildings to MERV 13 ventilation filters, which is the standard for superior commercial office buildings. Installed directional safety practice signage, contactless opening technology and proactive shield around front office desk in addition to a variety of other measures taken to facilitate safe reentry.
We have also established enhanced cleaning protocols that include more frequent cleaning and the use of electrical static cleaning machines and have developed elevator and common area safety protocols designed to mitigate the risk of virus transmission. Our tenant experience app and new [ph], which began rolling out in January has kept us connected with many of our tenants despite working remotely.
The concierge program has continued to provide a wide range of on-demand services and partnering with local vendors and farmers to provide grocery and other essential deliveries. We couldn't have picked a more critical time to roll out this technology to assist our tenants both professionally and personally during this challenging time.
Our Space Plus program has allowed us to meet changing tenant needs more efficiently with flexible lease terms. Our spaces offer tenants quick movements, all in pricing, flexibility for short- and long-term planning, as well as privacy and independence.
Not just for brand building, but now more importantly than ever for control over the health of the tenant office. All of our Space Plus tenants have control over their owned private space, which is becoming increasingly important in this COVID-19 environment.
In an environment where many tenants are moving slower on larger and longer requirements, flexibility is key and Space Plus is playing a crucial role in meeting tenant needs. We entered 2020 expecting to see sequential quarterly growth driven by renovation led value creation and commercial lease commencement.
While the pandemic has disrupted the timing of that growth, our key growth drivers remain intact. In multifamily, we have positioned our portfolio to retain the growth drivers that we may capture that value for our shareholders as normal activities and opportunities return.
We've allocated capital to Class B properties in sub markets with wider than average gaps between Class A and Class B rents and limited competitive supply, which sets us up for a quick recovery and preserves the value-add rent growth from renovations for the future. Through our 2019 strategic allocation, we increased our renovation pipeline to over 3000 units, which represents five years of growth at compelling return on costs.
While most of our portfolio does not directly compete with new supply, deliveries in Northern Virginia where 80% of our multifamily portfolio is located are expected to decrease by 24% over the next 12 months. Furthermore, the pandemic will likely cause delays in projected construction starts in the second half of 2020, which will reduce the number of deliveries in 2022 and into 2023.
Overall, there is an acute housing shortage in the Washington Metro region. In our in-house research affirms our confidence that growth opportunities are still ahead of us.
We also have a tremendous opportunity for growth, having substantially made the capital outlay for Trove, with phase two delivering in a couple of months. While the disruption certainly changed the initial pace of lease-up, we expect to reach a break-even occupancy level in the fourth quarter and thereafter achieve quarterly sequential NOI growth through stabilization in 2021 and into 2022.
In the office portfolio, our embedded growth is comprised of future commencement for high quality space at value-oriented pricing and move in ready space with flexible lease terms. We expect signed leases to continue to occupy and we expect to benefit from higher occupancy in the fourth quarter and throughout 2021.
Many of our speculative leasing opportunities for which we had excellent momentum before the pandemic hit are located in our best assets, including Watergate 600, Arlington Tower and Silverline Centre as well as our Space Plus program, which is positioned well to meet demand in these early cautious transition months. While physical touring did pause, it is now resuming, although decision making remains slower than normal while reentry is being worked through by prospective tenants.
We believe those leasing opportunities are a matter of when not if they will commence. And with that, I'd like to turn it over to Steve to review our collection performance, balance sheet, second quarter results and our outlook.
Steve Riffee
Thank you, Paul and good morning everyone. I'll start off by discussing our cash collection performance before reviewing our second quarter results and outlook for the remainder of 2020.
Our multifamily collections continue to be very strong, which is a testament to the resilience of our sub markets in the industry mix and lower average rent to income ratio of 26%. We collected over 99% of cash rents during the second quarter in over 99% of contractual rents.
And our rent collections through the first three weeks of July have been strong also. While we are offering deferred payment programs to residents who've been financially impacted by the pandemic today, deferrals have been relatively low, representing less than 0.4% of total monthly rental income on average.
Our monthly multifamily collection performance continues to track above national averages. We collected 99% of cash rents in June compared to 96% per NMHC.
