BXP filled more offices last quarter, but tenants got 356 days of free rent

BXP’s offices were 89.4% occupied at the end of September, up a full point from June, and the company signed about 1.2 million square feet of leases ^[1]. Those deals came with an average of 356 days of free rent on second-generation space ^[2].

BXP earned $1.89 a share in funds from operations, against $1.74 a year earlier, and raised its full-year range to $7.06 to $7.08 ^[1].

BXP’s new rents rose in New York and Washington and fell in San Francisco

Net cash rents on BXP’s second-generation leases rose 9.33% across the portfolio, led by Washington and New York ^[2]. In San Francisco they fell 11.19% ^[2].

Vornado, which reported on Nov. 2, signed 489,000 square feet of New York office leases at an average starting rent of $122.96 a square foot ^[4]. Its Chicago building, THE MART, was 79.5% occupied, and 555 California Street in San Francisco was 87.5% occupied ^[4].

West Coast offices are still about a quarter empty at Kilroy

Kilroy CEO Angela Aman said “momentum in our West Coast markets continued to accelerate in the third quarter” ^[3]. Its stabilized portfolio was 83.0% leased against 76.9% occupied, a gap of 6.1 points made up of signed leases that have not started ^[3].

How to use this

For office tenants

1. Ask for free rent and an improvement allowance in the first proposal, not the last. On BXP’s second-generation leases the averages were 356 days of free rent and $154.60 a square foot in improvements and commissions ^[2], and we calculate that a year of free rent on 10,000 square feet at BXP’s average starting gross rent of $84.29 is worth about $822,000.
2. Start renewal talks 18 to 24 months early in New York and Washington. BXP’s new net cash rents ran 18.11% above expiring ones in New York and 19.06% above in Washington ^[2], so waiting until the last year leaves you little time to compare buildings.

San Francisco tenants have the most room. BXP’s portfolio there was 81.4% occupied and its new net cash rents came in 11.19% below the old ones ^[1][2], while Kilroy’s Bay Area offices were 75.3% occupied ^[3].

For investors and lenders

1. Ask for occupied and leased figures separately, and for the start dates on signed leases. Kilroy reported 610 basis points of signed leases that had not yet commenced ^[3], and that space pays rent only after each lease begins and any free rent ends.
2. Underwrite concessions as a cost per year of lease term. BXP reported $16.27 a square foot per year of term in improvements and commissions on a 114-month average lease ^[2], which is a useful yardstick when a private office deal shows lower leasing costs.
3. Check recent public sales before you accept a sponsor’s exit value on a Washington office building. BXP sold Sumner Square and 1330 Connecticut Avenue for an aggregate gross price of about $155.4 million and booked gains of about $10.5 million ^[1], and asking the sponsor how its exit price per square foot compares with sales like these gives you a reference point.