Hudson Pacific Properties executives say the office market has officially hit an inflection point, boosting occupancy back to levels that haven't been seen in more than a decade and potentially opening the floodgates to blockbuster sales.
The real estate investment trust, which has a portfolio of properties scattered along the West Coast, is on track for its strongest year of leasing activity since 2019.
Executives attribute that trajectory to the return of larger lease deals, booming demand among artificial intelligence companies and strong venture capital investments.
Those improving market dynamics are now prompting the firm to evaluate sales of some of its office properties for prices "that could be much higher than they were, let's say, 12 or 18 months ago," Hudson Chief Executive Officer Victor Coleman recently said during an earnings call.
"We've got a list of a few assets that are there" and potentially ready to sell to investors eager to widen their bet on the nation's office recovery.
"Those opportunities are going to come fast and furious," Coleman said.
Growth trajectory takes off
Lagging occupancy rates have been a sticking point for some of the nation's largest landlords in recent years, as many have scrambled to backfill large blocks of space tenants ditched in the earlier years of the pandemic. Yet since the beginning of the year, the uptick in leasing momentum is finally beginning to materialize, closing the gulf between occupied and leased rates in a sign of the market's ongoing stabilization.
Hudson — which signed just shy of 515,000 square feet worth of deals throughout the third quarter — reported an occupancy rate of nearly 76% compared against a leased rate of 76.5%, a gradual uptick compared with previous figures reported throughout the year.
"The trajectory is there," Coleman said of the sequential improvement in the REIT's occupancy levels, proof that the market has bottomed out and has created an environment primed for dealmaking.
With spatial requirements on the rise and tenants signing larger and larger deals, Coleman said the landlord's average tenant size has materially increased to a point where Hudson is taking a closer look at its selling and buying strategies as valuations steadily improve.
"We're going to see what the opportunity is to capitalize on some form of external growth and disposing of assets," Coleman said.
The landlord declined to provide specifics about which properties that pipeline includes, but Coleman said the plans are all part of an improving outlook that has made it appealing on both the seller and buyer ends of the deal spectrum.
It recently acquired the remaining 45% stake for Hill7, the downtown Seattle office building it acquired alongside former joint venture partner CPP Investments in late 2016. Already Hudson executives said that touring activity has increased as demand for office space in the city gradually rebuilds, and owning the 1099 Stewart St. property outright clears the path for the landlord to best position the property ahead of that recovery.
"Our approach to asset sales remains disciplined and strategic, and we're under no pressure to transact and will move only when it clearly enhances shareholder value," Coleman said, adding that any incoming capital from sales will be recycled into "highest-conviction assets and markets.
"It's a selective, purposeful approach that positions Hudson Pacific to capitalize on the recovery gaining momentum across our West Coast footprint."