D.C. Developments Produce Best Returns For BXP, Analyst Finds

BXP, the country’s largest publicly traded office building owner, has been bullish on building in the D.C. market despite a lack of other development activity in the city. 

And according to a new analyst report, it’s for good reason.

The Boston-based REIT achieves a higher rate of return on buildings it delivers in the D.C. area than it does in its five other markets, Piper Sandler analysts said in a report this month on the D.C. market. 

The report says BXP’s D.C. developments consistently deliver 8%-plus returns over time.

Piper Sandler Managing Director Alex Goldfarb told Bisnow this outpaces all of its other markets — Boston, New York, San Francisco, Los Angeles and Seattle — where its development returns come in between 6% and 7%. 

“They easily deliver like 200 basis points better in D.C. than their other markets,” he said.

BXP's latest office project in the city is a 320K SF trophy building next to the Metro Center transit station. The developer paid $34M in December for the property, a 1990s-era office building that had its anchor tenant depart. The REIT plans to tear it down and rebuild. 

The developer announced the project in January, along with a 150K SF prelease with law firm McDermott, Will & Emery. In April, it signed another law firm to bring the project to nearly 90% leased. 

The company had “no problem” achieving average rents at $85 per SF for the project, according to Piper Sandler’s report.

On top of its strong returns, the developer sees virtually no other competition for new office development in the D.C. market, the report says, meaning it can take advantage of the rising demand for top-quality space.

“In New York, Boston, San Francisco, there are a lot of active landlords. And same in LA or Seattle — there are a lot of competitive landlords,” Goldfarb said. “For whatever reason, it seems like in D.C., a lot of the people have pulled back. And that's given BXP an opening to move forward.” 

The opening is a significant one. 

D.C.’s trophy market dipped in vacancy again last quarter to 10.2%, according to CBRE’s third-quarter report. That is well below the market's overall vacancy rate of 22.4%. 

And the pipeline is thin. Besides BXP’s project, there is just one trophy office building underway: the redevelopment of the former WMATA headquarters in Chinatown, which is more than half leased to law firm Crowell & Moring. 

“It just seems like a lot of the normal competition that they would have is not there right now,” Goldfarb said. 

Meanwhile, there are some big firms with large leases expiring in the early 2030s, including Sidley Austin and White & Case, which are on timelines that enable them to sign deals to anchor new construction projects. 

Goldfarb said that not only is BXP “one of the very few that has the capital” to build new trophy buildings in the city, but law firms also trust the REIT to reliably deliver some of the best space on the market.

And the city’s height restrictions, which “neuter mid-block buildings,” is “driving more law firms to BXP's door step, seeking new construction,” the report says.

In Piper Sandler’s meeting with BXP this fall, Goldfarb said company representatives told his team they were “busy with deals” and “very eager to sign up tenants and start new developments.”

BXP’s lucrative returns stem from the propensity for D.C. law firm tenants to prelease space even before development starts, the report says. Goldfarb also told Bisnow that because the developer is consistently active in the D.C. market, it likely gets good deals from general contractors.

Meanwhile, its landmark development just outside the city, Reston Town Center, has become a vibrant downtown on its own, he said, and a hub for defense tech and other specialized tenants. Last year, the REIT reclassified the town center as a central business district rather than suburban office. 

A recently completed expansion to the development includes two office buildings occupied by Fannie Mae and Volkswagen, a hotel and a residential tower. 

Reston Town Center is planned for an additional 930K SF of office space across two towers, two residential buildings, 22K SF of retail and other ground-floor uses, and a 60K SF public performing arts center. The total development is planned to span 4M SF.

“It’s a lot of different pieces that all come together,” Goldfarb said. “Consistently over time, BXP has demonstrated huge success with their D.C. development program.” 

BXP didn't respond to requests for comment. The REIT is set to release its third-quarter earnings Tuesday.