We attribute outperformance in part to high exposure to industries that have outperformed during this crisis and lower relative exposure to underperforming industries. The impact of COVID-19 on the Washington Metro market has been contained primarily to three sectors, representing approximately 75% of Washington Metro job losses while the impact has been more broadly spread across a wider range of sectors in the US overall, as those same three sectors represented less than 60% of total losses nationally, through June.
Thus the US overall is experiencing job losses that are spread across more industries than our region. The Washington Metro markets relative strength reflects the stability and business revenue provided by technology and federal contracting.
We track the industries our residents employed in and our exposure is most heavily weighted to the most resilient economic sectors and likewise less weighted to the industries that have been most impacted, which has resulted in very high collection rates and stable cash flows. Turning to office, we collected 97% of cash rents during the second quarter and over 99% of contractual rents, which excludes rent that has been deferred.
As of July 22, our collections for July are in line with the same period in June. Similar to our multifamily resident industry mix, our office tenants are relatively weighted to the stronger economic sectors than the US overall, which has helped us experience limited bad debt thus far.
We've agreed to defer $1.2 million of rent for office tenants and we expect to collect over 85% of that deferred rent by year end 2021, with the balance thereafter. We believe our efforts to substantially de-risk our portfolio by selling all single tenant office assets and 75% of our prior retail exposure, including all the power centers and reallocating that capital to our multifamily portfolio is certainly proving its value in these economic times.
Retail now comprises just 6% of NOI. And while retail tenants have struggled the most, we collected 72% of retail rents in the second quarter.
Excluding deferred rent, our collection rate was approximately 90% during the second quarter and 91% during the first three weeks of July. Year-to-date, we've only incurred approximately $770,000 of bad debt expense related to retail tenants and $638,000 of that was related to COVID-19.
We will continue to monitor their strength and ability as the economy progresses. We've agreed to defer partially $1 million of rent for retail tenants and we expect to collect over 50% of that rent by year end 2021.
This assumes that our region continues to gradually reopen through year end. Today we've not incurred material bad debts related to COVID-19.
Overall, we've only deferred a small portion of rent, and the expected cash NOI impact is less than a penny per share through year in 2021. While we have possibly experienced the most disruptive part of the pandemic, uncertainty regarding its duration and future impact remains.
We currently believe the second quarter represented the most challenging quarter. However, future and ongoing economic disruption could result in bad debt greater than what we've been incurred today.
We will continue to monitor future developments and proactively address them as they occur. Turning to the balance sheet, we have a strong liquidity position with approximately $530 million of available liquidity as of June 30, and no significant capital commitments for the balance of the year and the remaining maturities in 2020.
As of June 30, our net debt to EBITDA ratio was 6.1 times at the lower end of our targeted range. We prepaid our $250 million, 4.95% bonds in early April.
And we can go to the capital market to further term out debt when it makes sense to do so. We expect to remain well within our bank and bond covenants, and have access to our mostly undrawn line of credit if needed.
Based on our current projections, we have reduced 2020 assumed capital expenditures for the year by approximately $40 million, compared to our initial 2020 guidance. Included in this amount is almost $30 million of lower assumed capital expenditures and $11 million in less development spending, because we no longer expect to break ground on the Riverside development this year.
Our capital expenditure reductions include non-essential building improvements, tenant improvements and leasing cost perspective of leasing, as well as lower multifamily renovation CapEx. Our future multifamily renovation pipeline remains intact, although we are suspending the program until after the market disruptions subside.
We plan to allocate the renovation capital at a later date when the market allows for rent increases to deliver the appropriate ROI. As we navigate through the second half of the year, we will continue to explore opportunities to further reduce non-essential CapEx spending to further bolster our liquidity.
Looking forward, we feel confident in our ability to execute on our short-term goals to providing payment flexibility to residents and tenants indeed, while retaining the operational flexibility necessary to execute our long-term goals. As Paul mentioned, we posted a solid second quarter despite the challenging operating environment.
I will discuss those results before addressing our future outlook. We reported core FFO of $0.39 per diluted share.
