One of the nation's largest office landlords posted its biggest jump in the length of leases signed since the pandemic struck as companies return to shopping around for space.
Boston Properties executives said its focus on the high-end office market is letting it take advantage of an increasing willingness among tenants to commit to space for longer, driving leasing volume and higher-term rates across the Boston-based developer's portfolio. While higher interest rates and the uncertain economic outlook remain concerns, CEO Owen Thomas pointed to signs of a turnaround.
"We are continuing to defy the negative market sentiment for the commercial office sector," he told analysts Wednesday on a call to discuss the developer's first-quarter earnings. "Premier workplaces continue to materially outperform the broader market with rents that average about 50% higher, and that outperformance is evident."
Boston Properties, a real estate investment trust that touts itself as the largest publicly traded U.S. developer and office owner, has a portfolio that's watched closely because it's concentrated 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.
The developer reported its weighted average lease term had climbed to more than 11.5 years in the quarter, the highest 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 are now have the clarity they need to sign on for space.
The REIT reported about 900,000 square feet of leases across its portfolio over the first three months of this year, a 35% spike from the same time in 2023 despite an accelerating shift among tenants to sign deals for smaller spaces.
And in some cases, the demand has hit a point where Boston Properties doesn't have the space available to meet it.
"In some markets, there is outsized demand relative to our availability," President Doug Linde told investors on the call. "While concessions are still at elevated levels, we've been able to increase rents and have some clients we can't accommodate due to the lack of available space in certain buildings. We're experiencing an operating environment where leasing available space is primarily driven by market share, and we're winning."
East Coast Demand
That is especially the case across the developer's East Coast portfolio where financial services, asset management and law firms have bolstered occupancy and leasing demand in cities such as New York and greater Washington, D.C.
The average occupancy rate among Boston Properties' New York buildings was about 91.5% by the end of the first quarter. By comparison, San Francisco — a city largely concentrated with tech companies that have cut down their office holdings in recent years — the developer reported an average occupancy rate of roughly 86.5%.
"We have definitely seen more client demand for our East Coast properties compared to the West Coast, however, there have been some subtle and encouraging trends across much of the portfolio," Linde said.
To be clear, Boston Properties hasn't been immune to the turmoil the national office market has endured as it struggles to regain footing lost to the pandemic. A record number of tenants are still shedding large chunks of their real estate holdings, and widespread layoffs across myriad industries have created a financial outlook that analysts say is unlikely to be headed for a full recovery any time soon.
The national office vacancy rate, fueled by companies offloading record amounts of sublease space and responding to the effects of remote work, has climbed to nearly 14%, according to CoStar 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.
Caution Over Development
For Boston Properties, that has translated into the developer's hesitation over embarking on any major development project for which it hasn't yet landed a fully committed tenant.
While CEO Thomas said the company has been approached by "multiple clients in our core markets who are interested in occupying new spaces and anchoring development projects," high labor, material and capital costs have made it hard to justify adding to the developer's construction pipeline.
"New office development has slowed, but there will also be very limited new office development in our core markets, which will be favorable to our existing portfolio," Thomas said. "Vacancies will decline for premier workspaces, and rents will rise to help close the gap to help justify new developments."
Boston Properties reported revenue rose to nearly $839.5 million for the first quarter of 2024, up 4.5% from the same time in 2023. It reported net income of roughly $80 million, a boost from the nearly $78 million it reported in the same three-month period last year.
Its development pipeline spans roughly 3.2 million square feet and is valued at roughly $2.4 billion.