Executives with Boston Properties have said rising costs and diminished demand in recent years have made it nearly impossible to rationalize new office construction. Yet the company appears willing to find wiggle room with a pitch to substantially boost the space it plans for a development on the outskirts of Washington, D.C.
The company, otherwise known as BXP and one of the largest U.S. office landlords, has submitted a proposal to redevelop about a dozen acres for its second phase at the Reston Town Center campus in Reston, Virginia, a plan that involves increasing its initial office component from about 645,000 square feet to roughly 930,000 square feet.
The plan is "a unique proposal in Fairfax County during a time when the office market is undergoing significant contractions,” according to public filings, and appears to be an about-face for a developer that has pivoted away from several office developments in recent years.
With a portfolio of properties concentrated in high-end markets such as New York, Boston, San Francisco and Washington, D.C., Boston Properties has positioned itself as one of the largest providers of high-quality workspaces in the country. An increasing number of companies are investing in the nicest spaces they can afford as they look to upgrade to more desirable buildings as a tool for providing a better workplace experience.
If approved, BXP would overhaul two 1980s-era buildings and a parking lot, replacing those properties with five new buildings collectively designed to add about 2.1 million square feet to the campus's nearly 18 million-square-foot expanse.
The increase in proposed office space means the Boston-based developer would scale back its original restaurant, retail, hotel and residential uses by about 371,000 square feet, according to the filing. The campus's first phase, on which BXP is now finishing construction, includes two high-end office towers, a hotel and a 508-unit luxury multifamily complex.
National mortgage giant Fannie Mae leases the entirety of the nearly 644,000-square-foot tower at 2000 Opportunity Way, while automaker Volkswagen Group of America, Palo Alto Networks, Raymond James and a handful of other tenants have taken space in the new building next door at 1950 Opportunity Way, according to CoStar data.
The Reston campus is also home large corporate hubs for companies such as Leidos, Microsoft, the College Board, Yahoo, among others.
Collectively, Reston Town Center's office space is about 96% leased as of March 31, according to Boston Properties' most recent quarterly report.
'Materially Outperform'
"We are continuing to defy the negative market sentiment for the commercial office sector," BXP CEO Owen Thomas told analysts on the company's last earnings call. "Premier workplaces continue to materially outperform the broader market with rents that average about 50% higher, and that outperformance is evident."
The average vacancy rate among top-tier properties was less than 15% by the end of the first quarter this year, according to CoStar data, below the more than 19% reported among non-prime buildings, or those that have fewer amenities or are located in less desirable areas. The gap in vacancy rates between the two quality types has also increased in recent years, jumping from less than 2 percentage points in mid-2018 to about 4.5 percentage points by the end of March.
Tenants collectively signed on for 50 million square feet of high-quality office space in the United States between the first quarter of 2020 and the end of the first quarter of this year, according to a CBRE report. By comparison, nonprime buildings lost a total of about 170 million square feet of deals, as many companies opted to ditch their space and relocate to nicer properties.
Yet there are myriad challenges facing office developers across the U.S. that, despite the rising demand, have stifled new development activity.
Only 4 million square feet of top-tier office space is expected to be added to the national office market next year, CBRE reported. That amount is less than a quarter of the average annual total reported in the years prior the COVID-19 pandemic's 2020 outbreak.
If annual net absorption — the measure of the change in space occupied by office tenants — sticks to about 12 million square feet for high-end buildings, the lack of new construction would help drive the vacancy rate for prime properties down to a little more than 8% by 2027, according to the report.
That has meant many developers and landlords, including BXP, are expecting the shortage will boost demand for properties within their portfolios, something that could tip the scales back in their favor after several years of doing whatever necessary in order to maintain occupancy levels.
"What is 100% clear is that new construction is not part of the vernacular in 2024 [or] 2025, which means it's unlikely you're going to be seeing new buildings delivered for the next five plus years," BXP Executive Vice President Rodney Diehl recently told analysts. "There is going to become less and less premier space, and the premier space will continue to pick up its occupancy [and] its leased percentages, and we will see the fruits of that in the properties that we have in all of our markets."