Highwoods Properties (HIW) Q3 2025: Net Effective Rents Surge 18%, Unlocking Embedded NOI Growth
Highwoods Properties delivered a quarter defined by robust leasing momentum, with net effective rents reaching a record high and a clear path to occupancy gains in 2026. The company’s disciplined asset recycling and focus on core growth markets is driving a multi-year earnings and cash flow uplift. Investors should watch for continued capital rotation and the pace at which signed leases convert to occupancy as key catalysts for future performance.
Summary
- Leasing Power Accelerates: Record net effective rents and strong lease signings signal pricing leverage in key markets.
- Portfolio Rotation Deepens: Strategic asset recycling is upgrading portfolio quality and future growth profile.
- Occupancy Build Drives 2026 Trajectory: Signed but not-yet-commenced leases underpin a multi-year earnings ramp.
Performance Analysis
Highwoods posted a clean quarter, with net income of $12.9 million and FFO of $94.8 million, as leasing activity remained elevated across its Sunbelt-focused portfolio. Leasing volumes topped 1 million square feet for the eighth consecutive quarter, with 326,000 square feet of new leases and expansions outpacing contractions by four to one. Net effective rents, a measure of total rent realized after concessions, reached an all-time high and are now 18% above 2019’s pre-pandemic peak, reflecting tightening supply of high-quality office space in the company’s core markets.
Occupancy ended at 85.3%, with the lease rate at 88.7%, highlighting a significant pipeline of signed but not-yet-occupied leases. Development leasing also accelerated, with 122,000 square feet signed and the lease percentage on the four completed but not stabilized projects rising to 72% from 64% last quarter. Asset recycling continued, with the accretive acquisition of the Legacy Union parking garage in Charlotte and the sale of a non-core Richmond property, funded on a leverage-neutral basis.
- Sunbelt Market Strength: Dallas, Charlotte, Nashville, and Tampa outperformed with robust leasing and rising rents.
- Embedded NOI Growth: Over 50% of $25 million core four NOI upside is now locked in via signed leases.
- Balance Sheet Flexibility: Debt maturity extension and $625 million liquidity position HIW for further capital rotation.
With strong leasing economics and a healthy pipeline, Highwoods is set up for a sustained occupancy and earnings build through 2026 and beyond, though near-term cash flows remain pressured by elevated leasing capital expenditures.
Executive Commentary
"Our second gen leasing volume was strong with several sizable new leases inked in what we call our core four operating properties that have elevated vacancy... These strong volumes have driven our lease rate 340 basis points higher than our occupancy rate at quarter end, which explains why we are so confident occupancy will rise by year end 2025 and throughout 2026."
Ted Klink, Chief Executive Officer
"Our leasing metrics during the quarter were healthy, with net effective rents the highest in our history. The strength in leasing economics combined with the embedded NOI growth in our operating portfolio and development pipeline bodes well for our long-term cash flow outlook."
Brendan Moriorana, Chief Financial Officer
Strategic Positioning
1. Sunbelt Market Focus and Diversification
Highwoods’ portfolio remains concentrated in high-growth Sunbelt cities such as Dallas, Nashville, Charlotte, and Tampa, markets benefiting from strong corporate in-migration and economic resilience. This geographic focus supports both demand stability and rent growth, evidenced by double-digit rent increases and robust absorption in these markets. The company’s tenant base is diversified across industries and geographies, reducing concentration risk and supporting long-term occupancy.
2. Embedded NOI and Occupancy Ramp
Management is executing on a playbook of capturing embedded net operating income (NOI) growth, both from the operating portfolio (“core four” properties) and the development pipeline. With over 50% of the $25 million NOI upside from core four properties already secured via signed leases, and 72% of the $30 million NOI potential from development projects now leased, the company has high visibility into a future earnings ramp as these leases commence through 2026.
3. Capital Recycling and Portfolio Upgrading
Disciplined asset recycling is central to Highwoods’ capital allocation strategy. The company is selling older, non-core, and more capex-intensive assets, redeploying proceeds into higher-quality, better-located properties within existing markets. Recent acquisitions, including the Legacy Union garage and Advanced Auto Parts Tower, were both funded on a leverage-neutral basis and are expected to be accretive to cash flow and portfolio quality over time.