Overall same-store NOI declined 4.5% year-over-year on a GAAP basis and 3.5% on a cash basis due to a same store office NOI wide decline of 4.8% on a GAAP basis in 3.7% on a cash basis, as well as bad debt expenses related to COVID-19 of approximate $720,000. The same-store office NOI decline was driven by expected decline in parking income, as well as an increase in bad debt expenses related to COVID-19.
Excluding the decline in parking income and the increase in bad debt expenses compared to our prior 2020 expectations, same-store office NOI would have increased slightly on a year-over-year basis. Our multifamily same-store NOI increased by 0.7% year-over-year on a GAAP basis and 0.8% year-over-year on a cash basis.
The company achieved 40 basis points of blended year-over-year lease rate growth driven by strong performance from our suburban assets in our non-same-store portfolio. Same-store new lease rates declined by just under 4% while renewal rates increased by over 1.4% reflecting blended lease rate decline of approximate 40 basis points.
Non-same-store lease rates grew over 2% during the quarter on a blended basis, comprised of 2.6% of renewal lease rate growth, and 1% of new lease rate growth. Our same-store multifamily portfolio is currently partially 94% occupied and our total stabilized portfolio is over 94% occupied and 97% leased.
Same-store NOI decreased in our residual retail centers which we report as other a 24.6% on the GAAP basis and 22.1% on a cash basis, driven primarily by higher credit losses, which included amounts due from tenants impacted by COVID-19 being likely not collectible and lower recoveries compared to the prior year period. The combined write off impact of COVID-19 in the quarter was approximately $560,000, which included straight line rents and lease intangibles.
And the cash impact was approximately $335,000. Turning to leasing activity for the quarter, while velocity and touring was hit the economic shutdown, we signed a partially 20,000 square feet of new office leases and 15,000 square feet of office renewals in the second quarter.
We achieved rental rate increases of 0.8% on a cash basis and negative 2.3% on a cash basis for new leases and 19.4%, on a GAAP basis and 1.9% on a cash basis for renewals. The impact of operational cost savings initiatives reduced operating costs by approximately $848,000 during the second quarter net of tenant recoveries and expenses related to preparing our office buildings for reentry.
Second quarter operational cost savings primarily included reduced utility consumption, lower RNM, security expenses, and lower tenant event and amenity expenses relative to our original forecast. Now, I'd like to discuss our financial outlook.
We are now four months into the pandemic. While we're not in a position to predict the ongoing magnitude of the pandemic or durability of the recovery, we believe that we were able to forecast subject to certain caveats, the impact of COVID-19 for the balance of 2020 on our NOI and interest expense, exclusive of future bad debt.
Today, I will describe the impacts that we're experiencing on various financial performance metrics. Our expectations are based on the assumption that the gradual reopening will continue uninterrupted through year end.
Multifamily occupancy dipped to 94% in June and has remained stable through July. With the easing of confinement measures and increased staffing in our leasing offices, we've seen touring and application volumes increase substantially.
Total application volumes have increased by three times from early April lows and same-store applications have trended over 30% above prior levels since the end of May. We expect the continual increase in leasing volume to drive a gradual increase in occupancy to 95% by year end.
We did not increase rents on 12 plus month renewals for the second quarter which impacted our NOI growth as we normally would be achieving significant rent increases during the strong second quarter leasing season, especially since we had such strong lease rate growth in March. As a result, we experienced an increase in renewal retention of 60%.
While this higher renewal retention has helped us to maintain occupancy and preserve our seasonal rental during these uncertain times, it did not fully offset the impact of occupancy and lower new leasing volumes. Lower new and renewal lease rate growth as well as lower move in and other fee income were partially offset by operating expense initiatives during the second quarter.
The majority of the expected full year impact of operating expense savings related to COVID-19 was recognized in the second quarter. Excluding the impact of bad debt, we expect the impact of COVID-19 on our multifamily NOI to translate to a reduction of approximately $0.03 per share relative to our initial core FFO guidance for 2020.
Overall, we have previously expected significant multifamily growth in 2020 and that growth is likely now going to be deferred until 2021 and thereafter. As Paul said, we have a five-year pipeline of value-add renovations once conditions improve and it is appropriate to resume such growth.
