Boston Properties’ Owen Thomas isn’t afraid to work from home
It’s been Boston Properties’ mantra since pretty much the very beginning: A-properties in A-locations.
What that means, and has meant since founders Mort Zuckerman and Edward Linde started the company in the early 1970s, is clinging to the best skyscrapers in the very center of a small group of highly researched markets. and well recognized. The world will repeatedly beat a path towards them. Let others take the risk of expanding into larger or emerging markets.
And that’s still Boston Properties’ mantra, says Owen Thomas, the man who now heads America’s largest publicly traded office real estate investment trust. To hell with the torpedoes, lagging return-to-desk rates, laptops, the widespread and new notion that while having a beautiful, well-appointed office is nice, it’s no longer essential. Full speed!
“It’s more important now than ever,” Thomas, 61, said in an exclusive late-June interview with Commercial Observer. “Our clients are increasingly working with us to encourage, entice their employees to come back to the office. This is done in many ways, and one of them is certainly being in the highest quality buildings that are easily accessible by public transit, which are very well appointed. This has been our strategy since our inception, and this strategy helps us in this environment.
“We don’t need to drastically change our strategy,” he said.
Investors are not so sure. Boston Properties closed July 5 at $91.16 per share, down more than 30% since late March, when it hit a post-pandemic high of $132.51 (its all-time high of $143.35 was established just before the pandemic, in January 2020). It was widely regarded as a financial fortress, an impeccably managed corporation that controls some of America’s best-known and most lucrative real estate, including New York’s General Motors Building and what was once known as Citigroup. Center – now 601 Lexington – the inclined summit tower; Boston’s Hancock Tower and Prudential Center, the city’s two tallest spires and the first designed by Henry N. Cobb; Tallest building in San Francisco, the Salesforce Tower built by Boston Properties; and Washington’s glassy 601 Massachusetts Avenue NW.
During the same period, from late March to early July, the S&P 1500 Office REIT Index lost about 40% of its value. So, Boston Properties is not alone among REITs facing equity volatility.
He’s also not alone among office owners in general dealing with extremely low occupancy. Kastle Systems’ “Return to Work Barometer” tracks security card readings at office buildings in 10 major markets. The most recent reading before press time, for June 29, was a lackluster 43.8%, an occupancy level just shy of a post-pandemic high of 44.2% the previous week. In the Boston Properties markets, New York was at 41.2%, San Francisco at 34.7%, Los Angeles at 41% and Washington at 40.2%. (Kastle does not report Boston or Seattle.)
In his last earnings conference call in May, Thomas described his “count” of workers entering and occupying his buildings at between 40 and 80 percent, a difference you can truck through. Asked to cut it, he declined, but said the rate was improving.
“What we’re experiencing is more people in the office Tuesday through Thursday and fewer Monday and Friday,” he said. “Rush day is how we see it. We recognize that hybrid working is likely a sustainable concept. A lot of companies tell their staff, “We want you here three days, four days, but we want everyone here in a few days.” If not everyone is in the office, the advantage of collaboration disappears.
“The big variation in the census is geographic,” Thomas said. “We see the most in-person work happening in New York and the least in San Francisco. It’s related to a couple of different things. First, there’s a bigger financial services component of our customer base in New York, and in San Francisco it’s more technology. And, second, San Francisco and California have been closed longer than the rest of the country on COVID.
IBM CEO Arvind Krishna told CNBC in June that only about 20% of his US-based employees are back in the office three days a week, and he thinks that will never reach 60%. And Yelp, the popular online customer review site, has announced plans to close its offices in New York, DC and Chicago, with CEO Jeremy Stoppelman writing in a blog post in June that “the future of work at Yelp is distant”. The company intends to keep its headquarters in San Francisco open.
That 20% figure from IBM “is lower than what I’m hearing from other tech customers,” Thomas said. “What we’re seeing with our customers is that the workers who are in contact with the customers and the products collaborate in the office, and the workers who work in support areas like IT, accounting, HR, these workers aren’t in the office as much, and are working remotely more.
What Thomas said is that Boston Properties finds that while companies may not require all workers to be physically present all the time, they still want a place where employees can meet, collaborate and learn the corporate culture, and which can accommodate almost all of their workforce. It cannot be done at home, online or in a coffee shop. There is still a need for a location that is identifiable owned by Salesforce, law firm Arnold & Porter, Akamai Technologies and Biogen, to name Boston Properties’ four major tenants, according to its first-quarter supplemental filing.
