Highwoods CEO Sees End to Office Densification Trend

I'm Sarah Walks from Nareit, and in conjunction with Nareit's REITweek 2020 Virtual Investor Conference, I'm joined today by video link with Ted Klink, President and CEO of Highwoods Properties. Ted, thank you so much for joining me today.

Thank you, Sarah.

What are some of Highwoods' near-term priorities as you assess and strategize for the changing business landscape?

You know, first and foremost, our top priority is the safety of our employees and our customers. After that, we're very focused today on maintaining our liquidity and our fortress balance sheet, just given the economic uncertainty. We're also focused on really keeping our buildings open, fully operational, and safe as both Highwoods and our customers start bringing coworkers back to the office in the coming weeks and months. We're also spending a lot of time these days with our customers who have demonstrated a need for some sort of rent relief, so we're working with them to come up with solutions that can help keep them in our buildings while minimizing the financial impact to Highwoods. The management team is laser-focused on finding ways to reduce our operating expenses and our capex spend this year, and doing so in a way that doesn't really affect the operating performance of our properties. Our development team is working hard to ensure our $500 million development pipeline remains on schedule and on budget amid the crisis and some supply chain disruptions that we're seeing. And then finally, our leasing team, just given the economic slowdown, we're laser-focused on getting as many leases signed as possible, both new and renewals. So those are our primary focuses right now.

Development is a key growth driver at Highwoods. Do you anticipate having to make any changes to the pipeline going forward?

Sure. We continue to pursue development opportunities, and there are some in our markets that are continuing to progress. But we really don't plan on starting any spec developments until we get a better sense of the overall economic situation and specifically where rental rates are, where demand is, and so forth. In terms of building design, we're just starting to think about potential changes that we could make to our future development projects, but we're still in the very early days of doing that. Things that we're looking at right now are improved climate control systems that would improve air quality, potentially incorporating technologies that would allow touchless elevators or other technologies that would enable employees to avoid touching building surfaces, whether it's facial recognition, motion sensors, those types of things. But all of these things come at a cost, and I don't think we're in a hurry to design buildings if we don't know that they're going to be needed. Some of these features are going to be needed or required by our customers in the future. So I think as an industry, it's still early days from a design standpoint. We'll figure it out as we go.

More broadly, how do you expect the coronavirus crisis to change demand for real estate within your sector?

Yeah, I think it's really too early to know what the impact is going to be on the office sector. Certainly there's a lot of talk and speculation, you can see it on TV or read it in the paper every day about what's the future of office. But at this point, I think no one really knows. I think it's going to evolve over time, very similar to the densification trend that's taken many years to play out. We started hearing about densification 15 or 20 years ago, and it's just played out slowly over the years. I think it's going to be similar to this. In the short term, what we do know is that we've spoken to a lot of our customers in our existing buildings, and those customers are going into our developments and doing space planning right now. What we're generally hearing is that very few of these customers are planning any significant permanent changes to their space layouts or their space needs at this time. I think companies today are really focused on what they can do in the next 12 to 18 months to get past this crisis, and then they'll start to figure out what their real estate needs are and if they're going to change. Companies today don't want to panic and race to redo their work environments just to have to reverse it in the next year or two. So I think instead, and you're already seeing it, companies are going to delay bringing their employees back to work longer than the recommended guidelines, which I think is going to benefit both the employees, as they'll feel safer coming back later, as well as benefit the companies, as they don't have to spend a lot of capex redoing things that they might undo just a few months later. As to the long-term demand for office, I do think more companies will start allowing some of their employees to work from home for some of the time. But at the same time, I think they're going to likely increase the square footage per employee in their office space. So I think the densification trend is over, and I think it's likely going to reverse over time. As a result, the de-densification of office could easily offset the increased work-from-home trend that we may see. In terms of remote working in general, I just don't see how working from home for an entire company 100% of the time is going to be successful over the long term. I think it's very difficult to build a strong, great company culture when everyone's working remotely. I think employees and coworkers want the daily interactions, the collaboration, and the exchange of ideas on a daily basis. Younger employees want a place where they feel like they belong to a company, and they want a place they can go to where they can start to build their internal networks and relationships as they navigate how to advance their own careers. I just don't think you can get that with Zoom or Teams interacting on a daily basis. Another trend that's really been accelerating the last few years is that the workplace has really become a big retention and recruiting tool for companies. I don't see that trend ending. I think they want places where they can recruit and retain employees and have that great work experience. Finally, one other trend I do think is that the Sun Belt markets are going to see increased demand from companies relocating from the Northeast and the dense Northeast markets and the dense West Coast markets. The Sun Belt markets are less dense, we have less mass transportation issues, in addition to being a much lower cost place of doing business and a lower cost of living for coworkers and employees. The migration to the Sun Belt has been a trend for many years, but I think it has an opportunity to potentially accelerate going forward.

Ted, thank you so much again.

Thank you, I appreciate it. And let me know if there's anything else I can do to help.

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