Hilary Spann, Executive Vice President of Office REIT BXP Inc. BXP, (formerly known as Boston Properties), was recently interviewed by Bloomberg Intelligence on whether New York City's office market is back to its former glory, four years after the COVID-19 pandemic decimated large city office occupancy and spawned a surge in remote workers.
Ms. Spann pointed out a dichotomy in occupancy between newly constructed or rehabilitated properties versus older ones where little has been done for updating or new amenities. Landlords can increase rents in the better properties, whereas Grade B properties that are not retrofitted are struggling more.
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She added that occupancy and rents are also very location-dependent. For example, the Grand Central market is doing well because commuters can walk to the office when they get off the trains. She also pointed out that the increased construction costs are giving well-capitalized landlords an advantage in occupancy levels and the ability to increase rents.
When asked if BXP would acquire new properties in the near term, Ms. Spann replied that BXP would not buy if it could not find properties equal to the quality of what it already owns.
BXP
BXP owns and operates 186 properties with 53.5 million square feet. 89.1% of in-service properties are presently leased, with a weighted average lease term (WALT) of 7.5 years. It owns properties in large cities such as New York, Boston, Los Angeles, and San Francisco.
A deeper look at BXP's numbers shows a 90.8% occupancy rate for its nine buildings in New York City. However, that number would be considerably higher if not for its Dock 72 building in the borough of Brooklyn, which has 50% ownership. Only 33.4% of that building is occupied and 42.7% leased. However, occupancy rates in its other eight buildings in Manhattan range from 91.4% to 98.6%.
BXP's Q2 2024 operating results were mixed. FFO was $1.77 per share, well below Q2 2023 FFO of $1.86, but revenue of $850.48 million was above revenue of $817.15 million in Q2 2023. Full-year 2024 FFO guidance of $7.09-$7.15 per share exceeded the consensus of $7.05.
Recent history:
Between September 2022 and February 2023, the percentage of New York City remote workers declined from 16% to 10%. In October 2023, New York City Mayor Eric Adams announced that 16,500 workers not represented by unions could work up to two days remotely. However, the offices needed for the other three days would continue to be leased.
A huge problem for New York was that the city and its local businesses were losing billions in revenue because of all the remote work. Thus, in 2022, Mayor Adams met with 100 CEOs of city-operated businesses to pressure them to mandate that employees work from offices.
The mayor was not successful. In 2023, 64% of companies In New York City were on "hybrid schedules" (mix of office and remote work), but only 9% of companies were enforcing daily attendance.
Nevertheless, by April 2024, New York City had restored almost 80% of its pre-pandemic office occupancy. Many Wall Street firms, such as JP Morgan Chase & CO. JPM and Goldman Sachs Group Inc. GS, were pushing workers to return to the office. However, tech, media, and accounting sectors still had below-average office attendance.
A June 2024 report states, "New York City office report, though still quite slack, has shown signs of stabilizing: vacancy rates have leveled off and market rents have edged up." However, office attendance has reached a plateau, about 25% below pre-pandemic levels since mid-2023.
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SL Green Realty
SL Green Realty Corp SLG is the largest landlord of office buildings in New York City. As of June 30, SL Green held interests in 55 buildings of 31.8 million square feet. To fully understand whether New York City is a true "back," SL Green is the best REIT to measure how the city stands.
In its recent second-quarter operating results, Same-Store office occupancy, including signed leases not yet commenced, was 89.6%. While this is an improvement from 89.2% in Q1 2024, it was below Q2 2023 occupancy of 89.8%.
However, SL Green notes that replacement leases on existing square feet are seeing rent increases of up to 15.5%. This is a positive because it shows that demand for space is increasing.
SL Green's second-quarter funds from operations (FFO) of $2.05 per share was significantly higher than the FFO of $1.43 in Q2 2023. Still, $150.63 million was below $185.95 million in the year-ago same quarter. In addition, $0.69 per share of FFO in the second quarter was derived from gains from discounted debt extinguishments on three properties sold for $691.4 million.
SL Green also increased its FFO full-year 2024 guidance from $7.35-$7.65 to $7.45-$7.75 per share. The $7.60 midpoint was higher than the consensus estimate of $7.47. That's a real sign of optimism from New York City's largest commercial Landlord.
In summation, looking at the worker data and the recent quarterly reports from REITs such as BXP and SL Green, it would seem the BXP executive is correct that New York City's commercial office market is improving. However, it's still not back to where it was before the COVID-19 pandemic. The work-from-home movement remains strong, as workers find they can save money to overcome the effects of inflation. However, even if on-site work remains part-time and takes longer to reach pre-COVID levels, companies will still rent space from REIT stalwarts such as BXP and SL Green.
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