One of the nation's largest landlords is increasing its emphasis on high-end offices as a way to withstand the fallout from rising interest rates, elevated inflation and layoffs hitting the commercial real estate market.

Boston Properties, which calls itself the largest publicly traded U.S. developer and office owner, said leasing across its portfolio has slowed as users shift to controlling costs, reducing headcounts and taking less space.

The Boston-based developer reported about 660,000 square feet of leases across its properties in first quarter 2023, a drop from 1.1 million square feet it leased to tenants in the prior three months. Upscale offices are a bright spot for the company, verifying what U.S. office landlords have called a flight to quality by tenants seeking workplaces that will make staff want to abandon work-at-home practices begun in the pandemic.

"Companies are more cautious with capital outlays, but the premier workplace segment continues to materially outperform the broader office market," Boston Properties CEO Owen Thomas said on the developer's call with investors to discuss its most recent earnings. "Users are compelled to upgrade their buildings in order to attract their workers back to the office."

About 95% of the developer's portfolio includes properties classified as "premier workplaces," Thomas said, an emphasis that "has been and will be critical for our long-term success."

As capital costs rise, large employers across the country are holding off on expanding their real estate portfolios, the company's executives said. Tenants nationally offloaded more than 20 million square feet of office space in the first three months of this year, according to CoStar data, pushing the vacancy rate up to roughly 13%, eclipsing its Great Recession peak.

Even so, Boston Properties still expects it can lease more than 3 million square feet of space throughout 2023. By comparison, the developer leased 5.8 million square feet through all of 2022.

"It's fair to say we’re operating in a challenging real estate supply and demand environment," Boston Properties President Doug Linde said. "Companies are emphasizing the importance of in-person work, but job reductions impacted by the economy has affected both supply and demand, and no city is back to the levels of urban, in-person work activity that existed in 2019."

Boston Properties is contending with an office market that has experienced a shaky and uneven recovery since the pandemic unleashed seismic shifts that are expected to have dramatic, long-term effects.

The developer's office portfolio is concentrated in high-end cities including New York, Boston, San Francisco and Silicon Valley, Seattle and Washington, D.C., all of which have faced some of the steepest declines in leasing activity as well as an even slower return among employees getting back to physical work spaces.

In New York, for example, office availability is at a record high of more than 16% compared to the roughly 11% reported before the pandemic's 2020 outbreak, according to CoStar data. And in San Francisco, massive amounts of sublet space has halted rent growth, with average rates sliding from a pre-pandemic high of nearly $75 per square foot down to the current $61 per square foot.

The tech sector, which makes up nearly one-fifth of Boston Properties' tenant base, has been especially eager to shrink its previously vast real estate footprint. The industry accounts for almost 25%, or 43 million square feet, of the total amount of national office space available for sublease, a figure that has roughly doubled since early 2020 to settle at about 190 million square feet, according to real estate brokerage CBRE.

"Technology and some life science users are focused on cost management, which doesn't translate into near-term leasing activity," Linde said. "There are only a few instances of companies requiring all of their workers to be in the office all week, and therefore they need more space."

Instead, the developer is targeting private equity, asset managers and other financial services firms, part of the economy that continues to grow and lease new office space.

While Boston Properties executives say they are becoming increasingly selective with which investments they pursue, the landlord is expecting to spend about $750 million this year to fund its development pipeline, which spans about 4 million square feet of office, life science and multifamily projects.

That work includes construction on its 290 and 300 Binney St. development, an expansive biotech campus in Cambridge, Massachusetts, that has already been leased to AstraZeneca and the Broad Institute. It is also wrapping up Gateway Commons, a 1.1 million-square-foot life science campus in South San Francisco, California.

The company reported revenue rose 6.5% to more than $803 million for the quarter ended March 31 from the same time last year. Net income fell to about $78 million from $143 million for the first quarter of 2022.