The pandemic hit the office market hard, especially in New York City. Many companies shifted to remote work, giving employees the freedom to move away from the city to cheaper areas. Some might never return as remote work becomes a permanent option for many companies. That has investors worried about how much office space companies will need in the future.
Boston Properties (NYSE: BPX), the country's largest publicly traded developer and owner of Class A office properties, believes companies will return to the office. It's so confident in that view that it's moving forward with a massive office development in New York City.
Making plans for the city's next trophy office tower
Boston Properties wants to convert the Metropolitan Transportation Authority's (MTA) former headquarters on Madison Avenue into a massive mixed-use skyscraper. It has proposed building a supertall tower that could reach 1,050 feet high. The trophy office tower would have 925,000 square feet of mixed-use commercial, office, and retail space.
The office REIT, or real estate investment trust, has set a 2026 construction deadline to finish the project. By then, the pandemic should (hopefully) be a distant memory. New York City plans to fully reopen for business on July 1 by lifting all capacity restrictions on restaurants, retail, and other businesses. That will allow office staff to return to their workspaces, which should give office REITs like Boston Properties a better gauge on future office space demand in the city.
A long and winding road
The MTA originally bought the site, 347 Madison Avenue, in 1979 and subsequently purchased three adjacent sites in 1991. It started seeking bids to redevelop the property in 2013, which was around when it relocated its headquarters to 2 Broadway. It selected Boston Properties to develop the site in 2016.
Since then, the office REIT has faced some roadblocks, including an objection by the city over the allocation of property taxes. The two sides finally sorted out that issue shortly after the pandemic hit, as it caused financial problems for the city and the MTA.
Boston Properties still has a few more things to work out before starting construction. It needs the city to make two zoning changes to construct a building the size it's proposing. It wants to double the building's floor-area ratio in exchange for improving pedestrian and mass transit circulation. It's also seeking to have a smaller setback distance so the site can fit a larger building.
On top of that, it will need to secure some anchor tenants for the project. That would reduce risk so that it's not constructing a massive structure on pure speculation.
Despite those remaining hurdles, the company is excited about the MTA site. John Powers, Boston Property's executive vice president of the New York Region, called it a "terrific site" on the REIT's recent first-quarter conference call. He noted that they still need to go through a few things to "find out how big the building will be." While they've "drawn it in a certain way, and we're very excited to present it," the company might need to scale it back if it can't get the necessary approvals.
Because of that, Powers says: "This is going to be quite a few years out from now. So we're not talking to any tenants." Thus, there's a chance the company might not move forward with construction if it needs to scale back too much or doesn't get the interest it had hoped when it approaches prospective tenants.
Optimistic about the future of the office
Boston Properties fully believes that companies will return to their offices in a post-pandemic world. That's why it's making plans to build a new skyscraper in Manhattan.
However, that proposed project alone doesn't make the stock a buy since it's still a long way off. On the other hand, what makes the stock a compelling opportunity right now is that shares are still down about 20% since the start of 2020. With New York City reopening in a couple of months and other cities following as vaccines roll out, the weight of uncertainty holding down its stock price should begin to lift. That could give the stock a big booster shot to rally over the coming months.