Stronger East Coast Markets Drive Office Leasing Activity For BXP

East Coast office markets that have struggled with high vacancy and rising financial distress since the onset of the pandemic are now seeing a surge of leasing activity, the nation's largest office REIT says. 

BXP, formerly Boston Properties, completed 1.3M SF in leases in the second quarter, up from 900K SF in Q1. 86% of that activity came in Boston, New York City and Northern Virginia. The activity was driven by professional services firms, including asset managers, legal firms and venture capital funds.

"Q2 activity was concentrated in our East Coast markets," BXP President Doug Linde said on Wednesday on the company's earnings call. "The majority of our client expansions came from Manhattan this quarter."

BXP reported in its second-quarter earnings release that its revenue increased by 4.1% year-over-year to $850.5M. The REIT also saw a net income of $79.6M, down from $104.3M in the same quarter last year.

The company's office occupancy decreased 110 basis points over the prior quarter to 87.1%. Its stock price fell 1.9% Wednesday after the earnings report. 

The landlord's 1.3M SF of leasing activity included 445K SF in New York, 343K SF in Boston and 351K SF in Northern Virginia. 

The leases include a 289K SF renewal and expansion at the Reston Overlook property in Reston, Virginia, a 164K SF renewal and expansion at the GM Building in New York City and a 120K SF renewal at 200 Clarendon St. in Boston.

BXP also has office holdings in Seattle, San Francisco and Los Angeles — making it one of the only REITs with a window into major office markets on both coasts — but its West Coast portfolio saw much slower leasing activity in Q2. 

Linde pointed to two particular East Coast submarkets that have been especially strong. 

"While the markets need consistent incremental absorption to show a macro recovery, we've started to see pockets of strength where low availability is driving constructive client behavior," Linde said. "The Back Bay of Boston and the Park Avenue submarket of New York are the obvious examples." 

He said these two submarkets have seen net effective rents higher than they were both six months ago and a year ago.

This East Coast strength appears to be a widespread trend beyond BXP's portfolio. In CBRE's Q2 U.S. office market report released Wednesday, the top four spots in its leasing activity ranking were held by Atlanta, D.C., Manhattan and Philadelphia.

As for the West Coast, BXP's activity was primarily focused in San Francisco, with 146K SF of leases signed in the second quarter. Linde said that although the market is seeing more demand than in 2023, it continues to see additional sublet availability from tech tenants looking to downsize.

"Additional sublet availability and technology company lease downsizing upon lease expirations continue to mute the positive demand emanating from the AI organizations that continue to look for space," Linde said.

Like the East Coast, San Francisco has a host of professional services, asset managers, venture capital fund managers and legal advisors that are looking for space. But the activity of those firms looks different on each coast. 

"We continue to see many of the professional services and law firms continuing to downsize [in San Francisco], which is in stark contrast to the activities of those same tenants in New York and Boston," Linde said.

The REIT's executives also touched on the broader commercial real estate market recovery and the positive signs they see coming in interest rates and corporate earnings.

The Federal Open Market Committee left rates unchanged at its meeting Wednesday, but Federal Reserve Chair Jerome Powell said "we are more confident" about inflation reducing toward its 2% target. And Wall Street has become more optimistic about an interest rate cut in September. 

"Now, with more progress on inflation, the street has reverted back to three cuts this year," BXP Chief Financial Officer Michael LaBelle said on the earnings call. 

BXP CEO Owen Thomas said that corporate earnings in the S&P 500 remained flat last year but are now reporting growth of more than 9% this quarter.  

"Companies with earnings growth are much more likely to invest, to hire and to lease additional space, as demonstrated in our growing leasing volumes this year," Thomas said.  

Thomas also pointed to companies pushing office attendance initiatives,  including Salesforce, which announced that it would require most of its workers to come back into the office starting Oct. 1, The San Francisco Standard reported. Companies experiencing growth and pushing more employees back should help boost the performance of office landlords like BXP. 

"Expectations for lower interest rates and stronger corporate earnings growth will also provide a tailwind for our renewed growth over time," Thomas said.