BXP's bet on the high-end office market appears to be paying off.
The Boston-based landlord and developer reported more than 2.3 million square feet of new and renewal deals for the final quarter of last year, a figure that marks its strongest leasing quarter since mid 2019. That leasing momentum is indicative of the surge in demand for top-tier office space, which makes up the majority of BXP's national portfolio.
The company leased more than 5.6 million square feet for the entirety of 2024, 35% greater than the prior year as an influx of companies adopt stricter in-office policies, corporate earnings growth remains on an uphill trajectory, and office tenants increasingly shift their focus to space in the newest and nicest properties.
"Momentum is clearly building in the market," CEO Owen Thomas told analysts on the developer's earnings call Wednesday.
The demand for office space has been building over the past several months as corporate heavyweights such as Amazon, Starbucks, Dell, Salesforce, among others push for more stringent in-person requirements. The number of CEOs who believed their companies would adopt a full return to a five-day workweek climbed to about 85% from the 64% reported in 2023 according to a recent KPMG survey.
"The return to office is clearly accelerating, and it's helping our leasing activity," BXP President Doug Linde said during the call. "It's a big plus.
What's more, the return of Donald Trump to the White House has boosted optimism among executives such as Thomas, who said the new administration has "articulated policies that are business friendly, which will be positive for our clients and, as a result, stimulate leasing activity."
BXP, formerly known as Boston Properties, touts itself as the largest publicly traded U.S. developer and office owner. The company's portfolio is watched closely because of its concentration in high-end markets including New York, Boston, San Francisco and Seattle in addition to Washington, D.C. Each of those cities has faced some of the steepest leasing declines and a slow return among employees getting back to offices over the past five years.
The developer reported a weighted average lease term of more than 10 years in the quarter, a sharp spike since COVID-19 disrupted the office market in 2020. That's a sign tenants have shed some of their pandemic-related hesitation in making long-term real estate decisions and now have the clarity they need to sign on for space and commit to deals for the longer term.
Aiming higher
Across the country, landlords such as BXP, Cousins Properties, Kilroy Realty, Hudson Pacific Properties, among others have pointed to the influx of employees returning to offices and a pickup in confidence among companies shopping for space to fill them.
That clarity, combined with the trend among tenants to prioritize space in the best and newest buildings, has helped boost BXP's leasing pipeline past the 3.5 million square feet the landlord initially estimated it would sign throughout all of last year.
To be clear, the overall health of the office market falls into two distinct camps: a stable and strengthening premium segment versus a struggling and financially stressed lower-tier one. For BXP, its portfolio of high-end office space has benefitted as vacancy rates for the upper tier of the segment is about 13% compared to roughly 19% for the rest of the market, according to CBRE data.
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.
Bet on quality
Even so, the companies that are signing deals are focusing on the best space available and have proved willing to pay for it. Asking rents for premier office space is more than 50% higher than the rest of the market, up from the 40% premium landlords were able to command three years ago.
For BXP, a lot of the leasing activity it has been focused on its whittling away at its future-year expirations. Over the past 15 months, the landlord was able to renew or fill more than 1.5 million square feet of office space that was scheduled to expire next year. It is also in negotiations over an additional 500,000 square feet that is set to expire in 2026.
"If we continue to lease 2 to 3 million square feet of vacant and expiring space for 2026 and 2027, there will be a material improvement in our occupancy," Linde said.
The average occupancy rate across BXP's portfolio by the end of last year was about 87.5%, up slightly compared to previous quarters, but still a ways off from its pre-pandemic average. The landlord's leased portfolio rate, or the amount of space it has commitments for but has yet to be occupied, was just shy of 89.5% by year-end 2024.
And by this time next year, Linde said he expects that figure to be even higher.
"Look, we have always said return to office is important to leasing, but corporate earnings growth as a proxy for corporate health is actually even more important. And that's also a positive," Linde said. "So I would put both of those in the same category when you think about the health of the client base that we serve."