Life Sciences: What’s behind BXP’s big life sciences asset sale?

Why did Boston Properties sell 45 percent of two plum projects in Cambridge, Mass.?

By Murray W. Wolf

In what might go down as the largest life sciences real estate (LSRE) transaction of the year, Boston Properties Inc. (NYSE: BXP) announced last Tuesday (Nov. 14) that it has agreed to sell a 45 percent interest in two prominent Cambridge, Mass., developments at a gross valuation of about $1.66 billion, or $2,050 per square foot (PSF). On that basis, that interest would be worth about $746.4 million.

The buyer is Norges Bank Investment Management (NBIM), the branch of Oslo, Norway-based Norges Bank responsible for managing the Norwegian Government Pension Fund. BXP says it will continue to provide development, property management and leasing services.

But those two laboratory and office buildings, now under construction at 290 and 300 Binney St. in the Kendall Square area, total about 810,000 million square feet are arguably two of the most attractive assets in BXP’s entire portfolio of 190 properties and 53.5 million square feet of space (as of Sept. 30).

The 16-story, 570,000 square foot tower under construction at 290 Binney St. is 100 pre-leased to AstraZeneca plc (Nasdaq: AZN), a global pharmaceuticals and biotechnology company, with initial occupancy expected in April 2026. And the six-story, 240,000 square foot 300 Binney St. building is currently under redevelopment and is 100 percent pre-leased to the prestigious Eli and Edythe L. Broad Institute of MIT and Harvard University, with projected occupancy expected in January 2025. Both leases are for 15 years.

So why is BXP selling?

Executives of the Boston-based real estate investment trust (REIT) haven’t said much about the sale of the interest in the Binney Street properties, which was announced about two weeks after the firm reported its third quarter (Q3) earnings and conducted its quarterly earnings conference call with securities analysts. BXP has not filed specific information about the deal with the U.S. Securities and Exchange Commission (SEC) and, beyond the brief initial announcement, executives of the firm haven’t addressed the transaction.

In general, however, there are several reasons why a CRE firm might be willing to sell an interest in some of its plum projects.

A focus on ‘premier workplaces’

Before we delve into the possible motivations for the Norges transaction, let’s take a look at BXP’s market position and its executives’ perspectives on the U.S. economy and commercial real estate (CRE) market.

Through the end of Q3, life sciences assets accounted for more than 10 percent of the square footage in BXP’s total portfolio. Even so, the firm is generally viewed as an office REIT and, in terms of equity market capitalization, BXP ranks as the second largest publicly traded office REIT, with an equity market capitalization of about $9.3 billion as of the end of Q3.

(By that same reckoning, the largest publicly traded “office” REIT is Alexandria Real Estate Equities Inc., NYSE: ARE, which had a market cap of about $17.3 billion through the end of Q3. Of course, as BREI readers well know, Alexandria would be more correctly characterized as a life sciences REIT, not an office REIT. However, most analysts lump the firm into the office category.)

BXP attempts to differentiate itself from other office REITs by positioning itself as the nation’s largest publicly traded developer, owner and manager of “premier workplaces,” which the firm defines as the most modern and efficient “Class A” assets with the best designs, amenities, locations and tenants in the six most desirable metropolitan areas: Boston, Los Angeles, New York, San Francisco, Seattle and Washington, D.C.

BXP strongly emphasizes the “premier workplaces” positioning – especially these days, when the outlook is troubling for the mainstream CRE market, particularly office properties. Remote and hybrid work has driven up average office vacancy rates, and property values have declined. Meanwhile, low fixed-rate CRE loans are expiring and coming due for refinancing, but property owners are facing much higher interest rates and tighter credit. That “refinancing cliff” could lead to a wave of distressed properties, industry experts say.

Indeed, the value of distressed U.S. CRE rose to nearly $80 billion by the end of Q3, its highest level in a decade, according to MSCI Real Assets, the investment analysis service of the New York-based finance company MSCI Inc. MSCI also identified $215.7 billion of properties that are considered to be in “potential” distress, primarily due to rising vacancy rates, higher debt costs or both.

Office properties are responsible for most of the distress, with a 261 percent increase in delinquent loans year-to-date (YTD) through the end of October. So it’s understandable why BXP is trying to distance itself from other office REITs.

‘Misleading’ economic data

Again, BXP’s Q3 earnings conference call with securities analysts took place before the Norges deal was announced, so it did not specifically address that transaction. However, comments made by the company’s executives during the call provide some potential insights into their perspectives on the economy, the state of the CRE market and BXP’s strategies.

“The U.S. economy’s headline statistics remain remarkably strong,” Chairman and CEO Owen D. Thomas told securities analysts, “with GDP (Gross Domestic Product) growth at 4.9 percent in the third quarter, 336,000 jobs created in September, and the unemployment rate steady at 3.8 percent.”