And we still expect future NOI growth from Trove, which I will cover next. Trove is on pace to deliver phase two in the fourth quarter.
Our lease up had just begun when social distancing measures drew on site touring to a halt. However, we've been successfully converting virtual tours into signed leases.
While virtual touring is having continued success, we expect lease up to take longer than we had originally guided, and are likely to incur a loss of between $600,000 to $700,000 in 2020, that translates to a negative impact on core FFO relative to our initial guidance of approximately $0.01 per share. As Paul also said, we expect to reach break-even occupancy near this year end and to reach stabilization in the fourth quarter of 2021.
Therefore, the Trove should not only provide substantial growth in 2021, but also further year-over-year growth in 2022. Now moving on the commercial, tenant improvement build outs for near term lease commitments are expected to continue uninterrupted.
We have over 55,000 square feet representing approximate 150 basis points of future increased occupancy of signed leases that have not yet been commenced. Although physical tours had stopped, they've resume towards the end of the quarter and have substantial increased through July to just below pre-COVID-19 levels.
Overall, decision making has been slower. As the pace of phase three reentry has in many cases allowed prospective tenants more time.
Additionally, we're in lease extension negotiations with a handful of tenants who were previously expected to vacate. Our previous revenue expectations for 2020 included speculative office lease commencements that have been impacted by the current economic disruption and are now likely to be substantially executed in 2021 for leases not signed as off today.
The majority of this leasing was expected to occur during the third and fourth quarters and high-quality spaces across Watergate 600, Silverline Centre, Arlington Tower and Space Plus releasing momentum had been the strongest. We expect the impact of lower speculative leasing to be only partially offset by higher revenue from lease renewals and extensions.
We have minimal commercial lease expirations for the remainder of 2020, limiting the downside risk of our internal leasing estimates. Office lease expirations represent approximately 4% of our office revenues and less than 2% of or our overall revenue.
And as many tenants are opting to delay long-term decisions, short-term lease extensions and renewal activity could transpire as the year progresses. Parking revenues is down as people are not driving to their offices.
Our current projection is that parking revenue will decline by over $1.3 million over the remainder of the year. However, that estimate could change if the shutdown is more protracted, we've assumed likewise, once the economy returns, we could experience an increase in parking income from higher utilization, as tenant transportation preferences shift away from public transportation.
We're already seeing signs of increased transit parking at many of our properties. Currently, we are assuming that we may achieve additional operating cost savings of approximately $750,000 for the balance of the year, assuming a gradual increase in office utilization over the remainder of the year.
This amount is net of expenses associated with preparing our buildings for reentry and the cost savings that we expect to pass along to our tenants. Excluding future bad debt, we expect the impact of COVID-19 in our office and other NOI to translate to a negative impact of approximately $0.08 per share relative to our initial core FFO guidance for 2020.
Most of that impact will occur during the second half of the year, as we previously expected a ramp up in that timeframe that we now expect to occur throughout 2021, offsetting a part of the negative impact of COVID-19 on our businesses of reduction in our expectations for interest expense by $0.04 per share, relative to our initial core FFO 2020 guidance, excluding any future re-financings to further term out debt. On a combined basis, we expect the impact of COVID-19 on NOI and interest expense to translate to a negative impact of approximately $0.08 per share relative to our initial guidance for 2020.
We're not updating other guidance assumptions at this time. The majority of the impact will occur during the second half of the year as we previously expected a ramp up in that timeframe that we now have expected to incur throughout 2021.
Overall, we're actually slightly ahead of our original budget for the first six months of 2020, despite going through a historically challenging four-month period. As we've just explained, much of the growth we've planned for the second half of 2020 appears to be deferred, but we believe still impact for the future.
And with that, I will now turn the call back over to Paul.
Paul McDermott
Thanks Steve. In closing, while we are operating in a challenging environment, we're confident in our ability to effectively manage through this period of uncertainty while preserving the embedded growth of our assets.
Our value-oriented portfolio has demonstrated resilience as we absorb the near-term impact, which is further underscored by our strong rent collection performance and the proven stability of the Washington Metro economy. Furthermore, our sustained multifamily lease rate growth and stabilizing occupancy trends highlight the value of our research driven capital allocation strategy, which has led us to invest in well located residential units that will be in the path of growth once the economy resumes.
