BXP predicts dim prospects for San Francisco office occupancy in 2024

BXP, the biggest commercial landlord in San Francisco, looks at this year’s office prospects with a long face.

The Boston-based firm told its investors that, despite a local leasing spurt from artificial intelligence companies, a record office vacancy won’t likely ease because of tech, the San Francisco Chronicle reported.

“Traditional technology demand growth continues to be weak and more times than not renewing technology clients are reducing their lease premises,” Douglas Linde, president of the firm once known as Boston Properties, said in an earnings call last week. “Technology demand on the West Coast is lower than we would like it to be, largely because there have been a significant amount of technology layoffs over the past … 12 to 18 months, and they’re still happening.”

“We’re just sort of in a portion of time where there’s just no interest in growth from a real estate space perspective for technology companies. I believe that will change,” he added.

The once high-flying offices in San Francisco were nearly 36 percent vacant at the end of last year, according to CBRE. 

The tenant drain, caused by a pandemic shift to remote work, was mitigated by a 46-percent rise in office leasing from such AI companies as OpenAI and Anthropic. In all, AI firms leased 3.6 million square feet last year. 

But that didn’t move the expectations needle for BXP, which last year said commercial real estate was in a recession, though the broader economy was not.  BXP owns Salesforce Tower and Embarcadero Center.

Although the two deals in San Francisco last year by OpenAI and Anthropic created “leasing excitement,” Linde said, the city’s dozens of other AI firms are mostly smaller and early stage startups with diminished office needs.

The BXP executive told investors that there was a “very wide … bifurcation” of demand between the West Coast, which is seeing a tech slowdown, and the East Coast, which is benefitting from stronger tenant demand from finance, including private equity and hedge fund firms.

Linde said BXP was “actively engaged in lease modification discussions” with bankrupt co-working firm WeWork, a tenant at three properties in San Francisco, plus its Dock 72 project in Brooklyn. 

As a result, the firm expects WeWork to whittle down its offices and its $33 million in annual rent payments. WeWork axed a lease last year at BXP’s Madison Center in Seattle.

Owen Thomas, CEO of BXP, told investors the firm will “shift to offense on capital deployment.” 

That means BXP will look to purchase office properties as other landlords default on mortgages and prices decline. Some office towers in San Francisco have sold for 75 percent less than before the pandemic.

“Many office owners are facing existential risks, given slow leasing and limited secured financing and many institutional owners want to diversify away from the office asset class,” Thomas said.

— Dana Bartholomew

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