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BXP Looks To Flip Boston, D.C. Sales Into $730M ‘Showpiece’ Buy In Seattle

One year after entering the Seattle market, Boston Properties is preparing to make a huge splash with a $730M acquisition, and it is looking to sell assets in two of its oldest markets to fund the deal.

The 37-story Madison Centre office tower in Seattle.

The Boston-based REIT reached an agreement last month to purchase Seattle's 37-story Madison Centre office tower for $730M, it revealed on its Q1 earnings release Monday evening. The company's executives said they expect the deal to close May 17. 

The deal will initially be funded with a $730M bridge loan, but Boston Properties is working to line up property sales in the Boston and D.C. markets that it can use to fund the acquisition through a 1031 exchange deal, also known as a like-kind exchange. The REIT said this is the most efficient way to transfer capital between properties, as it allows it to defer capital gains taxes on the sales. 

"If we can accomplish this like-kind exchange, we basically will be reallocating investments we have in the Washington, D.C., and Boston markets to a terrific building that we just bought in Seattle," Boston Properties CEO Owen Thomas said on the REIT's Q1 earnings call Tuesday morning. 

The REIT didn't specify which buildings it would sell to fund the acquisition, but it did reveal two previously undisclosed capital markets deals in the D.C. and Boston markets. 

Boston Properties last month sold an office building in Waltham, Massachusetts, for $37.7M, it said in the earnings release. It said it realized a $22.7M gain on the sale of the 63,500 SF office building at 195 West St. 

In D.C., the REIT and its partners last month refinanced the loan on Metropolitan Square, a 657K SF office building in which it owns a 20% share. The new loans total around $420M, and the prior loans had a $294M outstanding balance with a scheduled maturity in July, it said in the earnings release.

The largest U.S. office REIT, Boston Properties prior to last year had focused its portfolio in five markets: Boston, New York, D.C., San Francisco and Los Angeles. Then in September, it completed its first acquisition in Seattle, acquiring the 50-story Safeco Plaza office building for $465M as part of a partnership in which it owns a one-third stake.

Its latest Seattle acquisition, the 760K SF Madison Centre tower, was developed in 2017 by Schnitzer West. The developer reportedly brought it on the market in early 2020 with an estimated price tag of $720M but didn't reach a deal at the time. The building is now 93% leased, according to Boston Properties.

The office tower features 30K SF of amenity space and achieved LEED Platinum certification, BXP said. It described the property as a "showpiece and foundational asset" for its Seattle expansion.

While they identified Boston and D.C. as markets where it would sell assets to fund the Seattle deal, the company's executives didn't voice any negative sentiment about the former two markets on the earnings call.

In Boston, they said they are experiencing strong growth by expanding their life sciences portfolio to benefit from that red-hot market. The company last week landed a 570K SF build-to-suit lab lease with AstraZeneca in Cambridge's Kendall Square

While some concerns have emerged in recent months about the biotech industry's lagging stock market performance, Boston Properties President Doug Linde said the growth in real estate demand from the industry has continued unabated. 

"By looking at your stock screens, it's clear the equity markets have not been kind to public biotech companies," Linde said on the earnings call. "However, there continues to be significant demand for life science tenants in the Boston market, many of which continues to be funded with private capital and have strong science in their favor."

In the D.C. area, Boston Properties said it completed several partial-floor leases in its Reston office portfolio, and it has one full-floor lease under negotiation for the next phase of Reston Town Center. The REIT also said it signed its second non-anchor lease at 2100 Pennsylvania Ave. NW, a 480K SF office redevelopment in Downtown D.C., and said it has another multifloor deal and a retail deal in the works that would bring the building to more than 80% leased. 

Across its 49M SF portfolio, Boston Properties said it executed 1.2M SF of leases in the first quarter, double the leasing volume it achieved in Q1 2021. 

The company reported $754.3M in Q1 revenue, up 6% from the same quarter last year. Its net income last quarter totaled $143M, up from $92M in Q1 2021. 

The office landlord said the percentage of its tenants' employees returning to the office is the highest it has been since the start of the pandemic, ranging from 40% to 80% depending on the market and the day of the week. It said its Manhattan and Boston properties are leading the way in the return to office, while its D.C. and San Francisco portfolios are further behind, but it didn't provide exact figures for each market. 

According to Kastle Systems, which tracks keycard swipes in the 10 largest office markets, average occupancy last week was at 43.4%, a 2.9% increase over the previous week. San Francisco, New York and D.C. were at 35.4%, 37.4% and 40.4%, respectively, each below the national average, according to Kastle data.

"Employee unwillingness to return to the office today on a consistent basis is primarily due to very tight labor conditions and employee desire for flexibility," Thomas said on the call. "As business conditions become more competitive due to rising interest rates, slowing economic growth and changes in the labor market, business leaders will likely feel increased urgency in bringing their employees together on a much more consistent basis and modify their return-to-office policies accordingly."