Now, we would like to open the call to answer your questions.
Operator
At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Antony Paolone with JP Morgan.
Please proceed with your question.
Anthony Paolone
Thank you and good morning. My first question is with regards to the multifamily portfolio.
Can you give us a sense as to what's happened to market rents in the last say a month or two where your new lease spreads are trending right now?
Paul McDermott
Tony, it's Paul, I would say market rents right now, I mean, we're just in the overall portfolio, we're seeing concessions rise in the market, but not materially. The market has become more concessionary as properties kind of open up.
And I'm just giving an example throughout our portfolio depending on the respective sub market we've seen concessions range from $250 to one month. And the largest concessions we're seeing are really a Trove and at that the markets move from one month to two months free.
We're also offering up to three months for 24-month deal to Trove. I don't see that materially changing in the future in terms of spreads.
Steve Riffee
Yeah, I would say, Tony, we did pretty well in the second quarter. We are – on renewals, we've now started in August, increasing rates on renewals for 12 months plus leases that we were holding flat.
We're doing okay on new lease rates in recent weeks. Although I will say for us, we're going to emphasize holding occupancy and keeping our leased maturity ladder intact so we might have a little bit of trade off on new leases.
So maybe in the most current month, they blend to slightly negative of new and renewals, but we feel they're holding very well and we've done – when we look at just on a relative basis, we think things are going well.
Anthony Paolone
Okay. And then on the office side, any – I know there's not a ton of volume, but just any color on what's happening there with net effective rents or how those tenants that may be in the market are behaving in terms of what they'd like to see to get a deal done.
Paul McDermott
Tony, I wish I had a better fact pattern to really articulate the second quarter. I would say overall what we're seeing in the market in terms of leasing are seeing a lot of short-term, a lot of two to three-year deal with extensions, definitely seeing a bit of an out migration from co-working.
I think in DC the activity probably dropped 50% in the second quarter in terms of leasing volume, thus I can't really provide you a great track record there. I think the thing that we were probably most impressed about in this region was Northern Virginia leaving the US with 1.6 million square feet absorbed.
I would also comment that in July, both in downtown and in Northern Virginia, our traffic and our velocity picked up notably. And we hope that a lot of that will crystallize for us, I'd say realistically, it's probably post Labor Day.
That's what we're getting from a lot of our tenants when we think there's going to be a lot more decision makers waiting back in, but we're optimistic about the balance of the year.
Anthony Paolone
Okay, thanks. And then just last one again, I know it's early, but just anything on the investment sale side or any commentary on early indications of price discovery or anything being brought to market?
Paul McDermott
Let me let me split that. I'll talk both about office and multifamily, Tony.
On the office side, very low volume, obviously. Interestingly, I've seen some single tenant credit deals where we see some investors trying to play the spread to fixed income, seeing a lot of recaps versus selling into this market right now.
The key for investors and lenders in the capital markets execution has to be there, but is just the weighted average lease term and what we're hearing both from lenders and equity folks that are looking for seven plus years on that. I think the big challenge right now we haven't really seen a lot of multi tenanted buildings come to the market.
It is just the lack of traditional buyers. I think the good thing I would observe over the last 90 days and especially talking with the lenders is there hasn't been any motivation on the lenders part to take any of these assets back.
They are working with deferral plans for their borrowers to try to do some type of bridge. Multifamily, a bit of a different story, obviously, with Fannie and Freddie being aggressively open for business.
I think the biggest challenge and we have seen definitely more multifamily deals hit the market in the last 60 days. And I think just talking to folks, a definite notable pickup in BOV activity probably with the top three brokerage firms in this region.
The feedback we get is really the first two years are the challenging underwriting. And people are always trying to make up for those first two years.
And then people are incorporating, I'd say 2023, '24, '25 we're seeing rent spikes being implemented between 5% and 8%. But the convergence really over the last 30 to 60 days has been around like a five cap.
We've seen old deals that probably were the way pre-COVID being dusted off and re-looked at and seeing some small off market activity. But like I said, the debt some of these folks are getting, sub three.
