Public REITs Are Positioned For Trophy Office Upside

An analyst highlights a positive outlook for high-quality office REITs, citing a bifurcation in the office sector where trophy assets in strong markets are outperforming obsolete buildings. The analyst capitalized on discounted valuations in 2023-24, achieving a 43% total return in 2024 with HIW, and has increased exposure to office REITs, particularly in Sunbelt and select coastal markets, based on leasing momentum, low supply, and return-to-office trends; however, the analyst remains underweight to the West Coast.

Analysis

The office REIT sector is experiencing a significant bifurcation, with high-quality 'trophy' assets in strong markets outperforming, while obsolete buildings face decline or conversion. This follows a substantial market correction where public office REITs saw an over 50% pullback between March 2022 and May 2023, with a market bottom forming several months later. One analyst capitalized on the subsequent deeply discounted valuations in 2023-2024, citing Highwoods Properties Inc. (HIW) as a notable success, which delivered a +43% total return in 2024. The positive outlook for high-quality office REITs is supported by current leasing momentum, generationally low new supply, and strengthening return-to-office trends, which are anticipated to drive positive earnings growth. Consequently, exposure to the office sector has been increased, with a strategic focus on Sunbelt and select coastal markets, while maintaining an underweight position on the West Coast. The analyst who authored the source article discloses beneficial long positions in HIW, BXP, Inc. (BXP), and Alexandria Real Estate Equities, Inc. (ARE).

Key Decisions for Investors

• Investors should consider targeted exposure to high-quality office REITs, particularly those with portfolios concentrated in Sunbelt and select coastal markets, given the observed bifurcation and outperformance of premium assets.
• Evaluate potential investments based on strong leasing momentum, favorable supply dynamics, and direct benefits from return-to-office trends, as these factors are highlighted as key drivers for earnings growth in the top-tier segment.
• Maintain a cautious approach towards office REITs with significant exposure to the West Coast or those holding older, less competitive assets, in line with the analyst's underweight stance and the challenges facing obsolete properties.
• Monitor specific REITs mentioned, such as HIW, BXP, and ARE, for individual performance and alignment with the broader thesis of quality and geographic focus, while noting the specific outperformance cited for HIW.