Office landlords across the country are still facing a myriad of headwinds when it comes to the market's post-pandemic recovery, but for one Philadelphia developer, the gradual uptick in leasing has bolstered its optimism for the years ahead.
Brandywine Realty Trust, a real estate investment trust 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. Most importantly, CEO Jerry Sweeney said the positive trajectory is expected to continue as the market rebounds back to pre-2020 levels.
"The key takeaways for us is that the overall market dynamics in our sector continue to improve," Sweeney told analysts on the company's earnings call Wednesday. "The overall market has been improving, albeit slowly, but our portfolio remains in solid shape, and we've got room for improvement over the next few years as we will — hopefully — see continued acceleration for leasing activity and continue to improve our market position."
In a sign of renewed tenant demand, tour activity across Brandywine's office portfolio jumped about 30% through the third quarter ended Sept. 30 compared to what it reported prior to the pandemic.
The landlord signed nearly 300,000 square feet in deals through the three-month period with another 185,000 square feet of new leases expected to commence before the end of the year. All of that has helped boost Brandywine's year-to-date total to roughly 820,000 square feet.
The REIT's portfolio includes roughly 65 properties that collectively span 12.2 million square feet is now about 88.7% leased.
Recognizing reality
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 210 million square feet since the beginning of 2020, according to CoStar data. The national office vacancy rate has soared to a record high of nearly 14%, and increased financial pressure on landlords has helped result in plummeting property valuations.
For Brandywine, those widespread challenges pushed it to recently offload a suburban Philadelphia office portfolio for about $60 million, a price Sweeney said wasn't fantastic, but was in line with where the market stands today.
"We're at a time in the market where we really do need to recognize reality, even if it's something we don't particularly like," the CEO said. "To help us recognize that reality, we have to look at the net present value of holding a single asset and come up with a range for what the real value is. If we take it to market and get an offer that lands within that strike zone, we'll sell it. Even if it's a price we don't particularly like, it's the right financial decision for the company."
Some of those lingering challenges have also pushed Brandywine to gradually pull the plug on its presence in Washington, D.C., a market Sweeney said has long taken a back seat to its focus on Philadelphia and Austin, Texas. The landlord owns a handful of properties in the area that, once the investment market improves, it plans to eventually sell.
Brandywine posted a net loss of about $157.5 million for the third quarter, largely a result of impairment costs the landlord incurred through the period.
Despite the loss, the REIT boosted its outlook for the remainder of the year, largely due to the pickup in leasing activity it has experienced across its portfolio.
"Our existing portfolio remains in very solid shape," Sweeney said. "We're positioned to be a strong participant in the market's eventual recovery."
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