BXP CEO Owen Thomas: Commercial Real Estate Is 'Currently In A Recession'

While macroeconomic indicators have shown mixed signals about whether the U.S. is entering a recession, the head of the country's largest publicly traded office landlord said the state of the commercial real estate industry is clearer. 

"Notwithstanding the running debate on whether the U.S. economy will experience a hard or soft landing, commercial real estate markets are currently in a recession," BXP CEO Owen Thomas said Wednesday morning on the REIT's fourth-quarter earnings call. 

The Boston-based REIT, which owns 54M SF of commercial real estate across 194 properties in six of the largest U.S. markets, is already feeling the impacts of that recession. Several of the company's largest tenants — including Salesforce, Google, Microsoft and WeWork — have been cutting costs in recent months by laying off workers and shrinking their office footprints. 

"Many of our clients are experiencing a slowdown in growth or reductions in top-line revenue and as a result are focused on cost control, including moderating headcount and space use," Thomas said.

The CEO added that layoffs and space cuts have been most prevalent in the tech sector but are "migrating into other sectors." BXP President Doug Linde said he sees layoffs in the finance and legal sectors and "across corporate America." 

These cuts will likely lead net office demand to turn negative this year, Linde said. 

"The overall demand we serve is unlikely to be growing their overall footprint in 2023," Linde said. "It’s hard to see much in the way of positive absorption."

One silver lining of the layoffs, Linde said, is that employers have more power to require employees to come back to the office, and that is showing up in BXP's portfolio. He said the number of unique occupants who swiped into its buildings last week was up 40% over the best week in March 2022.

"Companies are stepping up the days that workers are asked, required, cajoled to come into the office," Linde said. "In our portfolio, we’re a seeing steady increase in the number of unique occupants that are in office each week."

But the return to office isn't stopping some of its tenants from shrinking their footprints, a trend that is directly hitting BXP's bottom line at two properties it owns in New York and Washington, D.C. 

The REIT took a $51M impairment charge at the Dock 72 building in Brooklyn, where anchor tenant WeWork shrunk its footprint by two floors. BXP, which owns 50% of the building in a joint venture with Rudin Management, said it is now 25% occupied but is 42% leased, including signed deals that haven't yet begun. The landlord has negative net equity of $19.9M in the asset, it said in the financial supplement to its earnings release. 

In D.C., the firm also took a hit because of WeWork downsizing. At Metropolitan Square, a 658K SF office building near the White House that BXP owns 20% of, WeWork last year closed its space that had once spanned 226K SF, the Washington Business Journal reported. 

Metropolitan Square is now 85.7% leased, according to BXP's supplement, and the REIT has negative net equity of $37.6M in the asset. 

The company's executives didn't directly address WeWork on the earnings call, but they did respond to an analyst's question about cuts at Salesforce, which anchors BXP's 1.4M SF Salesforce Tower in San Francisco and is the largest tenant in its portfolio. 

Salesforce in early January said it will cut its workforce by 10% and exit some of its office space. But BXP Executive Vice President Robert Pester, who leads the landlord's San Francisco region, said he has heard it is cutting space elsewhere and has no indication it plans to shrink at Salesforce Tower. Plus, he said the tenant's lease there has roughly nine years remaining, so he is "not too concerned."

The impairment charge that BXP took in Brooklyn was the primary reason that its fourth-quarter earnings fell short of its guidance, the REIT said in its release Tuesday evening. BXP's stock price had fallen 1.77% as of 2:25 p.m. ET Wednesday, worse than the S&P 500's drop of 0.39% at that same time. 

The REIT's funds from operations, a performance metric that doesn't include the impairment charge, was $292.9M last quarter, up from $243M during the fourth quarter of 2021. Its full-year FFO of $1.2B was up 22% from the prior year, but BXP Chief Financial Officer Mike LaBelle said it expects this year's FFO to be down 5%.  

"The reduction is wholly due to the significant increase in interest rates as our portfolio NOI continues to grow, and we have a significant pipeline of accretive developments that are delivering over the next few years," LaBelle said on the call. 

As the company navigates a commercial real estate market that its CEO said is in a recession, it is shoring up its liquidity and pushing out its debt maturities.

The REIT sold 15 properties last year for a total of $864M, including the closing last quarter of an apartment building sale in Reston, Virginia, for $141M. It also closed Jan. 4 on a $1.2B loan that matures in May 2024 with a one-year extension option, it said in a release. And LaBelle said it has reduced its 2023 loan maturities to $930M, with options for extensions. 

"We’re not able to predict the depth or length of current economic slowdown, but its trajectory is coming into clearer focus," Thomas said. "Our goal is to position BXP for success regardless of the economy’s trajectory by carefully managing leverage and liquidity."