DC Office Landlords Lean Into Multifamily – Commercial Observer
These are trying times for Washington, D.C.-area office landlords, and the last several weeks of earnings results have shed light on how they’re faring.
While institutional investors like Boston Properties (BXP) (BXP) have the capital and heft to weather the current conditions in the office market — and even have excess capital to spend — some of the more local or specialized landlords, like JBG Smith (JBGS) and the Howard Hughes Corporation (HHC), are feeling the impacts more acutely.
Both JBG and Howard Hughes posted quarterly losses, while office leasing activity and occupancy rates are down across the board. But there are bright spots, too, thanks primarily to diversification. Howard Hughes saw home sales jump at its master-planned communities, while both BXP and JBG have leaned into multifamily development to diversify their portfolios.
Bethesda-based JBG Smith, the area’s largest landlord, has been working to transition its portfolio toward multifamily for the last several years, but remains split 60-to-40 in favor of commercial, according to its second quarter earnings report.
The commercial and office component spans 9.7 million square feet with an 84 percent occupancy rate, down from 85.2 percent last quarter. The multifamily portion, with 6,756 units, is 93.7 percent occupied, up from 92.9 in March. The company also has more than 1,500 multifamily units in the development pipeline.
The real estate investment trust (REIT) posted a $10 million loss in the second quarter on revenues of $152.1 million, of which $120 million came from rent. That’s compared with net income of $123 million last June on $145.5 million in revenue.
The most notable event for JBG Smith in the second quarter was the opening of Metropolitan Park, the first phase of Amazon’s HQ2 in National Landing, where the company has its heaviest concentration of office space and highlights its exposure to the issues plaguing the broader office market. The REIT has about 1.8 million square feet of office leases in National Landing that will expire in2024. Of these, it expects just a third to be renewed, leaving 1.2 million square feet of available space to fill by next year, according to a letter to investors.
A big portion of that loss is due to Amazon vacating other JBG Smith space to move into its new headquarters. Amazon’s exit will leave 1800 South Bell Street and 2100 Crystal Drive, which span a combined 444,000 square feet, completely vacant and potentially open for repositioning. The buildings are “two assets we plan to take offline and entitle for an alternate use,” per the earnings report. “Our ability to renew or re-lease this space will impact our future occupancy.”
Multifamily leasing, on the other hand, was strong during the second quarter, with close to a 50 percent renewal rate and a 7.5 percent increase in rent for renewals, per the letter. Overall asking rents increased by 1.2 percent year-over-year.
BXP is the nation’s largest office landlord, meaning it’s currently exposed in most of the markets suffering from the pandemic’s aftermath, including San Francisco, Los Angeles, Boston, New York and D.C.
That said, the office REIT posted a net income of $104.3 million in the second quarter, on $817.2 million of revenue, exceeding Wall Street forecasts. That was thanks to a 5.5 percent jump in net operating income (NOI), and despite a decline in occupancy from 89.5 percent to 88.3 percent across its portfolio.
The REIT posted its lowest occupancy rate in D.C., with 1.5 million square feet of vacant space out of 10 million square feet in total, translating to an 84.9 percent occupancy rate, according to an investor presentation. For comparison, BXP’s vacancy rates in Boston and New York, its two largest markets, were 90.6 and 88.5 percent, respectively.
Occupancy is one thing, attendance is another. That metric is ticking upward, according to BXP president Doug Linde, with 80 percent of desks in use at least once a week in BXP buildings in New York City, compared with 75 percent in Boston and 70 percent in San Francisco.
“The sentiment around office is worse than the reality,” Linde said on the earnings call in early August. “To illustrate the point in our portfolio, we continue to see an incremental pickup in daily activity as we look at the month-to-month trendline.”
In D.C., the company has another 275,839 square feet expiring this year, but that loss is offset by an additional 421,866 square feet of signed leases that haven’t yet commenced. That includes deals at the 475,849-square-foot 2100 Pennsylvania Avenue NW, which BXP placed into service this year. It is 61 occupied but 91 percent leased.
On the financing side, the company has a debt coming due on 500 North Capitol — which is 100 percent leased — and is not concerned about finding the right capital source to refinance, per the call.
Other activity in the D.C. region includes the acquisition of a 50 percent interest in Worldgate, a 10-acre office property near Reston Town Center that the company expects to demolish for a multifamily development. BXP has another multifamily development at 1001 Sixth Street and owns, or has a stake, in property with 4 million developable square feet across D.C., Virginia and Maryland,
The Texas-based Howard Hughes is best known for its master-planned communities, primarily in Texas and Nevada. HHC is also the master developer of Columbia, Md., including its commercial downtown areas, where it owns about 4 million square feet of office space, 1.2 million square feet of retail space and multifamily developments.
Also in the D.C. region, HHC and Foulger-Pratt are redeveloping 41 acres on the former Landmark Mall site near Alexandria, which has been approved for three residential buildings totaling 1,117 new residential units, an office tower and more than 215,000 square feet of retail. A portion of the site, which has been sold to the City of Alexandria, will house an Inova medical campus.
The company posted a $19.1 million loss in the second quarter, down from a $21.5 million gain a year ago, of revenue of $223.3 million, which came in above Wall Street expectations. The majority of its increase came from its master-planned community segment, in which home sales increased by 39 percent year-over-year to 605 sales in total. A big chunk of the losses, $5.4 million, stemmed from the South Street Seaport in New York City, where HHC has been involved in development battles for over a decade.
NOI in HHC’s office segment increased to $33.6 million, largely due to lease termination fees and activity in The Woodlands in Texas, which was offset by lower occupancy in Downtown Columbia, per the company’s earnings call. Its retail portfolio was 96 percent leased, but NOI declined to $12.5 million in the second quarter, down $1.5 million from the previous year.
Howard Hughes will soon transition its ticker from HHC to HHH.
Chava Gourarie can be reached at firstname.lastname@example.org.