Boston Properties (NYSE: BXP) has a very focused strategy. It primarily develops and owns Class A office properties in five key markets (its namesake Boston as well as New York; Washington, D.C.; San Francisco; and Los Angeles). It's currently the largest publicly traded office real estate investment trust (REIT) with 196 properties and 51.8 million square feet of leasable space.
The company hasn't deviated too much from its development-focused growth strategy over the years. Because of that, investors have a rather good idea where Boston Properties will likely be in three years. Here's a look at what seems to be ahead for the company.
Visible growth ahead
Because of Boston Properties' development focus, there's a lot of clarity on its growth prospects. The company has $2.9 billion of active developments under construction, which it should finish over the next few years. These projects total 5.2 million square feet, 73% of which it has pre-leased to tenants. The bulk of these projects ($2.2 billion) are new office buildings that tenants should start occupying by the end of 2022. The company also has two residential projects under construction (totaling $417 million) and two office redevelopment projects (which will cost about $198 million). The REIT estimates that these projects will grow its NOI at a 2.9% compound annual rate over the next several years.
In addition to those projects already under construction, Boston Properties has an extensive future development pipeline. It owns enough development rights to construct more than 15 million square feet of office space that it can build depending on demand. If it sanctions some of those developments soon, they could bolster its results within the next three years.
While Boston Properties is a development company at heart, it will make acquisitions to drive additional growth. The office REIT has a top-notch balance sheet to support deals. It has also historically sold assets to recycle capital into better opportunities, giving it another funding source.
What might change over the next three years
Boston Properties currently owns a highly concentrated portfolio focused on five top markets. However, that doesn't mean it will limit itself to these same areas in the future. For example, the REIT entered the Los Angeles market in 2016 and has steadily grown its presence over time, recently making its third investment. It could add another area over the next three years if it finds the right opportunity. There are several top office markets where Boston Properties could go next, like Chicago, Seattle, Dallas, or Atlanta.
Another aspect of the company's strategy that could change is an increased focus on developing properties other than office buildings, such as residential and mixed-use developments. One catalyst that could cause it to look elsewhere for growth is if demand for office space dampens in the future because of COVID-19. Many companies shifted to a remote work model to help slow the spread, and some have said they could allow their employees to work from home permanently. If that happens, office occupancy levels and rental rates could fall, which would lessen the need for future developments. Conversely, this trend could bolster demand for residential space, especially well-located properties with built-in home offices.
Meanwhile, many developers have been building more mixed-use properties in recent years where people can live, work, and play. These amenity-rich developments often include retail, restaurants, residential, entertainment, and office space, which appeals to younger generations who desire walkable communities. Boston Properties has already developed several of these properties in recent years and could build more if current demand trends continue.
Expect steady growth over the next three years
Boston Properties has a well laid out growth strategy focused on developing office buildings in its core markets. With an extensive slate of projects underway, the office REIT has lots of visible growth coming up over the next three years. Because of that, it might not deviate from its current strategy, though if it does, it likely won't stray too far. Thus, the Boston Properties of the future will likely look similar to today's version, though with a bigger portfolio of cash-generating office buildings. Because of that, it should also be able to keep growing its dividend.