One of the nation's largest office owners reported gains in occupancy and lease lengths as it works to build back some of its pandemic-related losses.
Brandywine Realty Trust, a Philadelphia-based real estate investment trust, pointed to longer lease-up periods among some of its newest developments as a sticking point in an effort to stabilize its portfolio for the year ahead. The landlord reported more than 2.3 million square feet of new and renewal deals last year, with roughly 783,000 square feet of that signed within the last quarter of 2024 alone.
"From a broader perspective, our real estate markets are improving, and we're seeing that every day," Brandywine CEO Jerry Sweeney told analysts on the company's earnings call Wednesday. "There are encouraging signs of stabilization, and during last year, we laid a solid operating foundation to capitalize on these improving office market dynamics."
In Philadelphia, for example, the REIT landed nearly half of the roughly 1 million square feet of office deals signed throughout the city's central business district last year, Sweeney said, largely due to the landlord's concentration of high-end properties across its portfolio.
In a sign of renewed tenant demand — with much of that targeted toward the nicest and newest properties — the Brandywine CEO said tour activity "remains well above pre-pandemic levels," and that more than 60% of the leases the company signed in the fourth quarter last year were a result of tenants upgrading their office space to higher quality options.
The REIT's portfolio includes roughly 65 properties that collectively span about 12 million square feet is now just shy of 90% leased, a slight boost compared to the previous quarter.
'Longer than anticipated'
For all of the optimism, however, property owners such as Brandywine are still grappling with the aftermath of the pandemic.
Tenants collectively handed back upward of 65 million square feet last year, boosting the total to more than 180 million square feet of move-outs since the start of 2020. What's more, the leases that are being signed these days have shrunk considerably, averaging about 20% smaller than their pre-pandemic averages.
"While leasing momentum continues to accelerate, the lease-up phase is taking longer than originally anticipated," Sweeney said. "We've made significant progress on liquidity and portfolio stability, but we have remaining work to do on development leasing. Stabilizing these development projects remains a top priority."
It's an interesting conundrum for the developer given the rising demand for top-tier office space, exactly what Brandywine is and has been developing in markets such as Philadelphia and Austin, Texas. However, executives say that lingering uncertainty among tenants has made it difficult for it to get some lease deals across the finish line.
Companies are weighing their real estate moves more pragmatically and cautiously than in the years leading up to the pandemic, Sweeney said, and many are still adjusting their in-office policies as many begin to call workers back more frequently and shed hybrid policies.
"Tenants weren't really sure what their return-to-work policies would be and how many seats they would need," the CEO said. "All of that is really starting to look like it's in the rearview mirror now for companies in general and certainly those looking to move up the quality curve."
To weed out some of the underperforming or lesser-grade properties in its portfolio, Brandywine has and plans to offload some in an effort to reposition its holdings to capture some of the demand for best-in-class space. The landlord sold off more than $300 million worth of properties last year, far exceeding the $150 million benchmark it initially set.
The REIT is also weighing whether to convert some of its remaining office properties to multifamily as a way to strengthen its existing portfolio.
"As we look ahead, we're confident that the strength of our operating platform and the quality of our developments will allow us to leverage improving real estate market trends and position the company for future growth," the CEO said. "The groundwork has been laid, and we are poised to build on our continuing momentum as we drive towards long-term value."