Boston Properties wary of “significant” commercial pipeline

REIT says supply, market conditions may test asset pricing
By Rey Mashayekhi | October 30, 2015 04:48PM

While continuing to see “strong interest” in Class A office properties from domestic and foreign buyers, Boston Properties said it remains wary of a “significant pipeline of real estate currently in the market” that may test pricing levels for assets moving forward.

In its third quarter earnings call Friday, the Boston-based real estate investment trust said it believes that “very strong capital market conditions” for quality commercial real estate assets still exist. But it also noted that recent stock market volatility, the looming possibility of an interest rate hike from the Federal Reserve and an increased “supply of product” in the market are factors worth monitoring in the months ahead.

“We continue to see strong interest from domestic and offshore investors in Class A office assets,” CEO Owen Thomas said. He said there is “a significant pipeline of real estate currently in the market, and pricing levels may be tested this fall” given not only the influx of supply, but “higher volatility” in public equity markets and “the prospect of an interest rate hike before year-end.”

Thomas said Boston Properties remains active in the market for both acquisitions and sales, though the REIT’s does not expect to see additional sales activity in 2015. It will, however, “continue to be opportunistic with asset sales in general and evaluate targeted sales of non-core assets for 2016,” Thomas said.

The CEO was also asked about the Qatar Investment Authority’s investment this week in Brookfield Property Partners’ $8.6 billion Manhattan West development, describing it as “another example of offshore investors being very interested in high-quality U.S. real estate assets in core markets.”

The move indicates “increasing interest” from sovereign wealth funds “in moving up somewhat in the risk curve and trying to achieve higher returns, albeit taking greater risks,” the CEO told analysts.

On the leasing front, president Doug Linde said the company closed 12 deals in Midtown Manhattan during the third quarter for roughly 90,000 square feet — with 10 of those deals having starting rents over $90 per square foot and seven starting above $100 per square foot.

“The bulk of our availability and rollover in the portfolio in the next few years occurs in spaces that command rents in excess of $100 a square foot,” Linde said, noting that Boston Properties has seen 900,000 square feet of leasing activity close above $100 per square foot in 2015 so far.

The REIT continues to market the GM Building space formerly belonging to toy store FAO Schwarz, which will be available for lease in 2017 – with potential tenants expressing interest in anywhere from 14,000 square feet to the entire 65,000-square-foot space, Linde said.