When discussing office market performance, the knee-jerk explanations have been hybrid work, work-from-home, and back-to-the-office trends. Or, in the case of the latter, lack of them.
In an interview with CNBC, BXP Chairman and Chief Executive Owen Thomas had a different view. "The two big drivers for our performance are interest rates and corporate earnings growth," he said.
To put this into a greater context, Thomas called the market bifurcated. "There's premier workplaces and then there's everything else," he said. "Premier buildings — the vacancy is lower, there's positive net absorption in those properties, it's very negative in the rest of the market."
Premiere buildings in his definition are the top 10% of the market, and that's where BXP operates. "Our buildings are predominantly in that premier workplace segment, and that's why our vacancy rate is 10% to 12% as opposed to what the market vacancy rates are," he says. "We have badge counts for half of our buildings and we compared them to before Covid. New York is back, 100%, three days a week. Boston's 85%," which would be presumably average occupancies. On the other hand, their West Coast properties are at about 50%.
The difference is the primary industries, Thomas said. BXP's tenants on the West Coast are largely high-tech. As has been widely reported, many of the tech companies have cut back on staffing for a variety of reasons, including having previously over-hired or reducing their needs for previous staff with increasing focus on artificial intelligence. On the East Coast, the tenants are predominantly financial and legal firms.
Perhaps it is the type of buildings or clientele, but BXP has seen a close correlation between corporate performance and their willingness to lease space. "Our leasing slowed down in '22 and '23 because in '22, the S&P 500 earnings growth was about 4% and in '23 it was flat," said Thomas. "But in the first quarter of '24, it's up about 4% or 5%. Guess what? BXP's leasing activity is taking off right now. We're seeing a significant increase in the volume of leases that we're signing and negotiating, even in the last couple of months versus three and six months ago."
This has also spurred acquisitions. "At the end of last year, we bought in JV interests in three buildings that we already owned from joint venture partners we thought at very interesting prices because those joint venture partners no longer wanted to invest in office," said Thomas. "Again, time will tell, but we think those were very exciting opportunities for us and our shareholders. And we're continuing to traffic in the market today. Many buildings are getting foreclosed on. Many institution owners want to downsize office exposure. We're pursuing opportunities in all those sectors to try and find things for the company."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.