200 Clarendon, Boston Properties’ most iconic trophy office holding in its namesake city. iStock photo

Boston Properties, our hometown real estate giant, recently found itself confronted with a question that would have been unthinkable before the watershed year of 2020.

Is there a future for a company whose livelihood hinges on the demand for office space, from buying and leasing out towers to building new ones?

The occasion was Boston Properties’ first quarter earnings call and it was Richard Anderson’s turn to grill the real estate giant’s executives on its performance and strategy.

It was about as philosophical a question as you’ll get from a Wall Street stock analyst.

Anderson, managing director for equity research at Wedbush Securities, kicked things off in typical, stock geek fashion by complementing BXP’s brass for their “commitment to FFO” – or funds from operations, a key measure for investors.

He then went on to cite some stats from Kastle Systems, which provides security equipment for offices and tracks actual office occupancy nationally – that is amount of space that is being used by human beings, as opposed to simply being paid for under a lease..

As of publication time the most recent Kastle report, which covered the May 27-May 31 work week, put the average share of office space actually in use at 48.4 percent, with the week’s peak hitting Wednesday at 58.3 percent.

Then Anderson went big-picture: “Is there a scenario where the BXP story can still work long-term, if we’re looking at sort of a permanent condition of underutilization of office? Or do you feel like you need to get fully back, to have a long-term story to tell? I’m just curious what you think about, sort of, the very long term when it comes to office utilization.”

When an analyst is asking your company whether its “story can still work long-term,” that’s not usually a good sign.

Exec Claims Boston Towers Doing Well

Execs at Boston Properties were ready with a suite of answers for the stock analyst’s thorny question, not all of them entirely convincing, though certainly credible.

First off, when in doubt, attack the messenger, in this case, Kastle Systems, which provides building access systems, including swipe cards that can be tracked to see how many people are showing up at the office each day.

Boston Properties and other big office tower owners hate Kastle and question its numbers at every turn, which makes sense since they suggest only around half the office space out there is being used throughout the week.

With official vacancy rates – the amount of office space covered under leases – at a still historically-high but much lower 20 percent, that suggests companies are still paying for or stuck with lots of space they aren’t using.

That is not a sustainable, long-term situation.

That aside, Owen Thomas, Boston Properties CEO and chair, noted that the REIT does not use Kastle Systems, so the stats aren’t measuring activity in BXP’s buildings.

“I think it’s a very imperfect measure of office demand,” Thomas said. “Many of the owners of premier workplaces don’t use Kastle Systems in their buildings. So, we’re not really exactly sure which buildings are being measured.”

Owen countered with office tower turnstile figures collected by BXP, which he claims show occupancy at the company’s New York properties back to March, 2020 levels.

Boston, he added, is 75 percent on “that measure,” while San Francisco, with its high concentration of tech companies, hovering in the 45 percent to 50 percent range.

What About Two-Fifths of the Week?

But here’s the kicker: the BXP chief’s numbers track only the peak of the workweek – Tuesday, Wednesday and Thursday – leaving out Monday and Friday.

“I actually say New York is basically back to the way it was,” Owen said. “Certainly, three days a week.”

Clearly, BXP’s office towers and buildings are a lot emptier during two-fifths of the workweek that the company would like or will admit.

That’s a big caveat.

However, Boston Properties is doing more than just countering skeptics of the future of the office market with its own numbers.

The company is also providing an alternative narrative to the story that has taken hold that the office market as we know it is terminally ill and headed for a crash.

BXP may claim that its office towers in New York and to some extent, Boston, are back or nearing their pre-COVID occupancy levels, but leasing of new office space is clearly slower.

Scott Van Voorhis

Don’t blame it on shift to remote work, though.

“As I tried to say over and over in my remarks, we think the issue, the reason our leasing is slower today is actually not because of work-from-home,” Owen told stock analysts. “It’s because of the earnings growth of the clients that we serve.”

Say what? Well, earnings growth is down at companies that are big users of office space, so they aren’t hiring the way they would otherwise hire.

And that means less demand for office space.

“We’re a provider of services to businesses, not consumers,” said Owen. “Those businesses are not growing their earnings. And if they’re not growing their earnings, they’re not hiring people and they’re not taking space.”

I guess that’s true to some extent. But the work-from-home revolution is both real and here to stay. And even a very well-run, top-quality company like Boston Properties can’t completely dodge that bullet.

Scott Van Voorhis is Banker & Tradesman’s columnist and publisher of the Contrarian Boston newsletter; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.