Boston Properties Buys Stakes of Office Portfolio Partners

It’s a sports cliché that the best offense is a good defense, but not if you have a ton of dry powder and folks with shaky balance sheets are coughing up prime office properties at discount prices.

The field of play in the office sector is tilted in favor of the cash-rich players as everyone waits for the Fed to loosen its grip on the money supply.

For Boston Properties (BXP), now is the time to maximize its commitment to the office sector and deploy capital from a robust balance sheet to secure acquisitions. The REIT has been busy in recent weeks buying out the stakes of two of its joint venture partners in three office properties.

“We said last quarter, we intended to shift to offense on capital deployment and this has started,” BXP CEO Owen Thomas said, in a Jan. 31 earnings call. “There are and will be significant additional investment opportunities available from both lenders and owners of property.”

“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,” he added.

In January, BXP acquired for $10M an unspecified partner’s 50% share in 901 New York Avenue, a 548K office building in Washington, DC that is 83% leased. Pricing for the acquisition was $414 per SF and a 6.4% initial cap rate on an as-is basis, and $516/ SF with an expected 8.4% cash yield on cost at stabilization in 2027, the firm said.

BXP secured the renewal of an 18-year, 214K SF lease for the anchor tenant at 901 New York Avenue, intellectual property law firm Finnegan Henderson. The REIT said it also renegotiated the terms of a $207M mortgage on the building, extending the 2025 maturity date for up to five years.

At Santa Monica Business Park, a 1.2M SF office complex adjacent to Santa Monica Airport, BXP purchased its partner’s 45% stake for $38M, which represents pricing of $395 per square foot and a 9% initial cap rate on a fee simple basis, based on market assumptions for land value.

BXP secured a 467K SF lease renewal for the business park’s anchor tenant, Snap, parent of Snapchat. A $300M mortgage backed by Santa Monica Business Park, which is 88% leased, comes due in 2025. BXP said 70% of the business park is encumbered by a ground lease, with above-market ground rent and a fee purchase option in 2028.

BXP also bought out a partner’s 29% interest in 360 Park Avenue in Manhattan, bringing its stake in the 450K SF Midtown South office building to 71%. This deal didn’t require the REIT to flex its dry powder muscle: in fact, the transaction price was only $1.

It’s a bit complicated, so here’s the Cliff Notes version: the partner had secured $71M in financing for the redevelopment of 360 Park Avenue and BXP is assuming their remaining $46M of projected funding obligation, hence the $1 transaction value.

“BXP invested only $48 million upfront and materially increased its ownership position in three high-quality assets,” Thomas noted, regarding the three deals.

“These transactions were sparked by anchor client renewals BXP achieved at two of the assets, requiring capital for tenant improvements, leasing commissions and building upgrades,” Thomas said. “In the current environment, these two joint venture partners decided they wanted to reduce their exposure to offices.”

Speaking of dry powder, BXP has hefty stack. “In 2023, BXP raised over $4B in new capital in the public unsecured debt, private secured mortgage and private equity markets,” Thomas said, during the earnings call.

Thomas also said BXP had raised almost $750M of equity capital by selling a 45% stake in 290 and 300 Binney Street, a life science development encompassing nearly 800K SF in Cambridge, MA, for $1.66B, which translates into more than $2K per SF.

The buyer was Norges Bank Investment Management, Norway’s oil and gas investment fund. BXP is retaining a 55% interest in the life science development, which includes a 236K SF office building that is being converted to lab use and a 566K SF ground-up development that is scheduled to be delivered in 2026.

BXP’s CEO said he expects CRE capital market conditions to improve as the Fed moves toward rate cuts.

“Though U.S. lenders continue to reduce exposure to office real estate, making secured financing extremely difficult to arrange, there is more distressed asset restructuring activity, more capitulation on pricing by owners and more confidence by buyers in their forecast cost of capital,” Thomas said.