Brandywine Expects Return-to-Office Recovery To Take At Least Three Quarters

 By Marissa Luck CoStar News

Brandywine Realty Trust is seeing a big comeback in leasing activity as more tenants contemplate returning to the office, but executives cautioned it could take several months until operations are back to normal.

More than a year into the pandemic, office landlords across the country are seeing more tenants start to return to their office space as the coronavirus vaccine rollout expands. However, as Brandywine’s portfolio shows, the return to office is likely to unfold in fits and starts over the coming months as companies evaluate their long-term real estate needs.

“We have to keep in mind that we are in the beginning phases of a transition in the return-to-work journey. … We believe it will take three quarters or so to fully play out,” said Jerry Sweeney, CEO of Philadelphia-based Brandywine, during an earnings call Thursday with investors.

Brandywine solely and jointly owns about 25 million square feet located mostly around Philadelphia and Washington, D.C., and is one of the largest office landlords in fast-growing Austin, Texas. It recently expanded into Maryland.

The office-focused real estate investment trust said physical tour activity from prospective tenants increased 40% in the first quarter and it had more than 1,500 virtual tours. The company’s overall pipeline of leasing activity jumped by 400,000 square feet in the first quarter, hitting about 1.2 million, with 165,000 square feet in advanced negotiations.

Most of the midsize to smaller tenants are leading the charge to get back to the office, Sweeney said. Many companies also are still determining how many employees may work from home permanently, he said.

“We are clearly seeing from the pipeline additions that the return-to-work movement will accelerate and the flight to higher quality office buildings is increasingly clear,” Sweeney said.

Among the tenants searching for space, there is a greater emphasis on health and safety. Tenants are increasingly favoring spaces with private offices, more air circulation, larger workstations and smaller gathering areas versus one large central space, Sweeney said. Some tenants in Philadelphia even took more square footage to allow for a more spacious layout, he said.

“Certainly more and more companies are seeing the value of having people together physically," Sweeney said. In conversations with larger companies, he said some employees are pushing back on the idea of being remote-only workers and want some flexibility to switch between remote work and being in an office at a dedicated workstation.

Few Workers Want Full-Time Return

While data varies, a January survey of office workers from Slack found that only 17% of office-based workers want to return to the office full time, 20% want to work remotely full time and 63% want the flexibility of a hybrid model.

Overall in the first quarter, Brandywine signed 493,251 square feet of new leases and renewals, according to its earnings results. Its profits were down about 14% year over year to $6.77 million, while revenue dipped 16% to $120 million, according to its first-quarter earnings results. However, about 99% of its office tenants are paying rent despite mostly not being back at the office. Brandywine is expecting some deferred rent later this year.

Although there is still uncertainty about timing of a full recovery, Brandywine is seeing noticeably more touring activity, with tenants in the Philadelphia market seeing the biggest jump and Austin ranking last in its portfolio for tour activity, Sweeney said.

In downtown Austin, Brandywine has substantially completed construction of the office tower at 405 Colorado St., Sweeney said. The 25-story tower has struggled with leasing in the pandemic, particularly after law firm DLA Piper abruptly dropped its lease commitment last year.

The 206,000-square-foot tower has remained about 18% leased since at least October, according to Brandywine’s previous earnings and first-quarter supplemental earnings results. However, Sweeney said the firm has a letter of intent for a full floor that it hopes to finalize in the next 30 days.

“Activity is definitely picking up. We’ve had four new tours in the last week alone," Sweeney said.

Elsewhere in Austin, at Brandywine's proposed Broadmoor campus in north Austin across from The Domain, IBM has declined to renew its lease at Building 905, and Brandywine expects to demolish the structure as part of its redevelopment of the area into a 66-acre mixed-use development.

Brandywine plans to advance Block A and the first phase of Block F at the project, encompassing $360 million of development. That includes 613 apartments, with about 341 units to start at a cost of about $119 million by the third quarter, Sweeney said. Brandywine also wants to kick off Broadmoor with 350,000 square feet of office but plans to wait until a significant portion is preleased prior to starting construction. Brandywine is looking for a joint-venture partner to help develop the first phase of Broadmoor and expects to select one within the week, Sweeney said.

Philadelphia Life Science Space

In Philadelphia, Brandywine and its joint-venture partner started construction on the $287 million Schuylkill Yards West in March at 3025 JFK Blvd. That project is expected to include 326 apartment units, 100,000 square feet of life science space and 100,000 square feet of office and street retail.

Brandywine struck a deal last month with the Pennsylvania Biotechnology Center to create B.Labs, a life science incubator at Cira Centre directly adjacent to the Schuylkill Yards neighborhood in the University City section of Philadelphia.

The initial 50,000-square-foot lab and research space is expected to open in the fourth quarter. Sweeney said Brandywine has a pipeline of leasing activity for 35% of the space in that project.

Last quarter, Brandywine expanded outside of its core markets into Maryland after it was selected by Terrapin Development Co. and the University of Maryland as the exclusive developer of a 5-acre mixed-use neighborhood within the University of Maryland's Discovery District.

Plans for the development include 550,000 square feet of research and life science space and about 200 to 250 multifamily units in several phases. Permitting and planning is underway with a target groundbreaking in the second half of 2022.

Discovery District is a $2 billion, 150-acre research-focused campus located in College Park, Maryland.