Commercial real estate (CRE) was rocked at the start of the pandemic. Mandated closures, lack of in-store business, and essentially no travel wrecked the retail, hotel and lodging, office, and entertainment industries. The majority of these industries are making a huge comeback, with business at or above pre-pandemic levels; that is, with the exception of office space.
The ability to work from home has motivated companies to reevaluate the need for office space and is putting the future of office space into question. This is not great news for Boston Properties (BXP -1.57%), one of the largest office REITs having ownership and interest in 201 office properties in some of the most popular cities of the United States.
Share prices just recently exceeded pre-pandemic levels, taking two full years to recover from its 40% fall back in March of 2020. While the company certainly has a questionable future, here are three reasons not to give up on Boston Properties just yet.
Cities are making a big comeback
At the start of the pandemic, major metropolitan cities like Boston, Los Angeles, Seattle, Washington, D.C., New York City, and San Francisco, where Boston Properties operates, saw a huge number of residents flee the city in search of more affordable housing and more space since they could work from home. Four of the five cities that saw the greatest decline in population from 2019 to 2020 are where Boston Properties owns and leases office space.
Until 2022, strict mandates in these cities made it difficult for businesses to return to normal in-office operations, causing office-space demand to steadily decline. Boston Properties occupancy levels went from 93% in 2019 to 88.8% by the end of 2021. But demand and interest for city living are making a big comeback, which is helping drive leasing activity for Boston Properties. The company executed leases on 5.1 million square feet of office space in 2021, 1.4 million more square feet than in 2020. This trend should continue as mandates and restrictions are eased and residents continue to return to these cities.
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Class A office space is dominating leasing demand
Boston Properties is known for being the premier developer and operator of Class A office space; in other words, the highest quality office spaces. This is a major advantage today as tenants look for new features to operate their office in a post-pandemic world. State-of-the-art air filtration systems, more space and privacy for workers, outdoor areas and green space, fitness centers, and more health-oriented services, as well as energy-efficient buildings, are things tenants want from office space moving forward.
Including these design elements into a new development is much easier and more cost-effective as compared to an older, more outdated office space, such as a Class B or C building, putting Boston Properties in a competitive advantage. Currently, the company has $1.9 billion in active developments underway, with space being 56% pre-leased.
The move toward life sciences
Boston Properties has a diverse range of tenants, although the majority of its office space is leased to legal services (21%), technology and media (20%), and financial services (17%). Moving forward, however, the company plans to increase the share of life science tenants, which sits at about 6% of all leases today. Life science investment and demand are growing rapidly. According to a recent report published by CBRE Group, in 2021, life science asking rents for office space grew 7.8% year over year, as limited supply strains the market. Research and development (R&D) labs hold the lowest vacancy rate within the life sciences market.
The company currently has 3.4 million square feet of dedicated life sciences space, but current developments will help add 1.2 million more square feet to its portfolio in the near future. Boston Properties has identified an additional 5 million more square feet of potential space for life sciences, although the plans of which haven't been finalized. Given the high demand for this sector, this could be a huge drive for revenue growth for Boston Properties in the coming years.
Boston Properties still has several hurdles to overcome, including increasing debt ratios, a steady decline in occupancy, and more companies adopting remote-work policies for the long term. However, the company seems to be preparing and hedging against these challenges with lots of hope for long-term recovery and growth. Year-to-date shares of Boston Properties are up 8%, a major improvement compared to the S&P 500 right now, which is down 6% at the time of this writing.
