Highwoods Properties (HIW) Q2 2025: Signed Leases Lock In $33M Future NOI Upside
Highwoods secured over 60% of its $55 million embedded NOI growth opportunity with signed leases, positioning the Sun Belt office REIT for a multi-year occupancy and earnings uptrend. Leasing momentum, disciplined capital recycling, and limited new supply are converging to drive future rent growth, even as near-term occupancy lags from proactive space takebacks. Management’s confidence in the embedded growth trajectory is reflected in another FFO guidance raise, with capital markets and tenant demand both showing incremental improvement.
Summary
- Leasing-Driven NOI Upside: Highwoods has locked in over half its targeted NOI growth with signed leases not yet contributing to results.
- Sun Belt Portfolio Outperformance: Core markets like Nashville and Dallas continue to deliver above-average demand and absorption.
- Forward Earnings Visibility: Large lease-to-occupancy spreads set the stage for steady earnings and occupancy gains through 2026.
Performance Analysis
Highwoods delivered another quarter of robust second-generation leasing, with 920,000 square feet signed, including 370,000 square feet of new leases, signaling continued tenant demand across its Sun Belt BBD (Best Business District) portfolio. Occupancy held steady at 85.6%, while the lease rate improved 80 basis points to 88.9%, reflecting the company’s strategy of proactively taking back and re-leasing space to higher quality, long-term tenants.
FFO guidance was raised for the second consecutive quarter, with management citing $0.04 of incremental NOI upside offsetting $0.02 in non-property-level headwinds. Over $33 million of the $55 million embedded NOI growth from core and development assets is now secured with signed leases, though much of this upside will not materialize until late 2025 and 2026 as leases commence. Leasing commissions and TI (tenant improvement) spend remain elevated, reflecting the high volume of new deals and continued investment in portfolio quality.
- Leasing Volume Resilience: Second-gen leasing volumes have remained elevated for several quarters, supporting a steady occupancy build.
- Embedded Growth Not Yet Realized: A significant portion of signed lease NOI will flow through in future periods, underpinning forward earnings visibility.
- Expense and Timing Dynamics: Proactive space takebacks and delayed lease commencements are creating short-term occupancy headwinds but de-risking future rollover.
Highwoods’ balance sheet remains robust, with a debt-to-EBITDA ratio of 6.3x, $700 million in liquidity, and limited near-term maturities, providing ample flexibility to capitalize on acquisition and disposition opportunities as capital markets thaw.
Executive Commentary
"We have forecasted $25 million of annual NOI upside just from stabilizing these core four. After our lease and performance this quarter, we now have 50% of this upside scotched with leases and we will have strong prospects for another 20%."
Ted Klink, Chief Executive Officer
"In total, these eight properties have over $55 million of annual NOI growth potential above our 2025 outlook. We have locked in over 60% or more than $33 million of this upside with leases that have been signed but are not contributing to 2025. Plus, we have strong prospects for another $9 million."
Brendan Mayorana, Investor Relations
Strategic Positioning
1. Sun Belt BBD Focus Yields Defensive Growth
Highwoods’ portfolio concentration in high-growth Sun Belt BBDs, such as Nashville, Dallas, Charlotte, and Tampa, is yielding above-average leasing activity and absorption. These markets benefit from demographic tailwinds, business in-migration, and limited new supply, with North Carolina, Texas, Florida, and Virginia ranked as top states for business. The company’s BBD strategy emphasizes both urban and suburban nodes, capturing a broad range of tenant demand.
2. Embedded NOI Growth Pipeline Provides Multi-Year Upside
Highwoods’ “core four” assets and recent development deliveries together represent $55 million of annual NOI growth potential, with over $33 million already secured via leases not yet in occupancy. This lease-to-occupancy spread is at a multi-year high, setting up a steady cadence of earnings and cash flow growth through 2026 as leases commence and developments stabilize.
3. Capital Recycling and Asset Upgrading Remain Central
Management continues to rotate out of older, capex-intensive properties and into higher-growth, capital-efficient assets, with $150 million of dispositions targeted this year and additional assets in the market. Acquisition opportunities are improving as capital markets reopen, with the bid-ask spread narrowing and higher-quality assets coming to market, though any deals would likely close late in the year or in 2026.
