By Katie Burke CoStar News
The scale between office tenant downsizings and expansions is tipping back toward some landlords' favor after several years of consolidation, said executives of one of the nation's largest real estate investment trusts.
Brandywine Realty Trust, a landlord and developer based in Philadelphia, reported a pickup in touring and leasing activity across its United States office portfolio as companies become more confident in expanding their real estate footprints. The shift, CEO Jerry Sweeney said, has primarily benefited landlords on solid financial footing as tenants increasingly prioritize space in high-quality buildings owned by firms that aren't facing any type of distress.
"The quality curve thesis continues to gain strength as reflected in the overall pickup in leasing activity," Sweeney told analysts on the company's earnings call Wednesday. "Given some of the stress our competitive landlords are facing, we have in several submarkets seen our competitive set shrink and the quality, operating and financial stability of our platform has continued to separate us from the pack, both in the minds of prospective customers, existing tenants and brokers."
Even with the improving leasing landscape, however, Brandywine and other office landlords across the United States are still contending with a market in recovery mode.
Depressed leasing demand has plagued most office landlords throughout the United States for the past several years, with many pointing to the ongoing impact of remote work and the wobbly economic outlook for the challenges they face in getting their properties back to pre-COVID occupancy levels.
Still, "we continue to see encouraging signs on the leasing front," Sweeney said, adding tour activity remains above pre-pandemic levels by 27%. "Tenant expansions continue to outweigh tenant contractions during the quarter, and the total leasing pipeline continues in a strong position."
Building From The Bottom
Brandywine reported just shy of $30 million in net income for the second quarter, a significant improvement from the $12.9 million loss it posted for the same period last year.
The landlord leased nearly 165,000 square feet through the second quarter ended June 30, boosting its year-to-date total to more than 523,230 square feet. Brandywine's portfolio that includes roughly 70 properties that collectively span 12.7 million square feet is now about 88.5% leased.
What's more, nearly 70% of the new deals the landlord signed in the second quarter were a result of what Sweeney attributed to the "flight to quality" trend in which tenants have increasingly prioritized real estate investments in new and top-tier buildings located in the best neighborhoods.
Demand for office space across the country has dwindled in the years since the COVID-19 pandemic's 2020 outbreak. Tenants have collectively handed back more than 205 million square feet since the beginning of 2020, according to CoStar data.
"Clearly we're still in a market that is over 20% vacancy," Sweeney said. "We're still competing against other product and sublease space."
Even so, the landlord is optimistic that the worst of the tenant offloading trend is behind it as companies return to their physical workspaces on an increasingly frequent basis.
"Companies want to bring tenants back to high quality space," the CEO said. "Part of the pipeline activity isn't necessarily what I would categorize as net new demand. I would indicate it as more shifting demand from lower- to higher-quality space, and I think we're very well positioned to take advantage of that."
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