Boston Properties, the biggest publicly traded proprietor, developer, and supervisor of Class A workplace house within the U.S., has lengthy had a presence in Boston (the place it was based in 1970), New York Metropolis, Washington D.C., and San Francisco. These main cities have been the REIT’s focus, excluding a more moderen entry into Los Angeles. As extra People migrate to the Sunbelt and cities like Dallas, Atlanta, and Austin, actual property cash has adopted them. Boston Properties may’ve chased the group and moved into these cities, however executives say the logical growth of their funding technique was in one other metropolis: Seattle. Seattle is understood by some as a secondary actual property market however is on the cusp of turning into a gateway market as its economic system and inhabitants develop.

In July 2021, Boston Properties introduced its acquisition of the Safeco Plaza, a 50-story, 800,000-square-foot Class A workplace property in Seattle. The acquisition marked the REIT’s preliminary entry into the Seattle market, and, true to the corporate’s type, the property is LEED-Platinum licensed and has a distinguished place within the metropolis’s skyline. Boston Properties acquired the constructing by means of a three way partnership with a participant in its not too long ago introduced Co-Funding Program, and the gross buy value for Safeco Plaza was about $465 million.

Safeco Plaza occupies a complete metropolis block in Seattle’s central enterprise district and is billed as a extremely fascinating location for tenants due to its superior walkability and transit entry. The property was 90 % leased when Boston Properties bought it, with a 17-year common tenure among the many largest tenants. “Safeco Plaza is a vital preliminary foray into the Seattle market, reinforcing our wealthy historical past of proudly owning, managing, and enhancing premier, Class A properties in every of our chosen markets,” Boston Properties’ CEO Owen Thomas mentioned in 2021. “This acquisition gives a superb platform for BXP to develop and develop in one of many strongest workplace markets in the US.”

The corporate’s preliminary foray into the Seattle market was massive, however its second acquisition was even bigger. Boston Properties made a splash in Could 2022 when it acquired Madison Centre, a 760,000-square-foot, 37-story workplace tower, for $730 million from Barings and Schnitzer West. Newmark brokered the deal, the biggest multi-tenant workplace sale within the nation on the time it was accomplished. The asset had garnered important curiosity from international buyers, a trophy constructing in a Seattle market many imagine has enhancing fundamentals. Madison Centre was 93 % leased on the time of sale and homes 20 numerous workplace tenants, together with a boatload of facilities like a rotunda with a three-story hearth, a 5,200 square-foot health middle, and a non-public rooftop deck. The workplace tower can be in Seattle’s central enterprise district, simply 5 blocks south of the town’s retail core.

The deal for Madison Centre was initially financed by means of a $730 million bridge mortgage, however Boston Properties lined up property gross sales in Boston and Washington, D.C., to fund the most important acquisition by means of a 1031 trade. The REIT mentioned this was one of the best ways to switch capital between properties as a result of it enabled them to defer capital positive factors taxes on the gross sales. Boston Properties described the Madison Centre as a “showpiece and foundational asset” for its growth into the Seattle market, a transfer the REIT made after its characteristically cautious evaluation.

The gateway technique

Regardless of flipping two Boston and D.C. properties to make the deal, Boston Properties executives didn’t voice any adverse sentiments about these two markets. Executives on the REIT mentioned they’re experiencing sturdy progress by increasing its life sciences portfolio in Boston, a metropolis with the biggest focus of life sciences researchers within the nation. Colliers reviews that with tens of hundreds of thousands of sq. ft both underway or proposed, Boston’s life sciences building pipeline can be the nation’s largest.

In Washington D.C., Boston Properties not too long ago offered a Mount Vernon Triangle workplace property to a Japanese investor for $531 million, the town’s largest property sale of the yr to this point. The sale to Tokyo-based Mori Belief Co. is a constructing Boston Properties developed in 2013 at a price of $350 million. D.C.’s workplace market has struggled with sagging tenant demand, however international buyers are flocking to the asset class within the metropolis. Uncertainty in world markets and inflation have pushed international buyers to American actual property, particularly in D.C., in accordance with Avison Younger. Boston Properties owns and manages 36 properties within the D.C. space, totaling 9.8 million sq. ft, and so they stay bullish on that market.

San Francisco is probably Boston Properties’ largest bother spot, the place they handle 7.7 million sq. ft of actual property. In January, firm executives talked concerning the influence crime and homelessness is having on the town’s workplace market throughout an earnings name. “There’s clearly an outcry from the enterprise group that issues have modified,” mentioned Robert Pester, Boston Properties’ govt vice chairman of the San Francisco area. “And hopefully, the DA will get recalled, and we get any individual in there that may begin imposing the legal guidelines.” 

The corporate obtained its want in June when metropolis voters overwhelmingly recalled District Lawyer Chesa Boudin, who had been one of many nation’s most progressive and ineffective high prosecutors. Even with San Francisco being a thorn in Boston Properties’ facet, the workplace REIT has put a stake within the floor in Seattle, one other West Coast metropolis, one which’s faring a lot better however nonetheless has some comparable issues.