4. Leasing Economics and Supply Constraints Drive Rent Growth
Net effective rents are rising, as concessions have peaked and are now declining in several strong submarkets. Limited new construction and record-low pipelines are expected to drive a “slow squeeze” on available high-quality space, supporting future rent growth and reducing competitive supply pressure.
5. Tenant Demand Diversification and Retention Dynamics
Leasing activity remains diversified across professional services, financials, healthcare, and manufacturing, with expansions outpacing contractions nearly three to one. Retention rates are expected to normalize at 45-50% for the next 18 months, higher than recent history, as the company has worked through major known move-outs and is now positioned for net occupancy gains.
Key Considerations
Highwoods’ Q2 results reinforce the company’s thesis that Sun Belt BBD exposure, disciplined capital allocation, and embedded NOI growth provide a durable foundation for future earnings and valuation upside. However, the timing of lease commencements and continued elevated leasing capex will be critical watchpoints as the cycle unfolds.
Key Considerations:
- Lease-to-Occupancy Spread at Multi-Year High: The 330 basis point gap between lease rate and occupancy is double the historical average, signaling future occupancy and earnings growth.
- Capital Markets Reopening: Improved debt and equity market conditions are bringing higher-quality assets to market, potentially accelerating portfolio upgrading.
- Development Pipeline Stabilization: Recent deliveries in Dallas and Tampa are 59% and 40% leased, respectively, with strong prospects for additional absorption.
- Expense and Capex Management: Elevated TI and commission spend will persist as leasing volumes remain high, but are not expected to spike materially above recent levels.
- Portfolio Rotation and Disposition Execution: Success in executing $150 million of targeted dispositions, including potential market exits like Pittsburgh, will impact long-term growth and capital flexibility.
Risks
Highwoods faces risks from the timing of lease commencements, as delays can defer NOI realization and occupancy gains. Market rent growth is dependent on continued demand and limited new supply, both of which could be impacted by macroeconomic slowdowns or shifts in remote work trends. Elevated leasing capex and commissions, while supporting growth, may pressure cash flows if leasing volumes slow or if new deals require higher incentives in weaker submarkets.
Forward Outlook
For Q3 2025, Highwoods guided to:
- Occupancy near the low end of the 86% to 87% year-end range, due to proactive space takebacks and delayed lease commencements.
- Continued elevated leasing capex and commissions as occupancy builds.
For full-year 2025, management raised FFO guidance to $3.37 to $3.45 per share:
- Embedded NOI growth from signed leases expected to drive results in 2026 and beyond.
Management highlighted several factors that underpin confidence in the outlook:
- “We remain optimistic we’ll see the lease rate and occupancy levels increase by the end of the year.”
- “We expect all of the leases signed to date to commence by late 2026, which gives us confidence about the trajectory of earnings and cash flow as we move into 2026 and even into 2027.”
Takeaways
Highwoods’ Q2 performance validates its Sun Belt BBD strategy, as embedded leasing gains and disciplined capital allocation set the stage for multi-year growth.
- Embedded NOI Growth: Over $33 million of future NOI is locked in via signed leases, providing strong forward visibility.
- Capital Recycling and Upgrading: The company remains active in rotating out of slower-growth assets and is poised to capitalize on improving acquisition opportunities.
- Watch Lease Commencement Timing: The pace at which signed leases translate to occupancy and earnings will be the key driver for valuation and cash flow realization in 2026 and beyond.
Conclusion
Highwoods is executing on its Sun Belt BBD strategy, turning robust leasing into future NOI growth and steadily improving portfolio quality. The company’s embedded growth drivers and balance sheet strength provide a durable foundation, though execution on lease commencements and capital recycling will be critical to realizing the full earnings potential.
Industry Read-Through
The Sun Belt office market continues to outperform coastal peers, with demographic and business migration fueling demand for high-quality space. Limited new construction and rising replacement costs are setting up a supply-demand imbalance that should favor landlords with well-located, amenitized assets. Other office REITs with embedded lease-up pipelines and Sun Belt exposure are likely to see similar multi-year occupancy and rent growth tailwinds, though success will depend on disciplined capital allocation and the ability to manage leasing capex as volumes remain high. Capital markets are gradually reopening, suggesting a window for strategic acquisitions and dispositions is emerging for well-capitalized owners.