Boston Properties (BXP) announced today that Chairman and CEO, Mort Zuckerman, will step down from his role as CEO effective April 2, 2013. Owen Thomas, currently Chairman of Lehman Brothers Holdings, and former head of Morgan Stanley (MS) real estate and MS Asia, will take his place. We must ask, if and how this will impact BXP's well known strategy of buying A office buildings in A locations - will Mr. Thomas change this track, modify it, or stay the course? I will explore this narrow but timely issue in this article, and try to chart a path that I think Mr. Thomas will take BXP on.
Boston Properties Current Strategy
As anyone who has followed BXP, or Mr. Zuckerman, even causally, you have undoubtedly heard the refrain, that BXP focuses on, "Supply constrained markets, and within those markets, A buildings in A locations." The thinking behind this strategy runs as follows: in the good times these buildings command the highest rents, over and above other buildings, and in the bad times, these buildings hold up much better than the competition as "aspirational tenants" upgrade to the pricier buildings.
This strategy has been mainly focused on office buildings in the US, and specifically (in percentage size order of the portfolio) -- Boston, DC, NYC, San Francisco and Princeton. Within the US, management has expressed interest in expanding into West Los Angeles, another supply constrained market, but has not found the right platform to begin that project.
Based on this, BXP can maintain its core strategy, while expanding both vertically and geographically. Vertically BXP could dramatically expand its currently tiny residential apartment portfolio. And geographically, BXP could begin to expand outside the US. It seems that Mr. Thomas has the ability to draw on his experience to help BXP in this effort.
Boston Properties Residential
As noted in the BXP press release, while Mr. Thomas held the chairman's role at Lehman Brothers Holdings, he oversaw, "the successful disposition of a range of assets, including the sale of Archstone Enterprise LP to Equity Residential (EQR) and AvalonBay Communities, Inc. (AVB) for $15 billion." This sale of a major portfolio, to two of the most major players in the residential apartment business, surely added a lot of heft to Mr. Thomas' already storied real estate career.
However, beyond this, as has been noted by Mr. Zuckerman himself, companies have begun to dramatically rethink their office space use. Specifically, technology advances have allowed both for remote working environments (Marissa Mayer's (YHOO) recent brouhaha notwithstanding) and the decrease in amount of support staff necessary. This has decreased the demand in office space (in terms of square feet needed), and will continue to put pressure on the office space market. Therefore, taken together - the secular shift of office tenants, and Mr. Thomas' recent Archstone transaction - BXP has put itself on a path to expanding its verticals to include not only office, but also residential real estate.
Boston Properties International
Last year, rumors began to float that BXP would make its entry into the London office market. In fact, BXP had a contract to buy an office building in London, but Mr. Zuckerman disclosed that the building had title issues that made the deal unfeasible. Nonetheless, BXP has said explicitly that they have taken a long hard look at the London market, and continue to monitor the situation for potential acquisitions.
In addition to a UK expansion, BXP could take a hard look in Asia. Here, too, Mr. Thomas can add a lot to the BXP mix, by drawing on his considerable experience in the region as President of MS Asia. As we all know, all parts of Asia, and specifically China, continue to experience rapid growth, and despite the news of a Chinese Real Estate bubble, BXP could still find current value, or swoop in if and when the bubble pops. This geographic growth could prove useful for BXP as it looks to grow its portfolio while sticking to its core mission.
Hotels, Industrial and Beyond
In addition to expanding into residential real estate, BXP could expand into hotels (they currently own one), and industrial real estate (which they have owned in the past). Moving away from vertical expansion, they don't need to limit their geographic expansion to London and Asia, but could take a look at other international locations that fit within their model. Bottom line, with Mr. Thomas taking over as CEO BXP will bring a new set of eyes at the helm to evaluate new and old opportunities.