4. Balance Sheet and Liquidity Management
Highwoods extended its only near-term debt maturity, pushing the next consolidated maturity to 2027 and maintaining $625 million in available liquidity. This positions the company to opportunistically execute on both acquisitions and dispositions as capital markets improve, while keeping leverage in check (debt to EBITDAIR at 6.4x, with a path to improvement as occupancy builds).
5. Operating Model Resilience
The company’s “commute-worthy” strategy—creating attractive, amenitized office environments— is resonating with tenants seeking high-quality space, as evidenced by expansion activity outpacing contractions and net expansion reaching the highest level since before the pandemic. Measured development and reinvestment, combined with targeted acquisitions, underpin a resilient business model built for long-term growth.
Key Considerations
This quarter demonstrates Highwoods’ ability to execute on multiple fronts, from leasing and development to capital recycling and balance sheet management. The company’s embedded growth profile is increasingly visible, but the timing of lease commencements and the normalization of leasing capex will determine the pace of cash flow recovery.
Key Considerations:
- Leasing Momentum Remains Critical: The pace of converting signed leases to occupancy will drive near-term earnings and cash flow inflection.
- Capital Recycling Execution: The ability to sell non-core assets at or above expectations and redeploy into higher-yielding assets is central to portfolio upgrade strategy.
- Leasing Capex Overhang: Elevated leasing capital expenditures are likely to persist into 2027, pressuring free cash flow despite NOI growth.
- Market Selection Discipline: All current acquisition targets are in existing markets, reinforcing the company’s commitment to scale and expertise over geographic expansion.
- Dividend Sustainability: While current cash flow is pressured, management’s confidence in future NOI and cash flow growth underpins the dividend, though prolonged capex could test payout ratios if leasing momentum slows.
Risks
Key risks include the potential for leasing momentum to slow, especially if economic conditions weaken or office demand softens in core Sunbelt markets. Elevated leasing capex could persist longer than expected, delaying cash flow normalization. Asset sales could be challenged by capital market volatility or buyer selectivity, and any shortfall in recycling proceeds could impact funding for acquisitions or balance sheet targets. Additionally, the office sector remains structurally challenged by remote work trends, though Highwoods’ focus on high-quality, commute-worthy assets may mitigate some risk.
Forward Outlook
For Q4 2025, Highwoods guided to:
- Year-end occupancy increase of 70 basis points at the midpoint
- FFO per share in the range of $3.41 to $3.45, up two cents at the midpoint
For full-year 2025, management raised guidance for both FFO and same property cash NOI, reflecting confidence in the occupancy build and leasing pipeline. Additional color:
- Elevated leasing capex will persist into 2027 as the company continues to refill its pipeline of future tenants
- Asset recycling activity could reach up to $500 million in acquisitions and dispositions over the next several quarters
Takeaways
Highwoods is entering a multi-year period of embedded NOI and occupancy growth, underpinned by strong Sunbelt market fundamentals, disciplined capital allocation, and a robust leasing pipeline. Execution on asset recycling and the pace of lease commencements are key variables for investors to monitor.
- Leasing and Rent Growth Stand Out: Record net effective rents and sustained leasing volumes across core markets provide clear evidence of pricing power and tenant demand.
- Portfolio Upgrade in Motion: Capital recycling is actively rotating out of non-core assets and into higher-growth properties, supporting long-term value creation.
- Cash Flow Inflection Ahead: As signed leases commence and leasing capex normalizes, investors should watch for a step-change in cash flow and earnings in 2026 and beyond.
Conclusion
Highwoods Properties delivered another quarter of operational progress, with robust leasing, record rent economics, and disciplined asset rotation. The company’s embedded growth profile is increasingly visible, but the next phase will depend on the timing of lease commencements and execution on asset recycling. Investors should monitor occupancy build and capital deployment as key drivers of future value.
Industry Read-Through
Highwoods’ results reinforce the narrative that high-quality, well-located office assets in Sunbelt markets remain in demand, even as the broader office sector faces secular headwinds. The company’s ability to command record net effective rents and sustain leasing momentum suggests that flight to quality and market selection are critical for office REITs. The deepening pool of institutional buyers and narrowing bid-ask spreads point to improving liquidity and price discovery in the office transaction market. Peers with Sunbelt exposure and a focus on core, amenitized assets may see similar tailwinds, while those with legacy or non-core portfolios could face greater challenges in capital recycling and rent growth.