Office landlords spent the past several years chasing tenants to fill space emptied by downsizing, relocations and pandemic-era retrenchment. Now, some of the nation's largest owners are watching companies jockey for the best remaining offices.
BXP, a major office space owner, has signed more than 3 million square feet of leases this year, with roughly two-thirds completed during the second quarter. The pace is well above the company's historical average and has left BXP with another 1.3 million square feet of signed deals waiting to commence, enough to push its portfolio occupancy to roughly 90% by year-end.
"BXP is set up well for success," Chief Executive Officer Owen Thomas told analysts on the company's earnings call Wednesday, saying it's "a very healthy environment for leasing premier workplaces."
A lack of new construction, combined with growing space needs, stricter attendance mandates and strong corporate earnings, is rebalancing the supply-demand equation for some of the nation's largest office landlords. BXP, Kilroy Realty, Cousins Properties and Vornado Realty Trust have all reported growing urgency among tenants as premium office space becomes harder to find.
Tenants across the United States collectively signed more than 62.4 million square feet of leases over the past year, according to a new CBRE report, a roughly 16% jump compared to the prior year. At the same time, only 2.2 million square feet of new space has been completed over the same period, marking a nearly 45% year-over-year drop.
For West Coast-focused Kilroy, Chief Executive Angela Aman said that has created a framework that largely favors landlords.
"We feel really good about what we've seen as it relates to strengthening of the leasing environment," she told analysts this week.
She acknowledges that the office market recovery "is not going to be a perfectly straight line," as the office vacancy rate, though coming down from historic highs, remains well above pre-pandemic levels.
Still, "there are lots of reasons to be optimistic," Aman said.
New pricing power
That emerging dynamic is particularly evident in Manhattan, where BXP is developing a 46-story trophy office tower that is officially past 50% preleased and it is currently negotiating several full- and multi-floor deals that, if signed, could push the project to nearly 70% leased.
Even more telling is that the rental rates the developer has been able to secure so far have been "at or above forecast," and BXP executives say they expect they'll be able to push rents even further as the tower moves closer to its 2029 completion.
"The pricing power in Manhattan remains favorable to landlords, and that is expanding geographically," said BXP Executive Vice President Hilary Spann, who covers the New York region.
She added that, in some neighborhoods, property owners have been posting higher and higher rents as they lease up remaining spaces. For some of BXP's own Manhattan properties, that has meant rents that are consistently about 15% above where they were last year.
Still, that pricing power is almost exclusively for properties at the highest end of the office quality spectrum.
When it comes to the market's newest and nicest options, tenants across the country are committing to more space than they're giving up, clearing a significant hurdle on the market's road to recovery.
Vacancy rate eases
Net absorption, the change in space measured by move-ins minus move-outs, has maintained a steady climb since the final months of last year, providing a welcome balm for the national vacancy rate after years of being stuck at a historic peak.
That rate has finally begun to drop, and in recent months has fallen below 14% for the first time in years, according to CoStar data.
For premium office space that figure is even lower, with vacancy rates for top-tier properties averaging about 8%.
That has been critical in landlords' ability to command higher rents — especially in cities such as San Francisco and New York where competition has become especially heated. Asking rates for those premium buildings are about 60% higher compared to a market's less-desirable counterparts.
That pricing power is expected to become even more pronounced as the national construction pipeline shrivels and leasing volume continues to build momentum.
"New construction for office has virtually halted, already leading to higher occupancy and rent growth in most submarkets where BXP operates," Thomas said.