Each massive workplace purchases in Seattle are a vote of confidence for the town’s actual property market and a brand new metropolis that Boston Properties plans to develop into. Throughout an earnings name final yr, a Morgan Stanley analyst requested Boston Properties’ President and Director, Douglas Linde, if the corporate could have a look at not simply Seattle however any key Sunbelt markets within the subsequent 2 to three years. For now, Boston Properties appears targeted on the markets they’re in. “We imagine in our Gateway technique; we predict Seattle was the logical growth as a gateway market, and there’s loads to do within the six markets we’re in now,” Linde replied to the analyst. “The New York market is 3 times the scale of Seattle – it’s a number of cities in and of itself.”

Linde mentioned in the course of the earnings name that Boston Properties not too long ago expanded into Park Avenue South and Midtown South in Manhattan, echoing his assertion that New York is so massive that submarkets exist inside it. The REIT’s Washington, D.C., group additionally not too long ago expanded into neighboring Montgomery County’s life science market, the place they hadn’t been earlier than. “So, I feel these offers are proof of all of the sturdy alternatives we’ve to develop our footprint in our current areas,” Linde continued.

Boston Properties’ gateway technique has been constant for a very long time: seize the most important skyscrapers within the downtown areas of some key gateway markets that the REIT closely analyzes. Till getting into Seattle, Boston Properties was solely focused on 5 U.S. markets, the place they maximize worth and let different actual property companies take their probabilities in rising markets. And regardless of the turmoil within the workplace market, the corporate continues to be dead-set on its core technique and doesn’t look prepared to alter. Owen Thomas, the corporate’s CEO, mentioned in a latest interview he believes a extra sturdy return to the workplace will occur, particularly in high-quality buildings with facilities and in shut proximity to transit entry, the main focus of the REIT’s two Seattle acquisitions.

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Creating worth

Out of all of the metro areas Boston Properties may’ve chosen to deal with, the query some are asking is, why Seattle? Executives on the firm revealed a few of their methods in the course of the second quarter of 2021 earnings name quickly after they introduced their first Seattle funding of the Safeco Plaza. 

Boston Properties CEO Thomas defined that the Seattle area is the headquarters for world tech giants like Amazon and Microsoft and has one of many largest concentrations of tech employees within the U.S. “Seattle has skilled excessive ranges of inhabitants and hire progress given its increasing know-how and life science employment base and is way more reasonably priced than different main tech markets given these State of Washington revenue taxes and decrease actual property prices for each workplace house and housing,” he mentioned.

Thomas claims that rents, land, and constructing values are decrease in Seattle than in another of the corporate’s core gateway markets. Boston Properties had an govt, Kelly Lovshin, based mostly within the metropolis for greater than a yr, laying the groundwork for the REIT’s growth into the market. The corporate has a pipeline of funding alternatives in Seattle at present below assessment, and it’s constructing a full-service actual property group there.

In keeping with Thomas, Boston Properties’ technique in Seattle is to not “purchase stabilized, lovely belongings” however discover properties the place they will create worth by means of their working prowess. He talked about the Safeco Plaza buy for example: a tower constructed within the Sixties however one which has “nice bones” and glorious ceiling heights. Thomas famous some vacancies within the constructing, however the firm is “not in a rush to lease the house as a result of we wish to make certain we perceive what the constructing may change into and promote what it will likely be and never what it’s.”

A downtown in tough form

Seattle has been a gorgeous industrial actual property marketplace for fairly a while. Trepp, a industrial actual property knowledge supplier, not too long ago ranked the town as the highest secondary metro statistical space for industrial actual property improvement nationwide in 2022. Seattle struggled in the course of the early days of the pandemic, nevertheless it has bounced again, for essentially the most half. However the image within the Emerald Metropolis, particularly for the workplace market, isn’t completely rosy. Most of the identical considerations impacting main actual property markets nationwide are affecting Seattle, together with worries about crime and public security and workplace occupancy charges which are enhancing however nonetheless not at pre-pandemic ranges.

By most measures, Seattle is a strong industrial actual property market, however Boston Properties is getting into a metropolis with a few of the identical considerations as San Francisco, a metropolis by which the REIT has a big presence with 37 properties spanning 7.7 million sq. ft. In keeping with reviews, some builders in Seattle have misplaced their persistence with rising crime charges and the town’s politics. Seattle had 11 homicides in August, making it the only deadliest month within the metropolis since 2008. The town has additionally had greater than 500 shootings to this point this yr.

Seattle Citywide Violent Crime Charge, 2017-2021

Seattle’s downtown is coming again, with 3 million guests to the world in August, essentially the most for the reason that pandemic began. However the specter of crime is an actual concern for a lot of within the metropolis. Seattle’s Police Division is battling hiring and recruiting law enforcement officials, and reported crimes elevated 10 % final yr from 2020 ranges, with violent and property crime rising. Downtown Seattle, the place each of Boston Properties’ latest workplace acquisitions are, is likely one of the most crime-ridden elements of the town. “There’s no getting round it — downtown Seattle is in tough form,” Gene Balk, a Seattle Instances columnist, not too long ago wrote.

