Despite the prevailing negative sentiment towards the commercial real estate sector, BXP has emerged as a beacon of resilience and performance in the fourth quarter of 2023. The company’s Funds from Operations (FFO) per share exceeded market expectations by $0.01 in the fourth quarter and surpassed the midpoint of its guidance range by $0.15 for the entirety of 2023, according to its latest earnings call.
BXP’s leasing activities have been notable, with the company completing over 1.5 million square feet of leasing in the fourth quarter alone and totaling 4.2 million square feet throughout 2023. These figures surpass prior forecasts, highlighting BXP’s ability to attract and retain tenants in a challenging market environment. The company’s leased properties now have a weighted average term of over eight years, ensuring long-term occupancy stability.
In terms of capital raising, BXP has successfully secured over $4 billion in new capital from various sources, including public unsecured debt, private secured mortgages, and private equity markets. Among these endeavors were a new $600 million mortgage financing and a $750 million asset-specific equity capital raise, marking some of the largest transactions in the sector last year.
BXP’s strategic capital allocation has been exemplified by the sale of a 45 percent interest in two significant life science developments in Cambridge to Norges Bank Investment Management, valued at a gross of $1.66 billion. These transactions not only underscore the high value of BXP’s assets but also reduce the company’s development funding requirements, demonstrating savvy financial management and strategic partnership.
Further, BXP’s acquisition of additional interests in Santa Monica Business Park and 360 Park Avenue South for a relatively minimal upfront investment of $48 million showcases the company’s ability to enhance its portfolio with high-quality assets at favorable terms. These acquisitions are expected to deliver returns well above the cost of equity capital raised, projecting an FFO per share accretion of approximately $0.14 in 2024.
Santa Monica Business Park is a 21-building, 1.2 million square foot property in the Los Angeles market, and it is an 88 percent leased office complex located adjacent to the Santa Monica Airport. The property carries a $300 million mortgage due in 2025, according to Owen Thomas, BXP’s Chairman and CEO. 70 percent of the park is encumbered by a ground lease, with above-market ground rent and a fee purchase option in 2028.
“We completed a 467,000 square foot lease renewal for Snap, the anchor client in the park for 10 years,” Thomas added. “And [we] purchased the 45 percent interest in the asset we didn’t own for $38 million, which represents pricing of $395 per square foot and a 9 percent initial cap rate on a fee simple basis based on market assumptions for land value.”
Despite challenges in securing financing for office real estate and a broader market shift away from the office asset class, BXP’s focus remains on leasing, preserving occupancy, and exploring new investment and development opportunities. The company’s engagement in lease modification discussions, particularly with WeWork, is one of the areas where the company will deploy recourses in order to maintain occupancy levels, stated Douglas Linde, president of BXP, on the call.
The broader market’s recovery remains uncertain, with office leasing absorption impacted by a slow pace of job growth in office-using sectors.
“The bifurcation of client demand between the East Coast and the West Coast continues to be very wide,” said Linde. “San Francisco, West L.A. and Seattle are dependent on technology employers. Traditional technology demand growth continues to be weak, and more times than not, renewing technology clients are reducing their lease premises.”
The company’s lease with Snap exemplified this trend. While the company was successful in executing a forward-starting 10-year lease extension commencing in ’26 for 467,000 square feet, the transaction does include an early termination of 140,000 square feet.
Central business districts on the West Coast have experienced similar demand, as illustrated by the company’s efforts in Seattle. “The Seattle CBD continues to have very little active demand other than lease exploration-driven exploration,” Linde said. “Our vacancy in Seattle increased by about 100,000 square feet in the second half of ’23, due to WeWork’s termination, as well as the give back of a floor from a technology company as part of a 5-floor lease extension at Madison Center. Again, technology-company [is] staying with us in our portfolio, but reducing some space.”
Artificial Intelligence companies have shown that there is an opportunity for new ventures to help spur interest in certain markets. However, these companies are still in the early stages of their evolution, and the opportunity has been primarily in San Francisco where over one million square feet of space was leased to the sector. “There have been billions of dollars of recent investment in this growing ecosystem, and there are additional clients in the market, but let’s acknowledge that, these other AI organizations are predominantly seed or early round funded entities and not at the same scale as an OpenAI or an Anthropic,” Linde stated.
