Boston Properties Make the Case for Office Investment

In a recent earnings call, Boston Properties’ CEO Owen Thomas argued the case of the office comeback, calling concerns over the impact to office space demand “overblown.”

“Business leaders want their employees back in the office to foster culture, collaboration, teamwork, and mentoring, and to provide more supervision,” he said. “Though employees may be working remotely more in the future, it will be difficult for employers to translate lower census into space savings due to employees’ desire for more privacy and a fixed workstation.”

Thomas predicted leasing likely won’t tick up until later in the year, once vaccine strategies are fully deployed coast-to-coast and people feel more comfortable returning to the workplace. He acknowledged that while WFH will become more commonplace in the US and globally, CEOs tend to have a “strong interest” in getting employees back to a physical office environment.  

Despite Boston Properties’ FFO dropping 15% the last three quarters versus pre-COVID levels, Thomas noted the company’s office portfolio is stable and that they’ve been collecting more than 99% of rents owed during the pandemic. And while office transaction volumes were “down materially” over the last three quarters, Thomas pointed out that activity improved each quarter as investors stepped back into the market. Volumes were down 45% year-over-year in Q4, for example, but were up 59% from the third quarter of 2020. 

“Office was no more out of favor then other asset classes after the pandemic as office transaction volume was 29% of total commercial real estate volume both in 2019 and the last three quarters of 2020,” Thomas said in his remarks.  With interest rates expected to remain low, Thomas said he expects transaction volume to increase and cap rates to potentially tighten for well-leased assets.

This contradicts somewhat the analysis released earlier this month by Mizuho Securities, which noted that the worsening pandemic and sluggish vaccine will negatively impact the sector in 2021. 

“The set-up thus feels a lot like 2020 in that low office utilization rates for much of 2021 would result in weak new leasing volume, put pressure on rents during lease negotiations and possibly result in lower retention rates,” the report says.  “2021 consensus estimates feel too high, especially for REITs with exposure to densely populated coastal CBD markets that have been disproportionately hit by the pandemic.”

Boston Properties’ FFO for the fourth quarter of 2020 was $213.1 million per $1.37 per diluted share.  It included a $0.22 per share non-cash charge to lease revenue for the write-off of accrued rent for coworking tenants. The company provided guidance for the first quarter 2021 with projected EPS of $0.53 - $0.57 per diluted share and projected FFO of $1.53 - $1.57 per diluted share.