Looking at the latest quarterly financials from Columbia Property Trust, you might forget that we’re in the middle of a pandemic. The office REIT leased more square footage than it did in the same period a year ago, and recorded its highest normalized funds from operation since 2018.
But the situation on the ground tells a different story. The company’s properties still stand mostly empty — which has helped reduce operational costs somewhat — and are likely to stay that way until the fall.
“I’d estimate we’re at 5 percent or less utilization probably today,” CEO and president Nelson Mills said Thursday on the firm’s latest earnings call, noting that this was what the company had anticipated. “Since the shut down we’ve been in regular active conversation with tenants… most of them have planned all along to do the re-openings late summer or after Labor Day, particularly in New York.”
The occupancy rate may be somewhat higher in the Washington D.C. market, Mills noted, while the company’s San Francisco buildings are currently closed following reversals in California’s reopening.
Even Twitter, one of the REIT’s largest tenants and one that has signaled a longer-term interest in remote work post-pandemic, will start to reenter around Labor Day, Mills said. “We do believe that once it starts, it may cascade a little faster than in the summer,” he said, as tenants seek to join teammates, partners and competitors in returning to the office.
Columbia recorded normalized FFO per share of $0.40 for the quarter, higher than the $0.38 from a year prior. The company also leased 87,000 square feet, the bulk of which came from a 68,000-square-foot extension and expansion with consulting firm Berkeley Research Group in Washington D.C.
In early July, the landlord terminated its lease with WeWork at 149 Madison Avenue. “We now have the benefit of the base building work that WeWork performed and we’ve been relieved of the obligation to pay $18.7 million for additional work, much of which would have been WeWork specific build-out,” CFO James Fleming said.
“We’re back to plan A essentially,” Mills added, noting that he was optimistic about getting the property leased within the next year or so.
Columbia also amended two other WeWork leases, in San Francisco and Washington D.C., abating rents of $6.7 million. Mills said the co-working firm remains committed to those properties. “If they are successful, which we believe and hope they will be, they’ll be successful at these properties first and foremost,” he said. And if not, “both those spaces would be terrific opportunities for releasing.”
Mills also noted that the firm’s office development at 799 Broadway in Manhattan has just topped out and is set to open next spring, and that some leasing activity is expected in the next few quarters. That project was being developed by a joint venture between Columbia and Normandy Real Estate Partners, and Columbia has since acquired the latter in a $100 million deal.
In terms of the long term impact of coronavirus on the office market, Mills said that he expected density to become a concern once tenants re-entered their offices. “We don’t have a lot of space available for our tenants to spread out in today, which is not the worst problem to have,” he said.
“Could there be significant long-lasting shifts in demand? That’s quite possible, perhaps even likely,” he said. “Economic downturns for one reason or another are inevitable. That’s why we continue to believe that portfolio quality, location and the capabilities of our team are so important.”
Contact Kevin Sun at [email protected].