So investors are clipping an eight. In DC I think the biggest challenge you're going to see in far as turnover and product is as you're aware of Tony, we have to go through a TOPA process.
And you can't submit TOPA until October 12, which is where the Mayor extended the state of emergency too, so that's really put – tapped the brakes there. In Northern Virginia not seeing any slowdown in the appetite for people with investors still looking at that long-term debt that like the Amazon renter changes the footprint, but both on the commercial side and on the multifamily side, we've gotten plenty of feedback that there'll be a lot more product moving to the market post Labor Day.
Anthony Paolone
Okay, great. That's all I had, great color, thank you.
Paul McDermott
Thanks, Tony.
Operator
Our next question comes in line of Blaine Heck with Wells Fargo. Please proceed with your question.
Blaine Heck
Great, thanks. Good morning.
So just a follow up on the last question, do you think Paul that the fallout from the pandemic ultimately increases the spread between office cap rates that you'll be selling at and the multifamily cap rates that you'll be buying.
Paul McDermott
I think that – look it's like I said earlier Blaine, I think to monetize assets in this environment, especially the office environment, people are – both lenders and investors are going to be looking for duration. I think we're fortunate to have that at a number of our assets if we choose to do that execution.
I do think when the dust does settle that you will definitely be seeing more activity in the multifamily space. There's still a lot of capital out there that was on the sidelines prior to COVID-19.
And just recently over the last year 30 days, I'd say I've seen activity and pricing people definitely becoming a little bit more aggressive. Like I said to Tony, I mean, it's really the separation gate is really that how you're underwriting years one and two in multifamily.
But I would expect it to be – again, with the assistance of Fannie and Freddie, I would expect to see a competitive fall for multifamily product in the region.
Blaine Heck
Yeah, that's helpful. And clearly your retail and other allocation has decreased a lot over the years down to I think 6% of NOI now, but it continues to be a little bit of a drag on the rest of the portfolio and results seem to be getting worse as COVID disrupts those businesses even more.
Can you just talk about your plan for that portfolio? Does it make sense to try to dispose of the rest as soon as possible or do you think it's best to hold on to what you have in the hopes that you can backfill any sort of move outs that you have and maybe get better pricing after the crisis.
Steve Riffee
Hey, Blaine it's Steve. I'll start and I think Paul will just tag team this.
This 6% and we've had less than a penny share of bad debts. And when we look at what we've contractually looked at we've collected 90% there, so it's really not that big a drag and it's some of our best retail assets.
And there's probably not much of a market right now, I'll let Paul comment on that in terms of trading retail assets, but these assets we kept because they also have the ability to be eventually converted into multifamily and other mixed uses. So there's more than one path to some of those assets.
Paul, I don't know if you want to add anything to that.
Paul McDermott
No, I'd say that the thing that's probably changed Blaine is obviously a pretty small pipeline of retail investors out there right now. And we're obviously sensitive to dilution.
I think first and foremost we're happy we got rid of our riskiest assets with the most lease turnover last year. As Steve said, over half of the assets inside of that 6% have redevelopment potential i.e., Randolph, Montrose, Tacoma, Chevy Chase Metro and in very good locations.
And I think that we're comfortable with that. We're actually working pretty well with our retail tenants right now and I'm comfortable over some of the programs that we've implemented with them, but also due to the quality of the locations if we did have some move outs, I'm also equally comfortable with our ability to backfill the space.
So right now, I think retail, given that it's only 6% is a manageable situation.
Blaine Heck
All right, great, thanks, guys.
Paul McDermott
Thanks, Blaine.
Operator
Our next question comes from line of Dave Rogers with Baird. Please proceed with your question.
Dave Rogers
Yeah. Good morning, guys.
Maybe two on office, the first is, it sounds like Northern Virginia recovering a little bit faster. By parking or any of your internal systems are you able to determine what percentage of employees are kind of back in the office or where utilization has gone to?
And then maybe a second question on office, what's been your experience with Space Plus in this current environment with collections, renewal, if you have any that are far enough along new demand for that product? Your thoughts around that will be helpful.
Thanks.
