A LSRE rebound is coming, REIT says, ‘It’s just a question of when’
By Murray W. Wolf
BXP’s 329,000 s.f. 180 CityPoint along Route 128 in Waltham, Mass., is about 43 percent leased, according to the firm’s Q2 2024 earnings report. (Rendering courtesy of BXP)
BOSTON – BXP Inc. (NYSE: BXP) reported generally good second quarter (Q2) earnings Thursday, July 31, buoyed by “the relative market strength of the premier workplace segment of the commercial office industry.” However, the results weren’t so rosy for the firm’s life sciences and technology properties.
The Boston-based real estate investment trust (REIT), which on June 20 officially changed its name to BXP from Boston Properties Group, reported Q2 2024 funds from operations (FFO) of $1.77 per share, beating the Zacks Consensus Estimate of $1.72. BXP also reported better-than-anticipated revenues of $850.5 million for Q2 2024, compared to $817.2 million in Q2 2023.
BXP officials attributed the positive results to healthy leasing activity; the REIT says it executed 73 leases totaling more than 1.3 million square feet during Q2, with a weighted-average lease term (WALT) of nine years. The occupancy rate for the firm’s “premier workplaces” – office space in high-end buildings in the central business districts (CBDs) of major cities – was 90.4 percent, or 92.2 percent leased including vacant space not yet occupied by signed tenants.
“Overall, we are experiencing an improving operating environment,” BXP President Douglas Linde said during the REIT’s Q2 earnings conference call with securities analysts last Wednesday, July 31.
Referring to the traditional office market, he said, “Leasing available space is primarily driven by gaining market share from competitive landlords and/or lower quality buildings, but not net new market demand growth. While the markets need consistent incremental absorption to show a macro recovery, we have started to see pockets of strength where low availability is driving constructive client behavior. The Back Bay of Boston and the Park Avenue submarket of New York are the obvious examples.”
Despite those encouraging signs in the office sector, BXP’s overall portfolio occupancy rate slipped to 87.1 percent during Q2, a decrease of 110 basis points from the prior quarter. This was primarily due to 1.2 million square feet of Q2 lease expirations and terminations, many of them involving its life sciences and tech properties.
“The life science lab demand in Greater Boston continues to be lackluster, with tenants displaying a little urgency around any potential new requirements or relocations,” Mr. Linde said during the earnings call. “To date this year, there have been eight non-renewal lab deals in Waltham, Lexington, Watertown and West Cambridge that didn’t involve a sublet. Only one was greater than 25,000 square feet.”
According to a July 1 U.S. Securities and Exchange Commission (SEC) filing, one of BXP’s Waltham tenants, the biotech firm AlloVir Inc. (Nasdaq: ALVR), reported that it had agreed to pay $7 million for the early termination of its lease for 78,541 square feet at the REIT’s 1100 Winter St. building in Waltham, effective June 30. The lease had been scheduled to expire July 31, 2030. AlloVir reportedly laid off 95 percent of its workforce in December after abandoning three late-stage drug trials.
He said the space “was simultaneously re-leased, but won’t be delivered into next quarter.”
Turning to another market where BXP has a significant life sciences property presence, Mr. Linde continued, “The lab market story in South San Francisco is not dissimilar to Greater Boston. There were only a handful of new leases completed during the first six months of the year that didn’t involve a renewal or sublease, though there have been about 100,000 square feet of new deals completed in the last 30 days.
He noted that new life sciences projects scheduled to deliver during the second half of 2024 will further decrease BXP’s occupancy rate.
“Our two Waltham life science developments will be added into our in-service portfolio in the third and fourth quarters,” he said, referring to the 103 and 180 CityPoint projects along Massachusetts Route 128. The buildings totaling about 442,000 square feet of space are a combined 32 percent occupied, he said, which will reduce BXP’s overall occupancy rate by about 50 basis points by year-end.
“For those of you that are focused on the next quarter,” Mr. Linde continued, “we expect us to be lower by about 40 basis points with a recovery in the fourth quarter, where most of the leases that have been signed start to commence where we project occupied space to be between 87 percent and 87.5 percent, inclusive of the addition to the in-service portfolio. In previous quarters, we have not been including the additions to the in-service portfolio, but we’re doing that now because it’s a quarter away.”
BXP Chairman and CEO Owen Thomas noted, “ When you look at the markets today, I would say, outside of tech and life science, our leasing is almost back to normal, whatever that is defined as, pre-pandemic. Those are the two places that there is a gap.”
Mr. Linde noted that all the life sciences space coming online during the second half of the year will give BXP plenty of upside to increase occupancy rates in 2025 and beyond.
“The trajectory is… there’s no question it’s going up,” he said. “It’s been going on. We’re hoping that we’ll start to pick up, but I’m not smart enough to know when that’s going to happen, but we know it will happen.
“And as we think about our cities and our portfolio, we have a view that there will be more creation of new jobs and new economic activity in life science and in technology, broadly thinking, than there will be in traditional financial services to asset management, professional and administrative services.
“So we’re banking on that happening. It’s just a question of when, and it’s really hard to be able to sort of give you a time frame for that,” Mr. Linde said,
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