As of March 31, the company controlled 202 U.S. properties, totaling 53.9 million square feet, 88.8% leased and generating $2.9 billion of its annualized revenue share (certain properties, such as the new Dock 72 building of the Brooklyn Navy Yard, belong to in partnership — in the case of Dock 72 with Rudin Management Company).
While Boston Properties’ most watched numbers — its occupancy rate, its funds from operations, its debt-to-revenue ratio, the performance of its development pipeline — have held up during the pandemic, Thomas said said he was not afraid of suddenly hitting a wall, as if the company was faced with a large number of tenants wanting to reduce their area in one fell swoop.
“A lot of our clients are in the office three or four days a week,” he said. “A lot of them require everyone to be in the office on certain days of the week, so it’s hard to reduce space when that happens.
A common strategy of large commercial landlords that Boston Properties engages in extensively is to develop their properties. The company has added gyms, coffee bars and bike rooms, and ensured its buildings have state-of-the-art lobbies. No one can use that as an excuse when it’s time to renew or extend a lease. For example, the General Motors Building – probably the best-located of Boston Properties’ buildings on the southeast corner of Central Park, but also one of the company’s oldest buildings, having been built in the 1960s – features a brand new amenity center, Thomas pointed out, including a health club and conference rooms.
“We are always updating our portfolio,” he said. “We started the General Motors Accreditation Center before the pandemic. I don’t know if you’ve ever been to Hugh, which is our food hall at 601 Lex, which we opened three or four years ago. It’s packed. It took me half an hour to get food there at lunch time.
And Boston Properties is also building lab space for life science companies, which are largely immune to the lure of working from home.
Its strategies were recently endorsed by Tayo Okusanya, REIT analyst at Credit Suisse, who wrote in a June 22 note that Boston Properties “offers low-risk reopening play in a post-COVID office return to markets.” Gateway”. He noted in his “grey sky scenario” that the REIT runs the risk of “widespread adoption of hybrid working (leading) to a significant reduction in demand for office space” and that a recession could force office users to “good sized organizations and fit out office space.
Thomas cut his teeth in the banking industry, though that industry eventually intersected with high-stakes real estate. For 24 years, until 2011, he held various positions in financial operations at Morgan Stanley, one of the largest investment banks in the world. He notably led the real estate investment arm of Morgan Stanley, which provided clients with access to value-added, opportunistic and essential strategies to grow their wealth. Such a branch exists in almost all of Morgan Stanley’s competitors, such as Goldman Sachs Group, JPMorgan Chase, Citigroup and, until its bankruptcy, Lehman Brothers Holdings.
In 2005, Thomas was named chairman of Morgan Stanley Investment Management, under John Mack, who was the bank’s CEO at the time. While Morgan Stanley held an inordinate number of subprime mortgage securities during the Great Financial Crisis, it partly avoided the fate of rival Lehman by receiving injections of cash, including $5 billion from the China Investment Corp. and $10 billion in US equity investments. Treasury.
In 2011, Lehman’s creditors selected seven professionals, including Thomas, to oversee the company’s dissolution. A year later, he was named Lehman’s first president after the breakup, and he still serves on that board today, although a large majority of his assets, including his real estate, have been liquidated. He retired from the presidency when he became CEO of Boston Properties in 2013.
One of the hallmarks of Boston Properties, even before Thomas arrived, is the slow and deliberate way of adding markets. It took years of analysis before he entered the Los Angeles market about five years ago, when he bought a position at the Colorado Center in Santa Monica. Likewise, it moved conservatively as it established a beachhead in the Seattle market with the acquisition of Safeco Plaza. In May, she acquired a second property in Seattle called Madison Center.
Don’t expect it to enter markets like Nashville or Austin anytime soon, even though those markets are making headlines in the commercial real estate world as businesses and residents scramble for them during the pandemic. .
“I think our footprint is set for the foreseeable future,” Thomas said. “We went to Seattle last year and Los Angeles four or five years ago, and those two regions each contribute 2-4% of our total bottom line, and we want those regions to be bigger. We have an opportunity in life sciences that we are also investing in, and that will be a bigger part of our business. So we have a lot of opportunities.