One of the biggest changes from the beginning of 2007 to the beginning of 2008, REIT president Douglas Linde noted was the dramatic turnaround in the credit markets. "Last year when we had this call, we were talking about the strong demand, rising rents and--most importantly--robust capital flows," the Boston Properties' chief said. This year, by contrast, Linde said "overall demand is still healthy, rents still seem to be rising, albeit at a slower pace, but the capital markets are anything but robust." He cited an example of how unpredictable those markets have become in the past year.

In November, Boston Properties locked in $525 million of underlying 10-year Treasuries at an average interest rate of about 4.63%. "Clearly, we did not anticipate the turmoil and the resulting rally in bonds or the 100-plus basis points reduction in short-term rates by the Fed that has occurred over the past 60 days," Linde said. "Consequently, it is with some caution that we discuss the impact of the current financial environment on our operating portfolio."

Although the financial markets turmoil has reduced the availability of funds and raised the cost of capital, Linde said it "has not produced any discernible impact on our operations." He summarized conditions in New York City, Boston and Cambridge, San Francisco and Washington, DC, where occupancy in general is high and demand remains strong.

Although Boston Properties expects that unemployment will rise and job growth will slow, Linde admitted "at the same time, we confess uncertainty in predicting the significance or the timing of these factors on our markets."

Location will remain a crucial factor this year as always, Linde said, pointing out that the importance of location "is not just by market, it's by street address or corner." For Boston Properties, he said "the good news is that the current availability is very limited in our markets and there still is growing demand."

Linde cited a Midtown Manhattan vacancy rate that is still under 5%, with an availability rate that is projected to remain under 8% in the next 12 months. Its market rents were up about 4% in the fourth quarter and more than 25% in 2007.

Just before the New Year, the REIT signed its first lease at 250 W. 55th St., a new Midtown tower that it has under development. The tenant is Gibson, Dunn & Crutcher, which will be expanding from 170,000 sf at 200 Park Ave. into 222,000 sf at the top of the new 250 W. 55th St. tower in 2010 when that building is delivered.

Boston Properties is in discussions with other tenants, all driven by lease expirations that could potentially fill all of the remaining space at 250 W. 55th St. "My point is not that we are fully committed, but rather that there continues to be activity and that there are tenants that must make leasing decisions," Linde said.

Linde cited generally sound conditions in the Boston, Cambridge, San Francisco, Silicon Valley and Washington, DC markets as well. He pointed out that in some cases, such as the Greater Boston area, vacancies have declined despite a number of larger corporate mergers that have dumped sublease space into the inventory. Washington, DC is probably the only market where supply is an issue, but it happens to be a market in which Boston Properties' portfolio is 99% leased and with its least amount of rollover in 2008, Linde pointed out.

"There is no doubt that everyone is concerned about the economy and the boards of lots of smaller companies are being very cautious about major decision-making," Linde said. "I'm sure this is going to start to slow things down."

Boston Properties, with a portfolio of nearly 44 million sf and a 95% occupancy rate in its operating portfolio, posted a fourth-quarter FFO increase to $147.5 million compared with $141.9 million in the previous year's fourth quarter. Its full-year FFO rose to $562.5 million from $527.7 million in 2006. Net income, which climbed to $123.8 million from $71.7 million for the fourth quarter, increased to more than $1.3 billion in 2007 versus $873.6 million in 2006.