BXP Focusing Investments On Labs, Apartments As Office Market Struggles

While office assets continue to struggle on a national level, Boston Properties has pushed to diversify its holdings in better-performing asset classes like life sciences and residential.

One of the largest office real estate investment trusts in the nation, BXP owns 171 office properties in six markets, but its development pipeline today is weighted more heavily toward life sciences. The REIT has seven life sciences projects under construction totaling 1.9M SF and one 417K SF multifamily project. By contrast, it has five office buildings underway totaling 1.5M SF, it said in its first-quarter earnings report Tuesday.

The company also announced it broke ground on two new lab projects last quarter, and it acquired a site for a new multifamily redevelopment. 

When asked by an analyst on its Q1 earnings call Wednesday morning where BXP plans to focus its next wave of capital investments, CEO Owen Thomas highlighted sectors other than office. 

"We're not going to go out and buy a cheap office building in the hopes of making it less cheap over time," Thomas said. "We are going to continue to focus on our life sciences portfolio, and we are also going to focus on residential development, more as a merchant builder as opposed to a long-term owner."

Of the four notable leases BXP listed in its financial supplement, three were with life sciences companies: AstraZeneca for 566K SF, Genetech for 229K SF and the Broad Institute for 225K SF.

The REIT began construction last quarter on two projects in Kendall Square, one of the largest lab clusters in the nation, that are both 100% leased to high-profile life sciences companies AstraZeneca and the Broad Institute.

As Biogen began cutting its space after poor performance last year, the biotech company made plans to terminate its lease at the 195K SF project at 300 Binney St., which the Broad Institute is now planning to occupy with a 15-year lease. 

BXP is also building out a 570K SF research and development facility at 290 Binney St., which is fully leased by AstraZeneca. The development is set to open in 2026.

While building out its life sciences portfolio, which also includes another property in San Francisco, BXP is making moves in the multifamily sector. 

The company paid $17.3M for a 50% stake in a pair of vacant office buildings and a parking deck in Herndon, Virginia. Through a joint venture with Artemis Real Estate Partners, it plans to redevelop the 10-acre property at 13100 and 13150 Worldgate Drive into a 349-unit apartment and condo development.

As the office market continues to underperform, BXP executives emphasized their efforts to pivot away from the sector and diversify the portfolio.

"The office sector is clearly facing challenges in the current economic environment," Thomas said, adding that it is experiencing a "deceleration" in leasing activity this year. 

"It's driven primarily by the economic slowdown, a cyclical trend rather than remote work, a secular trend," Thomas said. "In other words, we believe the current leasing slowdown is cyclical and will recover along with economic conditions. Our clear evidence of this observation is our own leasing experience." 

He said the REIT's leasing activity last year was in line with historical averages, despite fewer people going into the office daily, while this year more people are using offices but the economic headwinds have depressed leasing activity. 

"With slowing growth, companies are more focused on cost control, reducing headcount and taking less or reducing their space," Thomas said. "In addition, capital market volatility on the heels of recent bank failures drives companies to be more cautious in capital outlays, including capital required for leasing new space."

The amount of office sublease space put back onto the market in Boston has reached a 20-year peak, and some of that was boosted by BXP's projects, with Verizon giving back 190K SF last quarter at the Hub on Causeway, a 440K SF joint venture with Delaware North.

"We are operating in a challenging real estate supply-and-demand environment," BXP President Doug Linde said.

With the struggles of the office market in play, BXP Chief Financial Officer Michael LaBelle ended the call by assuring shareholders that the company's diversification would help mitigate the effects of the weakened economy. 

Tenants like those in life sciences, which make up 8% of BXP's overall revenue, are focused on longer-term leases as well as attracting and retaining their workforce.

"Overall, our portfolio is incredibly diversified by client, by industry sector and by geography," LaBelle said. "This portfolio construction is by design, given our focus on premier workplaces that attract a high-quality client base."