Real Estate Investing: Is The Office Sector Getting Back to Normal?

The past couple of years has been challenging for the office sector. The pandemic forced companies to work remotely. Because of that, they didn't need as much office space, which weighed on building occupancy levels and lease rates.

There has been some concern whether office demand would bounce back given the desire by many employees to continue working remotely. However, a couple of charts from leading office-focused real estate investment trust (REIT) Boston Properties (NYSE: BXP) suggests the sector is getting back to normal.

A person looking up at office buildings.

Image source: Getty Images.

Leasing is back above pre-pandemic levels

Few companies know the office sector better than Boston Properties. The REIT is the largest publicly traded developer, owner, and manager of Class A office properties. It owns 201 properties with 52.8 million square feet across six leading markets: Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, DC.

The office REIT reported strong leasing volume during the fourth quarter. It signed leases covering 1.8 million square feet with a weighted average lease term of 8.6 years. That brought its 2021 total to 5.1 million square feet of leases, with volumes steadily improving during the year:

A chart showing Boston Property's leasing volumes by quarter in recent years.

Data source: Boston Properties Investor Presentation.

The office REIT's fourth-quarter total was its highest since the third quarter of 2019 when it signed 2 million square feet of leases. It was also 55% above its tally at the end of 2020.

The company noted that leasing activity was widespread across its markets. CEO Owen Thomas stated, "The strong leasing momentum we experienced in the fourth quarter underscores the value companies place on securing high-quality workspaces essential for collaboration, innovation, and growth."

Subleasing is subsiding

One factor that has weighed on the office market during the pandemic was sublease availability. Many office tenants tried to sublease some or all their space to another tenant because they didn't need it with their employees working remotely. This increase in subleasing activity put more available office space on the market. That made it challenging for office landlords to lease their open space when existing leases expired. These factors weighed on rental rates.

The good news here is that the spike in subleasing seems to be subsiding:

A chart showing sublet availability over the past few years.

Data source: Boston Properties Investor Presentation.

While sublet availability isn't yet back to its pre-pandemic level, it's heading toward a more normal level.

One factor in the decline is that the market has absorbed much of the initial glut of available sublet space as new tenants took over those leases. Meanwhile, some existing tenants are now taking back their sublet space because they're reoccupying their offices. With less available sublet space, it's enabling Boston Properties to sign more new and renewal leases for its open space.

The office market is bouncing back

Boston Properties had its best quarter for leasing volumes since before the pandemic, thanks partly to declining sublet availability. That should lead to improving occupancy levels and rental rates on new and expiring leases this year, which should boost the REIT's income. This outlook suggests that there's some upside potential for Boston Properties stock price, which is still down double digits since the pandemic started.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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