BXP chief says the office sector is overbuilt

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The U.S. office market has been in a tailspin since the start of the pandemic, when workers were first ordered home. Some, especially younger workers, never came back — leaving many office buildings half full or empty. 

The overall vacancy rate for offices, however, fell 20 basis points in the third quarter to 18.8%, according to CBRE. While that’s still historically high, it marks the first year-over-year decline in vacancy since the first quarter of 2020, when Covid took hold in the U.S.

Leasing activity last quarter exceeded the five-year quarterly average, driven by financial services and technology firms, according to the report. The construction pipeline also dropped and is on track for the lowest annual total in over a decade.  

“I definitely think we hit bottom. I think we hit bottom in 2024,” said Owen Thomas, CEO of BXP (formerly Boston Properties), the largest office REIT in the U.S. “There are lots of positive things that are going on for part, not all, of the office business.”

One of those positives is lower interest rates. Capital is coming back to office real estate, Thomas said, starting on the debt side, where there have been several large debt securitizations. BXP just completed single-asset securitizations on high-end office buildings in New York City and Boston, he said. 

BXP is almost entirely invested in the top tier of the market, with many of its tenants in financial and legal services. And that, Thomas said, is another positive. Financial services firms are seeing big earnings growth, in part thanks to artificial intelligence. These firms also tend to use their spaces more than others. 

“These leading companies want to get their people back in the office, and, of course, they can mandate that, but what they really want is they want their people to want to come back to the office,” said Thomas. “That’s why you’re seeing this bifurcation in the office business, between the quality buildings that are being leased by the leading companies and then the rest, which are not performing nearly as well as the, what we call, premier workplace segment of the industry.” 

That “premier” tier is defined, roughly, as the top 10% of buildings. The vacancy rate in these buildings is far lower than the rest of the market — 11% on average in the cities where BXP operates, Thomas said, adding that the asking rents in those markets are 55% higher. 

Premier…