Highwoods Properties: A Beacon of Resilience in the Office REIT Doldrums?

Amid widespread skepticism about the future of office spaces, Highwoods Properties (NYSE: HIW) has emerged as a contrarian candidate for investors seeking to capitalize on a potential stabilization of the commercial real estate sector. The REIT's Q2 2025 leasing momentum, geographic focus, and resilient rent growth metrics suggest a strategy that may outperform peers in an environment where many office REITs face headwinds.

The Case for Office REIT Resilience

The office sector's struggles are well-documented: hybrid work models, remote办公 adoption, and oversupply concerns have pressured occupancy rates and rents. Yet Highwoods' Q2 performance highlights pockets of demand in strategically located markets. The company reported over 750,000 square feet of second-generation leases signed since April 1, including 300,000 square feet of new leases, underscoring strong tenant retention and expansion activity. CEO Ted Klinck emphasized that demand remains robust in Highwoods' “Best Business Districts” (BBDs), such as Raleigh, Nashville, and Tampa—markets with 1.7% annual population growth and 3.6% office employment growth since 2010, far exceeding national averages.

Key Metrics Signal Stabilization

While Q2 occupancy rates were not disclosed, Highwoods' 88.1% occupancy as of March 2025 and its leasing pipeline suggest further improvement. Rent growth remains a bright spot: net effective rents are 5% above 2019 levels, driven by premium pricing in BBDs and lease terms averaging 5.3 years. This contrasts with broader office markets where shorter-term leases and concessions are common. Notably, tenant expansions outnumbered contractions by 3:1 in recent quarters, a sign of enduring demand from businesses that value centralized workspaces for collaboration.

Geographic and Portfolio Strengths

Highwoods' focus on Sunbelt markets—including Atlanta, Dallas, and Orlando—is a key differentiator. These regions have minimal office construction pipelines (e.g., Raleigh's pipeline is empty for the first time since 2011), reducing supply-side risks. The REIT's portfolio also boasts well-diversified tenants, with no exposure to WeWork and minimal reliance on co-working operators. Top tenants account for just 21.9% of revenue, minimizing concentration risk.

Strategic capital recycling further bolsters resilience. The recent acquisition of Raleigh's Advance Auto Parts Tower ($138 million) exemplifies this: a 100%-leased, LEED-certified asset in a prime BBD with below-market rents poised for growth. Simultaneously, non-core Tampa assets were sold for $145 million, sharpening portfolio focus.

Catalysts vs. Risks

Catalysts for Growth:
- Embedded NOI upside: $55 million in potential growth from underperforming properties and developments.
- Development pipeline: $474 million invested in 1.4 million sq ft of projects, 63% leased.
- Dividend sustainability: A $2.00 annual dividend (6.7% yield) is supported by a $712 million liquidity cushion and a conservative 6.4x net debt/EBITDARE ratio.

Risks to Consider:
- Economic sensitivity: Tenant defaults (e.g., Tivity Health's Nashville lease negotiations) and broader recession risks could pressure occupancy.
- Market sentiment: Pessimism about office demand may keep multiples compressed despite operational strength.
- Lease rollover challenges: Over 25% of leases expire by 2026, requiring proactive tenant retention efforts.

Is This a Contrarian Buy?

Highwoods' Q2 leasing activity and geographic advantages suggest it could outperform peers if office demand stabilizes. At a P/FFO multiple of 10.5x (vs. its 5-year average of 13x), shares appear undervalued relative to its growth profile and balance sheet strength. The 6.7% dividend yield offers further downside protection.

However, investors must weigh risks: a recession or prolonged remote work adoption could test the REIT's occupancy assumptions. A cautious approach might involve a gradual build-up of positions, with a focus on Highwoods' upcoming July 29 earnings report for clarity on occupancy trends and lease renewals.

Final Analysis

Highwoods Properties presents a compelling contrarian opportunity for investors willing to bet on the resilience of high-quality office spaces in growth-oriented markets. While risks remain, its disciplined capital allocation, strong balance sheet, and Sunbelt focus position it to navigate challenges better than many peers. For income-oriented investors seeking a leveraged bet on office sector stabilization, HIW merits consideration—if priced right.

Investment Takeaway:
- Buy: For investors with a 3–5 year horizon willing to accept office sector risks for dividend yield and potential multiple expansion.
- Hold: If near-term economic uncertainty or earnings misses temper enthusiasm.
- Avoid: For those skeptical of long-term office demand or unable to stomach REIT volatility.

Stay tuned for the July 29 earnings call, where occupancy rates and lease renewal metrics will be key to validating this thesis.