Paul McDermott
Dave, I'll take the first shot at that and Steve can jump in. First, in terms of Northern Virginia and occupancy levels, Northern Virginia, I mean, we obviously through our flops we track activity.
I think Northern Virginia got up over 20% first. We've seen that dial back a little bit.
And I attribute a lot of that to, we're in the month of August and I think some folks are candidly just kicking the can until past Labor Day. DC a little bit different, I think DC probably peaked in the 12% to 15%.
And we've – we think that that is probably going to remain probably at a lower occupancy level than Northern Virginia. I'd say the activity and I'm comfortable saying that the activity in terms of that has to – that people coming back, we want that to translate into leasing activity.
And two of the three assets that we're focusing on are Arlington Tower and Silverline Centre, some of our best assets with some of our best space. So I think we're optimistic that that will turn into something post Labor Day just in terms of execution.
I believe the second part of your question was Space Plus, without a doubt we've – and it's not just me, we've talked to a lot of tenant reps and a lot of the larger shops, both on the agency side and the tenant rep side here, definitely seeing a bit of an out migration out of the co-working space, folks looking for their own identity. As I made a comment earlier on leasing, Space Plus really is kind of a slipper fit for people looking for two to three-year terms with flexible leasing.
Not only that, but they also get to create their own identity and they get to, most importantly in this environment, they get to control the protocols in their own space. And so we actually have seen – the first deal that we did at 2000 M Street was a Space Plus execution that I believe was coming out of We Work and we expect that trend to continue.
We haven't had any – Steve, asking, I don't believe we've had any real material rent hiccups in the Space Plus space, so.
Steve Riffee
Not at all, let me – no, credit. I mean, I think you've covered just about everything.
Paul. I think the key words are flexibility.
People are slow to make longer term decisions. So Space Plus fits it really well.
It fits for those that are worried about the health of the environment that they've been in so they can have their own independent suite. And it can be healthy and they don't have to interact like in co-working with others.
And it allows people who have longer term needs to get started on the short-term basis and so. And I think the fact that we have Space Plus in some of our best assets that's available in some cases is actually helping and they might even need longer term lease decisions after that.
Dave Rogers
Okay, that's helpful. And then maybe just one on the multifamily side, the 3000 units over five years.
And I guess I understand taking a pause here, but as you talked about starting to push rents a little bit here into August, as you guys talked about the confidence just in the broader economy with not having as many deliveries maybe over the next couple of years. When will we expect you to see more – be more aggressive on the apartment renovations?
It would seem like that trade up today might make sense, especially as you get a little bit more vacancy in the apartment portfolio to just kind of continue through with that product. So I guess ultimately, what would you want to see to get more aggressive there and get back on track?
Paul McDermott
Well, I'd say Dave is you've heard from us before, I mean, the whole – the renovation pipeline is based on the affordability gap. And we still see a good affordability gap, A and B, it's not like there's been a wide divergence like A is come in and B is dropped precipitously.
We've seen them kind of move lockstep, and I'll defer to Grant Montgomery, our head of research, but we're going to evaluate it on a sub market by sub market basis, Dave. I think, as you're aware, we had achieved mid-teens return on cost metrics.
I think we're going to reevaluate that, is that still appropriate in this environment? And then what type of movements are we seeing, particularly in the B space.
I think we've been pretty pleased with the B space and how it's performed even on – not only on the collections, but on some rent movements, both on the renewal side of it. But we're going to look at each one of those properties.
We're doing it on a monthly basis right now. And I would tell you that if we saw an opportunity where we thought that that affordability gap was intact, and we could achieve a suitable return on cost, we would move forward in the sub market.
Again, I'll defer to Grant, Grant if you had anything you wanted to add there.
Grant Montgomery
No. Paul, I think you said it well.
I think we have seen very similar past with A and B, I think through April, it's really been within 30, 40 basis points in terms of their tracking, in terms of your overall rent growth. So that mid 20% rent gap that we have between A and B region wide is still intact, and it really speaks to how B has held up during this time speaks to sort of The exposure of our residents to the stronger industries, which we've talked about in the scripts both last quarter and this and that the majority of f job losses in our region have been really concentrated in a couple of three industries, particularly in retail, and leisure and hospitality are only 60% of the job losses.
