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Boston Properties turned in a record performance on a key metric for the fourth quarter. But while business was good generally, one big, flashy building that has ties to WeWork has been slow to fill.
- Boston Properties' Dock 72, a 675,000-square-foot WeWork-anchored Brooklyn Navy Yard office property co-owned with Rudin Management is 33% leased, flat from the third quarter of 2019. All of that is WeWork.
- Business Insider spoke with analysts about their take on potential leasing challenges at the location before the fourth-quarter earnings.
- In a conversation with Business Insider after the earnings call, Bill Rudin, chief executive and co-chairman of Rudin Management, said that he believes that the food hall and other amenities will draw more tenants in.
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Boston Properties turned in a record performance on a key metric for the fourth quarter. But while business was good generally, one big, flashy building that has ties to WeWork has been slow to fill.
WeWork-anchored Dock 72, a 675,000-square-foot office building that's a 20 minute walk from the nearest subway entrance but with a ferry stop right at its entrance, continues to lease up more slowly than Boston Property execs expected.
Earnings releases showed that Dock 72, Boston Properties' collaboration with Rudin Management in the Brooklyn Navy Yard, is only a third leased up, flat from where it was in the third quarter of 2019. Building ownership is split 50/50 between Rudin and Boston Properties.
John Powers, the executive vice president of Boston Properties New York Region, said that WeWork has two thirds of its space built out and is paying rent on all of it.
The more than 30,000 square feet of amenities space, originally slated to open this month, hasn't yet opened. Powers said on a call with analysts on Wednesday to discuss earnings that the amenities space will open this quarter, and could attract more potential tenants once it does so. When the building opened last October, a Rudin spokesperson told Business Insider that amenities would open later in 2019.
Powers said that the rest of the leasing is "very slow," but that Boston Properties is "optimistic" about a proposal for one full-floor lease that's in process now.
In a conversation with Business Insider after the earnings call, Bill Rudin, chief executive and co-chairman of Rudin Management, said that he believes that the food hall and other amenities will draw more tenants in.
"We're optimistic that leasing activity will pick up in the next two quarters," Rudin said. He cited the property's high-tech amenities and its "grit" - it's stationed next to still-functioning dry docks - as assets that will attract tenants.
A Wall Street Journal report on Wednesday about fashion company Lafayette 148 moving to Building 77 in the Navy Yard made the case that Brooklyn is attracting a wide range of companies with tax credits, accessibility to Brooklyn-based talent, and cheaper rent.
Boston Properties overall had a quarterly record-high funds from operations (FFO) - a key cash-flow measure - of $1.87 a share, with FFO increasing by 11% in 2019 versus 2018.
Brooklyn's ability to attract young professionals indicates that it could be a strong office market, but Dock 72 is the first ground-up office development in Brooklyn since Metrotech in the 1980s.
Crain's reported in early December that WeWork's coworking space was 40% leased, up only 10% from the October opening.
Back on the third-quarter earnings call, Michael LaBelle, CFO of Boston Properties, said that "clearly the lease-up of this property has been slower than we expected," though he touted the amenities of the "emerging office location."
"I think it's kind of a trial balloon for that market," said Jeffrey Langbaum, Senior REIT analyst at Bloomberg Intelligence in a conversation with Business Insider earlier this month. "So, setting the WeWork piece of it aside. It was going to take some convincing to get some office tenants to get there."
Langbaum said that Boston Properties factored this risk into its calculations, which is likely why it worked with WeWork and Rudin on the project, but it may have underestimated the challenges of getting tenants to an unproven Brooklyn market.
Langbaum said that a slow lease-up would have minimal impact on Boston Properties' financial situation, but it could be a "blip" on its reputation of success in new and challenging markets.
Thomas Catherwood, director and REIT analyst at BTIG Research, said that Brooklyn is a "very early-stage office market."
Boston Properties was also an early adopter of WeWork. Cofounder and former executive chairman Mort Zuckerman invested in WeWork in 2014, and Dock 72 was announced in 2015.
"In my conversations with management, they (Boston Properties) really viewed them (WeWork) as a positive addition to the New York city market because they could aggregate small demand," Catherwood said.
On the call to discuss fourth-quarter earnings, multiple executives also said that there is a slowdown in new leases from flex-office firms after WeWork's plans for an IPO imploded, but they continue to think that flex-office is an important addition to the portfolio.
Catherwood said that the WeWork brand should help attract smaller companies that are more amenable to moving to the Brooklyn Navy Yard. Neither analyst thought that WeWork's recent challenges were much of a reputational hit for the Dock 72 property.
Dock 72 houses some WeWork employees, as well as multiple floors of coworking space.
Kenford Peli, CEO at entrepreneurial accounting firm the Peli Firm, brought his small company to WeWork's Dock 72 location when it opened. It was his first time working in a WeWork. Dock 72 wasn't the first WeWork location he saw, but once he saw the location, he was sold.
He said the office has been filling up, and he said he sees two to three tours WeWork tours a day.
"At this point, I can't see us at any other location," Peli said.