However, he added, “This rosy economic picture is misleading as it does not accurately reflect the market tone and operating environment for many of our clients… Our clients are corporations that actively manage their headcount and operating expenses in times of weak or negative earnings growth and, as a result, they’re more cautious and making new space commitments.

“Though remote work is obviously not helping space demand, we believe economic conditions are the primary driver of our slower leasing activity in 2023, and leasing will rebound when earnings growth returns. We continue to be encouraged with the return-to-office trajectory we are experiencing in our buildings, as well as the rhetoric and actions of many of our clients with respect to their in-person work policies.”

Mr. Thomas said that BXP executives believe national “turnstile” data indicating that office buildings are generally 50 percent occupied versus pre-pandemic levels. However, he said, BXP’s buildings are generally faring better, with 95 percent occupancy for its New York properties and 74 percent for its Boston assets – although its San Francisco properties are at 45 percent.

“And the space utilization data in all our markets continues to improve,” he continued. “Workers in premier workplaces are returning to their offices in greater numbers…

“Lastly, and importantly, all office buildings are not the same,” noting that “occupancy, absorption rates and rents for premier workplaces are significantly higher.”

Douglas T. Linde, BXP’s president, added, “We are all seeing the stress that many buildings are feeling due to their current capital structure and the reality of the supply and demand fundamentals reflected in the leasing market activity. The transition or recapitalization or re-equitization of these buildings is going to take an extended period of time.

“Many of these assets are not in a position to commit capital to existing or new tenants, which greatly impacts the leasing brokers interested in considering them for their clients, and offers us with the opportunity to further increase our market share.”

Mr. Thomas added, “U.S. lenders are trying to reduce their exposure to commercial real estate loans and have limited available lending capacity for repayments.”

Later, during the question and answer (Q&A) portion of the earnings call, Mr. Thomas noted, “There’s a tremendous amount of restructuring activity that’s going on in the market generally. It may not all be reported, but it’s definitely happening because there are overleveraged loans that are coming due all the time, and borrowers are in discussions with their lenders on what to do. So there are lots of those things going on right now.

“And then, I think, second, for buyers to get more active, there has to be more visibility on the two uncertainties that I mentioned.”

Some potential motivations

One reason a CRE firm might sell an interest in a project is that engaging in strategic partnerships can bring additional expertise, resources or strategic advantages, as collaborating with strategic partners can sometimes enhance a project’s success and marketability. In the brief news release distributed Nov. 14 to announce the Norges deal, BXP specifically mentioned that aspect of the transaction.

“BXP’s newest joint venture (JV) with NBIM solidifies what is already a key strategic partnership,” Cole Pinney, VP, JV client relationships, was quoted as saying. “We look forward to continued collaboration between our organizations.”

But as the nation’s second largest office REIT, BXP undoubtedly brings plenty of expertise and resources to bear for the completion of the Binney Street properties without any help from a partner, especially a foreign investor with less U.S. market expertise. So it’s reasonable to speculate that the transaction is motivated by more than simply a desire to enhance BXP’s relationship with one of its JV partners.

Then what else might be behind the deal?

Another reason CRE firms might sell an interest in a property would be to capitalize on high investor demand resulting from certain market conditions or economic trends.

Historically, demand for LSRE has been strong and, as noted previously, the Binney Street properties are highly desirable. But in terms of broad market trends, investor demand is at its lowest point in three years. There were only $4.8 billion in LSRE transactions during Q3 2023, which represents a steady decline since Q3 2022, when sales totaled $18.4 billion, according to RevistaLab data.

Broadly speaking then, LSRE sales volume is historically low, which probably doesn’t make this the optimal time to sell assets – although the Binney Street assets are more desirable than most.

CRE firms might also sell an interest in a property to monetize some of the appreciated value of an asset, and BXP has certainly added value to the Binney Street projects by gaining approval, leasing them and starting construction. But it seems reasonable to assume the appreciation will be even greater when the projects are completed and the tenants move in, and when overall CRE property values rebound

Playing offense

Another reason for selling an interest in an asset might be to achieve certain financial goals, such as balancing a portfolio or hitting various financial targets.

In that vein, BXP executives say they see potential buying opportunities in the coming months in light of the growing number of delinquencies in the office market.

“In anticipation of the current market distress in our sector, we have been positioning BXP to play offense for the past year by raising $4.1 billion in gross funding and currently holding $2.7 billion in liquidity,” Mr. Thomas said during the earnings conference call.

“In search of opportunities, we’re maintaining continuous dialogue with lenders that are foreclosing on or restructuring assets, as well as owners seeking to reduce their office exposure. Our focus will remain in our core markets on premier workplace assets, life science and residential development.”