But we only have about 13.5% exposure to that industry. And so that's really spoken and relate to the strength of our Class B in light of what's going on broadly, and has really held that up quite well, relative to what's going on the market.
Paul McDermott
The only other thing I'd add, Dave is and we've told you this before, we're very sensitive to the income to rent metric, and our average renter, I believe, is a 26%. So we want to keep that intact.
We think that's important, given the economic disruption we're going through. So I'm comfortable with that.
And we'll monitor that as we kind of move forward and look at reactivating our renovation program.
Dave Rogers
Appreciate all the detailed color guys, thanks.
Paul McDermott
Thanks, Dave.
Operator
[Operator Instructions] Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.
Bill Crow
Hey, good morning, folks. Paul, on the on the multifamily front, if we see a big reduction in the unemployment benefits, would you anticipate your collection rate to decline in the next few quarters?
Paul McDermott
Bill?
Steve Riffee
Bill this is Steve, I'll start it and Grant may be able to help out and follow as well. One of the things that we're really pleased with obviously, we've collected 99% of our rents and there's a lot of information in our materials and that we've put out, as we've met with investors about the strength of our – the sectors that our residents are employed by and how they've held up so well on a relative basis to the US overall.
One of the things that we noticed and we were looking at recent stuff and Grant, maybe you can comment a little further on it. But broadly speaking, in terms of the large metro areas, the DC rent income is better than, say, New York or Los Angeles or the Bay Area.
So for instance, the CARES Act is really very less of a burden here in DC. And again, that's not really affecting that many of our tenants as we're collecting 99%.
But I think it also speaks to just our region. I don't know Grant if you want to add a little to that or Paul.
Grant Montgomery
I can just add to that to echo what I – in a way sort of the way I answered the previous question is, I think it really does get down to how our portfolio is somewhat insulated based on the employment distribution of our residents. Looking at another way within the Washington region, professional business services, government and finance has on average declined less than 2.5% during the period we're going through, and those industries comprise approximately 60% of our tenant base in class B, which really speaks to perhaps our Washington DCs Class B, in particular our Class B within Washington DC is somewhat different than perhaps some of the pressures that might occur in other markets as Steve mentioned, that have higher rent to income ratios or alternatively a different employment base make up their economy.
Bill Crow
All right, thanks and one an office, I know it's early and I know one of the tenants are tied to the government in one way or another, but any buzz among the tenant reps that some of the CBD tenants might be looking for the suburbs, either to avoid mass transit or in reaction to some of the protest, the activities or anything like that.
Grant Montgomery
Bill, I haven't seen that per se with an executed lease. I think that some folks just given the remote working paradigm that we are going through right now, I do think you're going to see a hub and spoke approach.
I know a number of companies that have downtown presences are also going to be employing satellite offices in Virginia or in Maryland. I think that we've definitely without question we – if you look at our same-store numbers and multifamily, I know you asked about office, but you look, people are definitely moving out there.
And I think that folks want to live close to where they work. So I would anticipate some of that follow-on activity.
I don't think there's some massive trend we're observing over the last 90 days Bill, but that's clearly something that we're going to keep our eye on moving forward.
Paul McDermott
That said, Bill, I'd say what – Grant, you can correct me if I'm wrong, like 70% of the job growth, for the last period of time has been in the Northern Virginia, it's been really the growth engine for our region for a while. And tech is a huge part of it and the contracting and the government contracting has increased that hasn't decreased.
And I think you know about many big tech firms that are moving are in big ways, HQ2, Microsoft, Facebook, even Wallmart Labs, people like that. So I just think there's just more job – there's just more growth coming in Northern Virginia.
Bill Crow
Great, I appreciate the time and thanks.
Paul McDermott
Thanks Bill.
Operator
And as there are no further questions left in the queue now. I'd like to pass the floor back over to management for any closing remarks.
Paul McDermott
I would like to thank everyone again for taking time to join us this morning. We appreciate your continued support during these challenging times and we look forward to talking with you over the coming weeks and months.
Thank you and have a good day.
Operator
This concludes today's teleconference. You may now disconnect your lines at this time.
Thank you for your participation and have a wonderful day.