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Elevated rates of interest have additionally impacted workplace valuations and have elevated materials and labor prices, which have pushed up tenant enchancment prices in new workplace leases. The Broderick Group’s Seattle workplace reviews that earlier than the pandemic, there have been roughly 5.5 million sq. ft of lively tenant demand for workplace house. The lively demand within the second quarter of this yr has fallen to round 2.2 million sq. ft. 

Regardless of that sobering statistic, workplace leasing exercise continues to be important, and Seattle’s fundamentals appear sturdy. Within the second quarter, there have been 380,000 sq. ft of “important” workplace leases throughout your complete Seattle market, outlined as new and current tenants rising and increasing long-term. And the Broderick Group is monitoring about 400,000 sq. ft of pending workplace leases they anticipate will shut by the top of 2022.

One factor that works to Boston Properties’ benefit in Seattle is that like most markets nationwide, the workplace sector is cut up between excessive demand for Class A buildings and decrease demand for B and C properties. Class A workplace belongings in Seattle stay extremely fascinating to occupiers, and buildings within the B and C asset lessons battle essentially the most. Most signed leases in the course of the second quarter in Seattle had been in Class A buildings near main transit traces and facilities, the kind of properties that Boston Properties focuses on. 

The influence of distant work means workplace occupancy charges within the metropolis are nonetheless hovering round 40 %, and emptiness and sublease charges are stubbornly excessive. However regardless of low occupancy charges, June and July had the very best variety of workplace employees returning to the downtown space for the reason that pandemic began.

Seattle’s workplace market has had setbacks, however downtown continues to see important workplace investments that present confidence available in the market. Together with Boston Properties’ acquisitions, different massive investments embody the sale of the 770,000 sq. foot former Macy’s constructing for $580 million in April 2021. Kilroy Realty additionally not too long ago purchased a 28-story workplace tower for $490 million, and 2021 noticed practically 2.5 million sq. ft of workplace house delivered downtown. Biotech property gross sales have remained sturdy, too, because the Puget Sound space ranks third nationally for all times science progress, an asset class that Boston Properties has been specializing in extra as of late. 

A vote of confidence

Regardless of some downsides, different elements of Seattle are sturdy. The metro space’s unemployment fee was 3.1 % in August, decrease than the nationwide common of three.7 %. Whereas cities like San Francisco have seen an “exodus” of tech expertise, many in Seattle look like staying, not less than for now. Employment migration knowledge from LinkedIn confirmed that Seattle added 2.2 tech employees for each employee that left from March to October 2020. Enterprise capital {dollars} additionally flowed into the area in 2020 and 2021 and began a slew of life sciences, well being care, and software program companies. The area’s enterprise capital elevated 200 % in the course of the previous 5 years and rose 300 % to achieve $1.1 billion within the first quarter of 2021 in comparison with the earlier yr.

The inhabitants of King County, Washington, house of Seattle, declined by greater than 20,000 individuals between July 2020 and July 2021, in accordance with new estimates from the U.S. Census Bureau. However the lower in inhabitants from 2.27 million to 2.25 million was simply one-third of 1 %, lower than different main metro areas in America. In keeping with some surveys, Seattle additionally ranks excessive amongst of us within the youngest era, Gen Z. CommercialCafe, an actual property itemizing service, ranked Seattle because the 7^th-most widespread metropolis for members of Gen Z, primarily due to the town’s low unemployment fee and excessive web speeds.

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Boston Properties could be very gradual and deliberate after they enter new markets. It took a number of years earlier than they entered the Los Angeles marketplace for the primary time 5 years in the past, and so they’ve additionally been conservative about their entry into Seattle, regardless of the splashy purchases. Many actual property companies are operating full-speed forward towards sizzling markets like Nashville, Atlanta, Austin, and different rising cities, however this doesn’t appear to be one thing Boston Properties is occupied with. 

Thomas, the CEO, mentioned in a latest interview that they assume their regional footprints are established for the foreseeable future. “We went into Seattle final yr and Los Angeles 4 or 5 years in the past, and each of these areas are contributing 2 to 4 % every of our complete outcome, and we would like these areas to be greater,” Thomas mentioned. “We now have a life sciences alternative that we’re additionally investing in, and that might be a much bigger a part of our firm. So we’ve obtained loads of alternatives.”

Behemoth tech corporations like Microsoft and Amazon name Seattle house and now Boston Properties has planted some roots as effectively with these latest acquisitions. The REIT’s core funding technique has remained constant for many years, and its group spends quite a lot of time analyzing alternatives. The corporate could face challenges within the Emerald Metropolis, one nonetheless battling excessive crime charges and the influence of distant work, however the nation’s largest Class A workplace house proprietor has given it a vote of confidence.