For example, Mr. Thomas noted, “During the last major downturn caused by the global financial crisis, BXP was able to acquire the General Motors Building, 200 Clarendon St., 100 Federal St. and 510 Madison – all at attractive prices at the time.”

Perhaps hinting at the Norges deal announced about two weeks later, he told the earnings call listeners, “On dispositions, we continue to pursue additional capital raising through joint ventures with select pre-leased developments and to consider incremental asset sales.”

Part of the REIT routine

Regardless of other potential motivations, dispositions are a routine part of the overall strategies of public REITs, and BXP isn’t the only such firm that has been selling interests in its life sciences-related assets.

In September, Alexandria Real Estate Equities, which has pursued an ongoing program of “value harvesting and asset recycling self-funding,” sold about 41 percent of the square footage in the “Class A,” 660,034 square foot 421 Park Drive development in Boston for about $174.4 million. The buyer was an affiliate of the REIT’s “long-term strategic partner,” Boston Children’s Hospital.

Earlier in the year, Alexandria sold an 18 percent interest in a property at 15 Necco St. in Boston for about $66.1 million, and a 20.1 percent interest in 9625 Towne Centre Drive in San Diego for about $32.3 million.

Earlier in the year, during Q2, Alexandria also sold 100 percent of three properties for total dispositions and sales of partial interests of about $875 million during the first nine months of 2023.

Of course, publicly traded REITs might be a bit more inclined to sell full or partial interests in assets these days due to growing financial pressures. The financial markets have punished the share prices of REIT stocks this year, especially for REITs viewed – fairly or unfairly – as part of the troubled office sector. Alexandria’s stock closed at $105.18 yesterday (Nov. 24), down 39 percent from a high of $172.65 in February. BXP shares closed at $53.71 yesterday, down 32 percent from their February high of $79.42.

Thus it is reasonable to assume that those share price declines, which have trimmed the equity market capitalizations of REITs including Alexandria and BXP, have also been a consideration in the firms’ 2023 disposition decisions.

How will the sale affect BXP?

Some real estate firms will sell a stake in a high-value asset to provide an immediate capital infusion, which can be used for various purposes, including funding new developments, reducing debt or investing in other opportunities.

In its Nov. 14 news release announcing the Norges deal, BXP stated, “NBIM funded approximately $212.9 million at closing for its investment in 300 Binney St. and, upon closing of its investment in 290 Binney St., NBIM’s investment will reduce BXP’s share of estimated future development spend over time by approximately $533.5 million.”

The transaction also frees up about $746.4 million in cash that BXP can use to pay down debt and/or invest in other more profitable opportunities. But, as noted, the 290 and 300 Binney St. are arguably some of the most desirable assets in the REIT’s portfolio. The firm also won’t make much of a profit on the partial sale, and partnering will reduce future profits.

Another reason to sell a share in a property is risk mitigation. Diversifying ownership among other investors or partners can help reduce risk, providing a buffer against market fluctuations or unforeseen challenges. However, with both Binney Street properties 100 percent long-term pre-leased to highly desirable life sciences tenants, it would seem that the properties would be less risky than many of BXP’s other assets, even its “premier workplace” office properties.

The Norges deal also reduces BXP’s diversification by property type. The 45 percent stake in the 810,000 square foot 290 and 300 Binney St. developments equates to about 400,000 square feet. That’s a sizable decrease in BXP’s total 5.5 million square foot LSRE portfolio, reducing life sciences assets to about 9.5 percent of BXP’s total holdings.

Who is Norges Bank Investment Management?

As noted, the buyer of the minority interest in the Binney Street properties is Norges Bank Investment Management (NBIM), the branch of Norges Bank responsible for managing the Norwegian Government Pension Fund.

“We are very pleased to grow our portfolio in Greater Boston,” Mie Holstad, NBIM’s chief real assets officer, was quoted as saying in the Nov. 14 news release announcing the deal. “The investment aligns with our long-term strategy, and we are delighted to strengthen our partnership with BXP in a sector where we have high conviction.”

This was not NBIM’s first LSRE transaction in Cambridge. In a deal very similar to the 290 and 300 Binney St. transaction, NBIM, MetLife Investment Management (MIM) and an affiliate of Alexandria Real Estate Equities formed a new JV in late 2021 to recapitalize Alexandria’s 50 and 60 Binney St. properties for $1.2 billion. NBIM acquired a 41 percent interest in the properties; MIM, an affiliate of MetLife Inc. (NYSE: MET), acquired 25 percent; and an Alexandria subsidiary retained 34 percent.

Built in 2017, the Alexandria-developed properties are two 10-story, fully occupied, “Class A” office and lab buildings totaling 532,395 square feet.

NBIM has been investing in European CRE since 2011 and in U.S. properties since 2013, when it formed a JV with MetLife.

News Release: BXP Agrees to Sell a 45% Interest in Kendall Square Life Sciences Properties