Office buildings.

They’re practically a dirty word these days.

Office builders used to be the epicenter of weekday activity. Their very existence guaranteed commerce to restaurants, convenience stores, gas stations, and other surrounding businesses.

But then the pandemic struck, the shutdowns were imposed, and the world turned upside down.

The work-from-home phenomenon was supposed to last for just two weeks. Then just two more. Then it was a matter of months.

Before we knew it, a whole year had passed without workers sitting at their traditional desks.

Office buildings have struggled ever since, facing vacancy rates never previously thought possible. It’s created havoc with so many investments – and investment portfolios.

But what many people don’t realize is that the pandemic exposed an already evolving problem in the office building space… It accelerated a trend that was already taking place.

Today I’ll share what that problem is along with one significantly discounted office building opportunity that can generate consistent profits for you – even in this environment.

The Office Problem the Pandemic Accelerated

Two days ago, the commercial real estate e-letter CRE Daily proved my point, writing, “America’s offices are emptier than at any point in at least 40 years.”

According to the article, this reflects “years of overbuilding and shifting work habits that were accelerated by the pandemic.”

The plummeting of the office sector is not solely the pandemic’s fault. Overbuilding has been an enormous problem for decades.

This is especially true down South, where office attendance is much higher. There are simply too many buildings to choose from.

That’s why Houston, Dallas, and Austin – despite Texas’ continuing population and business gains – top the vacancy list.

Another issue is a shift toward smaller office spaces. Open floor plans and cubicles means less space for private offices.

As with overbuilding, this isn’t a new issue. It’s just that the pandemic accelerated the trend.

Intensely.

The latest figures out from Moody’s Analytics show that, across major U.S. cities, a whopping 19.6% of office space was unleased at year-end 2023.

That’s up from 18.8% in 2022, so it’s clearly not getting any better even as more companies are making their employees go back to work.

What profitable opportunity could be hidden in this mess?

A real estate investment trust (REIT) that’s defying the odds and still rewarding shareholders with reliable dividend payments.

A Profitable Play Hidden in the Office Space

In the past, office REITs’ corporate-sized finances and assets have helped them operate the most attractive properties. That’s been more than enough to keep them stable through previous economic issues and growing long term.

But today, even enormous NYC-based REITs are struggling to maintain their client appeal. As such, both their stock prices and ability to maintain relevant dividend payments are suffering.

And dividends are supposed to be REITs’ biggest appeal.

That’s why I believe Highwoods Properties (HIW) is a profitable play hidden in the office space.

This North Carolina-based office REIT owns 28.5 million square feet of office space. 95% of its properties are located in strong Sunbelt markets like Dallas, Nashville, Orlando, and Atlanta.

Its portfolio is only 88.7% occupied at last check. But it was able to sustain its dividend in both the Great Recession and the pandemic shutdowns.

And its balance sheet remains strong enough to warrant an investment-grade rating from Moody’s and the S&P.

Though its dividend payout admittedly only grew an annual 1.3% since 2019 and didn’t rise at all last year, it hasn’t gone down.

Right now, Highwoods is trading 33% lower than it was trading during the pandemic. And I believe it will bounce back and return to profitability with an 8% increase in annual earnings growth by 2026.

So to be clear, this is a long-term play that may look to others like a flat investment in the short term. (Highwoods’ earnings rose an average annual 7% between 2019 and 2022. But last year’s forecast is for -9%. And analysts expect -3% growth this year and -8% next year.)

But my analysis indicates it will be able to maintain its dividend going forward.

That’s important, but its current discounted price makes it even more attractive.

The office sector is still in the process of recalibrating itself as it adjusts to current supply and demand.

But I believe Highwoods shares could reach $27.50 (11.9x earnings) by the end of 2025, which would make your total return estimate 20% annually.

Now that’s a bargain deal.

It’s not all doom and gloom in the office space. If you can stick through a downturn and identify businesses that continue to grow, you’ll be able to keep your wealth growing in the years ahead.

Happy SWAN (sleep well at night) investing,

Brad Thomas
Editor, Intelligent Income Daily