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Boston Properties Posts Best Leasing Quarter Since 2019 But Sees Headwinds Coming

Boston Properties, the largest U.S. office REIT, recorded its best quarter of leasing since before the pandemic in Q2, but its executives say worsening macroeconomic conditions are creating new issues for the company.

A rendering of the Boston Properties development in Kendall Square, where AstraZeneca signed a 570K SF lease.

The company signed 1.9M SF of leases in the second quarter, its highest total since Q3 2019, it reported in its Q2 earnings release issued Tuesday evening.

The leases helped the company increase its revenue by 8% year-over-year to $774M. The REIT, which trades under the ticker BXP, saw its stock price rise more than 2% Wednesday after the earnings release. 

The company revealed new leases, including a 125K SF deal at the GM Building in New York City and two leases totaling 140K SF in Waltham, Massachusetts, both with undisclosed tenants. It also highlighted leases it previously announced during the quarter, including AstraZeneca's 570K SF lease in Cambridge's Kendall Square.

As the country faces new economic turbulence, BXP executives said the factors tenants are weighing in their leasing decisions have changed.

"The conversations on the demand side of our business have really shifted from return to work and space utilization to the pace of job growth and job reduction," BXP President Douglas Linde said on the company's earnings call Wednesday.

BXP CEO Owen Thomas said inflationary pressures and interest rate hikes could create challenges for the office owner. 

"It's clear over the last quarter that economic conditions in the U.S. and globally have deteriorated," Thomas said. "The key culprit is inflation. This evolving operating environment is having several impacts on BXP operating activities."

Tenants have increasingly looked to give back space this year as they adjust growth expectations. Nationally, sublease availability rose by 1.3% last quarter to 162.8M SF, according to JLL's Q2 office outlook report. Major technology companies Yelp, Salesforce and Twitter have announced plans to give back office space over the last five weeks. 

Boston Properties' office portfolio includes holdings in the Boston, New York, D.C., San Francisco, Los Angeles and Seattle markets. 

"East Coast activity is stronger than activity on our West Coast portfolio," Linde said. "I think this is a function of the composition of customer demand."

Linde went on to say that the main differentiator between the coasts is that the East Coast has more traditional financial and professional service firms compared to the West Coast's tech and media companies. 

In Boston and New York City, utilization of BXP's office buildings is around 70%, with 50% of employees using the office three to five times a week, Linde said. He predicted it might see greater daily utilization of office space as more CEOs become "sterner" about coming into the office.

"I think this is going to be a journey, and any industry experts that tell you they know how a business is going to use their space, or what they even think remote or hybrid work actually means in 2024, is grossly overestimating their expertise," Linde said.

Boston's central business district is one of the most active markets in BXP's portfolio, and it signed more than 775K SF of life sciences leases in the Boston market last quarter. The company said that the majority of activity in the New York City; Reston, Virginia; and San Francisco markets came from leases of fewer than 25K SF.

BXP expanded its presence in Seattle last quarter by closing on the acquisition of the 755K SF Madison Centre office tower, a $730M deal it first revealed was under contract in May. 

It also continued to grow its Northern Virginia portfolio last quarter, breaking ground on two buildings at its Reston Town Center development: a 39-story tower featuring 509 residential units and a 90K SF boutique office building. It said it formed a new joint venture with an undisclosed partner and obtained a $140M construction loan for the residential tower.