Boston Properties: Crime, Covid hindering urban office recovery

Office landlord exec calls for ouster of San Francisco District Attorney on earnings call

Boston Properties CEO Owen Thomas (Thomas by Axel Dupeux, iStock)
Boston Properties CEO Owen Thomas (Thomas by Axel Dupeux, iStock)

The outlook for major office markets is gradually improving, but it’s not just Covid variants that are keeping buildings empty — it’s crime, too, according to Boston Properties.

The Boston-based REIT, one of the largest publicly traded owners of Class A office buildings, executed about 5.1 million square feet in leases last year, up from 3.7 million square feet in 2020, it said in its fourth-quarter earnings Wednesday.

“We do think companies are going to return to the office, we do think hybrid is here to stay,” said CEO Owen Thomas.

But the company’s earnings also gave a clear picture of the office sector’s struggles. Overall leasing declined to 88.8 percent in December, down from 90.1 percent a year prior, and despite the nearly 40 percent jump in leasing, revenue increased just 4 percent year-over-year to $2.9 billion.

On a conference call, executives blamed the Delta and Omicron variants for delaying the broader return to the office.

Thomas added that the tight labor market “is impacting business leaders’ willingness to be more aggressive about having their employees come back to work.”

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In San Francisco, Boston Properties executives discussed the impact that homelessness and crime is having on the city’s core office market.

“There’s clearly an outcry from the business community that things have changed,” said Robert Pester, Boston Properties’ executive vice president of the San Francisco region. “And hopefully the DA gets recalled and we get somebody in there that will start enforcing the laws.”

The company provided some insight into its latest deals in New York City, including its purchase of a 20-story office building at 360 Park Avenue South in Midtown Manhattan, which closed in December. Boston Properties plans to completely reposition its building systems as well as its common spaces, executives said on the call.

“It creates a great opportunity for us to have a blank slate to rebuild this thing,” said Douglas Linde, the firm’s president. “Going into Midtown South is like entering a new market for Boston Properties based on its scale and New York’s scale relative to all the other cities.”

The company said it has multi-floor lease negotiations ongoing at the GM Building at 767 Fifth Avenue, as well as at 601 Lexington Avenue and 510 Madison Avenue, along with a number of smaller transactions.

Boston Properties is focusing a large part of its business on laboratory space. In the fourth quarter, the company announced a development in Waltham, Massachusetts, that will have about 113,000 net rentable square feet of life sciences space. Boston Properties is also redeveloping 651 Gateway in South San Francisco, a 300,000-square-foot office building that it owns through a joint venture, into life sciences space.