Office REITs May Be The Best Value In The Market

I was lucky to catch an interview on Bloomberg early this morning while I was eating breakfast with Thomas Kennedy, JP Morgan Asset Management Head of Real Estate Strategy. What I especially liked is that he wasn’t wishy washy like so many commentators on financial TV but flat out said “The bottom is in” when talking about office.

The two data points he gave are that job postings for software engineers are up (despite all the pessimism being priced into software stocks) and San Francisco office space – the center of AI – is booming. (You can watch the interview on YouTube. Kennedy’s interview starts just before the 1:41:00 mark).

The first thing to understand is that office has been taken to the woodshed since the start of 2020 as a result of COVID, work from home and now concerns about AI destroying jobs. The four office REITs I’m going to cover in this blog – BXP, Kilroy (KRC), Cousins (CUZ) and Highwood (HIW) – are down between 40% and 60% over that time period. That has created a lot of value.

Let’s start with BXP – the biggest one with a $9 billion market cap. BXP’s office portfolio is focused on the big cities on the East Coast: Boston, New York and Washington D.C. It also has a good chunk of properties in San Francisco. BXP is trading at 8x 2026 FFO Guidance and yields 7%.

$3.7 billion market cap KRC’s portfolio is focused on the big tech hubs on the West Coast: San Francisco and the rest of the Bay Area, Los Angeles, San Diego and Seattle (plus a small exposure to Austin). KRC trades at 9x 2026 FFO Guidance and yields 7%.

$4 billion market cap CUZ’s portfolio is 2/3 Austin and Atlanta with the rest in Charlotte, Tampa, Phoenix, Dallas and Houston. CUZ trades at 9x 2026 FFO Guidance and yields 5.3%.

$2.6 billion market cap HIW’s portfolio is focused on the Sun Belt – second tier cities that are attracting a lot of people and businesses that are fleeing the high taxes and bureaucracy on the coastal blue states: Raleigh, Nashville, Atlanta, Charlotte, Tampa, Orlando and Richmond. HIW is the cheapest of the bunch at 6.6x 2026 FFO Guidance and yields 8.6%.

On page 12 of its Investor Presentation from Monday (3/2), Kilroy said that new technologies get adopted gradually. Companies need to make sure AI can do what their current processes are doing cheaper and/or better before fully committing. Adoption is therefore a slow process of trial and error as companies figure out how best to integrate the new technology. We are still early in the “experimenting” and “piloting” phase of AI adoption. “This gradual trajectory means even powerful technologies reshape labor markets over years, not days, giving employers and workers time to adapt, retrain, and shift into higher value roles.”

In sum, office real estate is cheap as worst case scenarios have been priced in while the fundamentals appear to be turning. I believe this space can double over the next 5 years.

Disclosure: Top Gun is long HIW, CUZ and KRC.