Office landlords profess optimism despite dip in occupancy

Boston Properties, SL Green and Vornado among those brushing off Q3 declines

Boston Properties’ Owen Thomas, Vornado Realty Trust’s Steve Roth, Paramount Group’s Albert Behler, SL Green’s Marc Holliday and Empire Real Estate Trust’s Tony Malkin (iStock,,,,, LinkedIn)
Boston Properties’ Owen Thomas, Vornado Realty Trust’s Steve Roth, Paramount Group’s Albert Behler, SL Green’s Marc Holliday and Empire Real Estate Trust’s Tony Malkin (iStock,,,,, LinkedIn)

The onset of the pandemic last year left office landlords’ portfolios mostly empty, but their bottom lines largely unaffected.

Initially saved by the long-term nature of their leases, landlords have since seen work-from-home policies elevate office vacancy rates. Office leasing tours — one indicator of prospective tenants’ interest — were few and far between until early this year.

But leasing volumes have picked up in recent months. Despite widespread discussions over a hybrid working model that could lead to smaller offices, landlords in their third quarter earnings calls were largely optimistic about the future of demand for quality office space.

Boston Properties CEO Owen Thomas said in the late October call that across its portfolio spanning both coasts, the company counted over 1.4 million square feet of leasing, marking more than double the first quarter’s volume and a rise from the second quarter.

The developer’s eight office buildings in New York City — totaling 9.5 million square feet — were 89.9 percent leased at the end of September. That figure was partly driven down by Dock 72, a struggling office building on the Brooklyn waterfront, which is only 33.1 percent leased, according to the quarterly filing.

A few days later, Vornado Realty Trust CFO Michael Franco told analysts the real estate investment trust had 91.6 percent of offices leased at the end of the third quarter. The figure was up 50 basis points from the previous quarter, which Franco said the company believes “represented the bottom for our office occupancy.”

“We expect this figure to keep moving up from here based on leases we have out for signature and in negotiation,” Franco said.

SL Green CEO Marc Holliday addressed analysts on Oct. 21, hours after the ribbon cutting of Summit One Vanderbilt, an observation deck atop the 1.6-million-square-foot office skyscraper the REIT built next to Grand Central Terminal.

Holliday lauded his supertall building, which is now more than 90 percent leased. The REIT’s third quarter revenue was $205.2 million, down 17.7 percent from the same period last year in a fall that can be partly attributed to the REIT’s asset sales to increase liquidity during the pandemic.

The company’s office portfolio was 93.1 percent leased at the end of the third quarter, including those that were signed but not yet commenced. The rate is about 1 percentage point less than a year ago, but still places the firm ahead of its peers.

Holliday said 830,000 square feet of office space are in the leasing pipeline and, overall, “the numbers speak for themselves.”

One defining factor for attracting tenants? “Amenitized buildings,” he said.

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Flight to quality, by design

Landlords touting their portfolios pointed to tenants’ newfound preference for tuned-up office products.

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“Every day, we are seeing more evidence of a flight to quality and that trend endures to our benefit,” said Albert Behler, CEO and president of Paramount Group, in the late October earnings call. “It is not by chance that we have had the leasing success we have had. It is by design.”

During the third quarter, Paramount managed to partially fill 500,000 square feet at 1301 Sixth Avenue vacated by Barclay’s. A total of 279,000 square feet was leased at the 45-story office tower, including a 167,000 square feet to French bank Credit Agricole and 112,000 square feet in a renewal and expansion lease with SVB Leerink.

Paramount’s portfolio-wide occupancy rate was 90.3 percent in the third quarter, compared to New York City’s rate of 89.9 percent and San Francisco’s at 91.4 percent.

Empire State Realty Trust was similarly hit by 353,000 square feet of vacancy when a bankruptcy court allowed its major tenant, GBG, to terminate leases for 162,000 square feet at ESRT’s 1333 Broadway and 191,000 square feet at the Empire State Building.

The subsidiary of Global Brands Group Holding sought Chapter 11 protection in July. About a third of GBG’s space has been subleased to tenants and ESRT is actively marketing the remaining 220,000 square feet, said Tom Durels, the firm’s head of real estate.

With the additional vacancy, the REIT’s Manhattan office portfolio was 84.5 percent leased at the end of the third quarter, down 2.4 percentage points from a year ago, and down 5.1 percentage points from the 2019 level, according to the firm’s quarterly reports.

But the REIT’s executives said during the conference that the firm had a solid leasing quarter with a total of 268,000-square-foot leases signed during the third quarter.

“Our properties continue to benefit from the flight to quality trends spoken broadly in the market, and we see it in leasing activity underway and our results,” said Tony Malkin, the firm’s chairman, CEO and president, during the call.

Carrots and negotiation

Quality alone, however, is not enough to win over tenants in the pandemic recovery.

Take SL Green as an example. The REIT in the third quarter signed 44 office leases in Manhattan, totaling 445,000 square feet. The average length of these leases was 10.7 years, doubling the average length of 33 leases signed in the third quarter of 2019.

But to get those leases signed, SL Green sweetened the deals with generous concessions, including 8.8 months of free rent and a tenant improvement allowance of $77.63 per rentable square foot on average, according to the quarterly report. (The average excludes leases at One Vanderbilt.) The average concession package a year ago was 4.7 months of free rent with an allowance of $19.33 per rentable square foot.

Additionally, landlords’ willingness to negotiate in the pandemic started to bear fruit, according to Douglas Linde, Boston Properties’ president and director.

In late 2020, Boston Properties’ tenants with soon-to-expire leases told the landlord they might leave — their employees were largely working from home anyway — but if they could secure a short-term extension, they would hold onto the space and consider their next steps, Linde told analysts.

With the market at a standstill, the landlord agreed to the extension, thinking that it would be better to have a tenant rather than no tenant. Linde said the approach has paid off.

“We’re starting to see the success of that strategy, which is that the tenants that did those short-term commitments are going to likely be renewing on a long-term basis” with terms that are pricier compared to the old leases, Linde said. “And we’ll get a dramatic uptick [in rent].”