Boston Properties (BXP 2.57%) is the country's largest publicly traded owner and developer of high-quality office properties. The real estate investment trust (REIT) concentrates on some of the country's biggest office markets, with properties in Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. All this means it has its fingers on the pulse of the office market.
Despite all the negative headlines declaring the death of the office over the past year, the office REIT's recently reported fourth-quarter results suggest that the office market is alive and well. Here's a look at what the company is seeing in the office sector these days.
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Signing leases like it's 2019
Boston Properties signed leases covering 1.8 million square feet during the fourth quarter, with an average weighted term of 8.6 years. That was the office REIT's best quarter for leasing since the third quarter of 2019, when it signed 2 million square feet of leases. It was also 50% above its pace in the fourth quarter of 2020.
Overall, Boston Properties signed 5.1 million square feet of leases in 2021, with activity steadily increasing throughout the year. The company saw widespread leasing activity across all six of its major markets.
One of the big drivers was the life science sector, which accounted for more than 25% of the leases it signed during the fourth quarter. That's due in large part to the tailwind from the pandemic, as governments and investors have flooded the sector with money to research and test new therapeutics, vaccines, and diagnostic tests. That's given these companies the cash to expand.
However, while life science clients were an important driver, they weren't the only ones. Boston Properties noted that clients in other industry groups also accelerated their leasing last year, which helped drive the higher activity. Boston Properties CEO Owen Thomas pointed out that "the strong leasing momentum we experienced in the fourth quarter underscores the value companies place on securing high-quality workspaces essential for collaboration, innovation, and growth."
What's ahead for the office market?
The office REIT's CEO also provided some commentary on what his company sees ahead in the office market on the accompanying conference call. Thomas stated:
Now turning to 2022, we believe the market and economic factors which impact BXP are, on balance, very favorable. Though the omicron variant has been a setback and the course of the pandemic has proven hard to forecast, most experts believe conditions will improve in 2022, resulting in more workers returning to the office and further improved space demand. The economic recovery in the U.S. continues, with consensus GDP growth predicted to be 4% in 2022, and innovations in technology and life science remain promising and well-funded, a key driver for office and lab space demand.
Thomas also noted a few challenges facing the market. He stated, "The labor market is also very tight, which contributes to our client's hesitancy in bringing their employees back to an in-person work environment." That could dampen demand in the near term. However, he also reiterated his belief that "the phenomenon will change over time, given widespread corporate dissatisfaction with a decaying of efficiency, retention, and culture associated with remote work."
He concluded by stating that "though challenges persist, we see 2022 market conditions as a favorable backdrop for BXP to continue to perform." That's evident in the company's guidance for the coming year. The company expects its funds from operations (FFO) to be between $7.30 and $7.45 per share. That implies 12% growth at the midpoint from 2021's FFO numbers and 17% above 2020's level.
The REIT is benefiting from the overall improvement in office demand and the steady return of companies to their offices. That latter factor is helping boost revenue from parking and other services. This continued recovery should help boost its same-property net income by 2% to 3% this year.
Boston Properties' other growth drivers are its investments to expand its office portfolio. It completed five development projects last year -- including four in the fourth quarter -- and seven redevelopments, which will help boost FFO. The company also purchased two life science properties and entered the Seattle market by acquiring a high-quality office building. While it's not planning to make any acquisitions this year, deals represent additional upside potential.
The office market is on the mend
Boston Properties' fourth-quarter results show that the office market is improving. While it's still facing some near-term headwinds, they should fade over time. Companies are increasingly eager to return to the office because of the issues they're facing with remote work. That bodes well for the future of Boston Properties.
