Two of the largest U.S. office landlords are boosting their outlooks as a result of better-than-expected leasing, climbing occupancy and rental rates, the latest sign tenants are back in dealmaking mode.
Real estate investment trusts Cousins Properties and Highwoods Properties say their Sun Belt-focused portfolios, with concentrations in large cities including Dallas and Atlanta, will put their growth ahead of rivals. Both landlords raised their earnings expectations for 2025, the second time each boosted its financial outlook for the year.
"Our Sun Belt strategy, which is both urban and suburban in nature, is serving us well," Highwoods Chief Operating Officer Brian Leary told analysts on the company's earnings call this past week. "Our states are repeat best-for-business winners, our markets are outpacing the nation with higher population gains and lower unemployment rates, and our portfolio is outperforming as the beneficiary of our customers' preference for in-office occupancy."
The demand for office space has been building since the start of the year as corporate heavyweights such as Amazon, Starbucks, Dell and Salesforce push for more stringent in-person requirements. The number of CEOs who thought their companies would adopt a full return to a five-day workweek has climbed to about 85% from the 64% reported in 2023, according to a KPMG survey.
"Demand remains robust, leasing is strong, and as we believe vacancy is reaching a peak, market tightening is not far off in the lifestyle sector," Atlanta-based Cousins Properties CEO Colin Connolly told investors on Friday. "Return to office is transitioning to a return to normal."
To be clear, the office market falls into two categories: a stable and strengthening premium segment and a struggling and financially stressed lower-tier portion, regardless of location. Property owners of high-end office space have benefited as vacancy rates for the upper tier of the segment is about 13%, lower than the roughly 19% for the rest of the market, according to real estate services firm CBRE.
Rent growth
Highwood's growing optimism for the office market's broader rebound has been bolstered by a steady pickup in leasing activity, a trend the Raleigh, North Carolina-based firm's executives attribute to its concentration on Sun Belt markets such as Nashville, Tennessee; Orlando; Atlanta; and Charlotte and Raleigh, North Carolina.
The Raleigh-based landlord signed just shy of 925,000 square feet of office leases through the quarter ended June 30. New deals accounted for almost half of that, in a sign that tenants are more willing to commit and invest heavily in office space.
Highwoods reported a more than 3.5% spike in cash rent growth compared to the same time last year, a jump largely attributable to more new tenants in its total leasing volume.
"Improving in-office utilization, declining competitive supply and strong demographics, all combined with a resilient economy, are bearing fruit in our leasing activity and make us optimistic our strong performance will continue," Leary said.
It's a similar position for Cousins Properties. The landlord inked about 334,000 square feet of deals throughout the second quarter at rates about 5.5% higher than the same period last year. New or expanded agreements accounted for about 80% of that leasing volume, Connolly said, adding that Cousins' "leasing pipeline remains robust."
That momentum has created a foundation upon which Cousins has dived back into the capital markets, dropping more than $1 billion over the past nine months on major acquisitions in Atlanta; Charlotte; Austin, Texas; and most recently, Dallas. The company this month closed a $218 million deal to acquire The Link, a roughly 292,000-square-foot trophy office property in the city's Uptown area.
Positioned for growth
Other large landlords such as BXP, Kilroy Realty and Vornado Realty Trust have expressed similar sentiments.
The difference is that while those with portfolios concentrated in urban markets such as San Francisco or Washington, D.C., are still pushing against some lingering pandemic-related headwinds, those with stakes in what used to be considered secondary cities say they are in a far more solid position to capitalize on rebounding office demand.
"Charlotte, Dallas and Nashville ... All three of those markets are outperforming," said Highwoods CEO Ted Klinck, adding that momentum across its Tampa properties is also "performing very, very well."
Widespread demand for top-tier office space across the country has helped position landlords such as Highwoods and Cousins at the forefront of the market's broadening recovery. Occupancy rates for premier office properties are substantially higher than rates reported across older, less desirable counterparts.
The number of Fortune 100 companies that now require a five-day workweek in the office has soared to about 55% from 5% reported two years ago, according to a survey from real estate services firm JLL. Hybrid mandates have plummeted from about 80% to roughly 40% over the same period, and only 1% of companies continue to accommodate fully remote policies.
"We’re extremely excited about the next few years for Highwoods," Klinck said. "We’re operating in the strongest [markets] in the Sun Belt that continually have proven to be the places where talent and companies want to be."