AI Leasing Demand Fuels Growth Across BXP's Portfolio

As artificial intelligence demand surges and large tech companies continue to expand, Class-A office space in top markets is benefiting from the activity.

At the end of the first quarter, BXP had leased 1.1M SF across 68 transactions. The firm's central business district portfolio was 89.9% occupied and 93.4% leased, according to the REIT's Q1 earnings report.

Although tech and media companies make up roughly 20% of the REIT's client base, AI-driven companies were an integral part of BXP's growth last quarter.

By the end of Q1, portfolio-wide occupancy increased 70 basis points from 86.7% to 87.4%, and leasing increased 150 basis points, from 89.4% in Q4 to 90.9% in Q1.

"There is no question that AI has been and continues to be enormously beneficial to BXP's leasing activity, despite the market anxiety regarding the impact of AI on job creation and resultant leasing demand," BXP CEO Owen Thomas said during the REIT's Wednesday earnings call.

BXP President Doug Linde said the uptick in AI-driven leasing has been most prominent in office markets that have historically benefited from the technology sector.

The firm is seeing direct benefits from AI companies growing rapidly in San Francisco, New York and Seattle. Indirectly, BXP occupancy is also benefiting from financial, legal and business services firms serving AI companies and from firms "displaced by growing AI firms," Thomas said.

Although concern is growing across the commercial real estate industry over AI's impact on job creation and office demand, Thomas said his firm isn't worried AI will make office jobs obsolete.

"The near- and medium-term negative impacts of AI on jobs are more likely in support functions, which are less present in premier workplaces and in gateway markets," Thomas said.

While leasing demand was strong and the REIT's funds from operations guidance increased slightly, BXP investors were jittery throughout the day, likely because of a mix of AI skittishness, geopolitical turmoil and BXP's $10M increase in interest expenses.

BXP's stock was trading at $57.20 at the end of the earnings call at 11 a.m. ET. The stock price dropped more than 2.6% by the closing bell.

As part of its goals to improve occupancy and optimize the REIT's portfolio, BXP has made several notable sales in line with its pursuit of raising roughly $1.9B by 2028.

In the first quarter, the REIT completed sales of North First Business Park in San Jose, California, and The Loft at Atlantic Wharf in Boston. The REIT also sold its ownership interest in Gateway Commons in South San Francisco and 7750 Wisconsin Ave. in Bethesda, Maryland.

In total, BXP made approximately $495.7M in residential, land and "non-strategic office" sales in Q1.

"What we do know is that the U.S. economy has gone through many technology cycles since the invention of the personal computer 45 years ago, and in this cycle today, there is dramatic incremental office demand growth from new organizations that are developing AI," Linde said.

Since the beginning of 2024, AI and tech leasing have steadily increased from 50% of total leasing demand to 57% to almost 80% in the first quarter of this year in San Francisco alone.

In New York, AI firms accounted for roughly 415K SF of the 8.5M SF of leasing that took place so far this year. Of these companies' leases, 55% of was for future growth space.

An existing AI tenant agreed to expand to an additional floor of BXP's 360 Park Avenue South office tower in New York's Midtown. The expansion brings the office building's occupancy to 95%, Linde said.

OpenAI and Anthropic are leading the charge, but several other smaller companies are looking for space, Linde said. The demand is coming as the market, which has historically been home to tech behemoths like Meta and Google, has seen demand pull back dramatically.

"It's clear the clients that are growing are not the tech titans that expanded during the last decade, but there is meaningful office-using growth in our market," Linde said.

One analyst on the earnings call raised concerns about whether the acceleration in the market could be sustained. Linde said the fundamentals of the company's business bode well for the office market, at least for now.

"I can't tell you if that's going to hold for a consistent basis for the next three or four or five quarters, but these companies are, relatively speaking, aggressively hiring people, and they've made a decision that in-place work is critically important to their business strategies," Linde said.