Boston Properties (BXP 2.59%) is the largest publicly traded owner of Class A office properties in the country. Modern, well-located offices have always been in high demand, which is why the real estate investment trust (REIT) focuses on this specific type of office building.
However, the preference for quality office space grew stronger during the pandemic. That was clear from comments on the company's first-quarter conference call.
The flight to quality
CEO Owen Thomas discussed what the office REIT was seeing in the sector on the call. He noted that:
As the effects of the pandemic are increasingly behind us, there continues to be much speculation about the future of work and its impacts on the use of office space. While many questions remain unanswered, there are a number of trends which are increasingly coming into focus.
One of the trends he highlighted is that "building and workspace are more important in the office business." Thomas stated, "To help entice workers back to their workplaces, employers are increasingly attracted to buildings that are new or recently renovated, well-amenitized inside and out, and proximate to transportation."
Image source: Getty Images.
Thomas noted that the overall office-market statistics currently show elevated vacancy levels and weak net absorption rates. However, those aggregate numbers "do not properly reflect the market dynamics of the premium end of the market where most of our portfolio competes."
Boston Properties recently completed a disaggregated office-market study with CBRE Econometric Advisors for five of the central business districts (CBDs) where it owns assets. It found that:
The vacancy rate is more than five percentage points lower for prime office assets versus non-prime assets and 10 percentage points lower in San Francisco. In 2021, for those 5 CBDs, net absorption for prime assets was a positive 1.2 million square feet versus a negative 6.6 million square feet for non-prime assets.
Thomas commented that "this dynamic explains BXP's recent success in achieving pre-pandemic levels of leasing despite elevated total market vacancy statistics." The company completed 1.2 million square feet of leasing in the first quarter, which was "more than double the space we leased in the first quarter of 2021 and in line with our pre-pandemic leasing activity for the first quarter."
Adding more quality to the portfolio
Given the flight to quality by office tenants, Boston Properties continues to focus on owning the highest-quality office buildings. It recently agreed to buy Madison Centre, which Thomas noted was "one of the highest quality office buildings in the Seattle CBD."
The building, which completed construction in 2017, has "one of the most generous amenity offerings in the Seattle market with 30,000 square feet of fitness, conference, library, living room, boardroom, fast-casual food, bike storage, and roof deck space." Thomas also noted that it's "well located two blocks from light rail and bus transportation and direct vehicular access to the I-5 North and South ramps."
The company also recently resumed construction on the first phase of the Platform 16 development project in San Jose. It will include constructing a 390,000 square-foot class A creative office building and a below-ground parking garage. It's next to Google's planned 8 million-square-foot Downtown West and Diridon Station, a prominent Bay Area transportation hub.
The campus will eventually include three buildings, 16 private outdoor terraces with unobstructed views of the city, and two pedestrian plazas for social gatherings and corporate events. Meanwhile, onsite amenities will include a large fitness center, wellness center, and a cafe. It's also next to Guadalupe River Park and various retail and restaurant offerings.
These are the type of features that companies are finding helpful in enticing employees back to the office. As the CEO of fellow office REIT Cousins Properties recently put it: "To attract their teams to come together in person, more companies are shifting to exciting space and highly dynamic locations. The goal is to offer a more attractive daily experience than the convenience of the dining room table."
Having amenities they can't get at home in an easy-to-reach location makes employees less resistant to coming back to the office.
Offices that employees want to work in
Many employees have hesitated to return to the office because of the ease of working from home. That's leading more employers to upgrade their office spaces by moving to higher-quality, well-located buildings with lots of amenities.
Those features are helping companies attract their workers back to the office, which they view as crucial to improving retention, productivity, mentoring, trust, relationships, and collaboration.
