Kilroy Realty Corp.’s headquarters on Olympic Boulevard in Los Angeles
Kilroy Realty got a leasing boost in the third quarter from San Francisco’s rapidly rebounding real estate market, but it still has a large wave of impending vacancies.
The Los Angeles-based REIT signed approximately 552K SF of leases in Q3, with 315K SF of those leases renewals. That total is Kilroy’s highest-ever third-quarter performance.
Kilroy also reported that of the 1.9M SF of leases it had previously reported as expiring in 2026, it had signed renewals for all but 970K SF, giving the company a 40% retention rate.
However, most, if not all, of those remaining 970K SF are expected to move out, CEO Angela Aman told analysts on a Tuesday earnings call.
“The path forward will require a greater emphasis on new leasing activity,” Aman said. “As a result, we’re approaching the remainder of this year with a clear focus on capturing growing demand across our markets and ensuring that our assets are well positioned to outperform.”
Kilroy’s stabilized portfolio was 83% occupied and 83.3% leased as of the end of September, compared to 84.3% occupied and 85.8% leased the same time last year.
One space that Kilroy hasn’t lined up a new occupant for is the 95K SF at Hollywood’s Columbia Square that private club Neuehouse previously occupied. The entertainment industry-focused company shuttered all locations abruptly in September and filed for bankruptcy. The club will be out of Columbia Square this month.
The Neuehouse space’s interior build-out and historical significance are generating strong interest from prospective users, Kilroy Chief Financial Officer Jeffrey Kuehling told analysts.
Kilroy has a heavy presence in Los Angeles, San Diego and San Francisco, and the latter saw strong renewed interest in office space from tenants specializing in artificial intelligence. Kilroy has been a beneficiary of that, especially in the South of Market neighborhood in San Francisco, executives said. The firm closed 95K SF of new leases and renewals in that neighborhood in the third quarter.
Overall, Kilroy is seeing a shift in the market that it anticipates can work in its favor.
“One change we’re noticing in our portfolio is that there’s less demand for bargain space and more demand for impactful space,” Chief Leasing Officer Robert Paratte said.
Kilroy purchased a Class-A Beverly Hills office property called Maple Plaza for $205M in Q3. That asset has become the strongest driver of leasing activity in Kilroy’s Los Angeles portfolio, Chief Investment Officer Eliott Trencher said.
Beverly Hills has seen several outsized sales in the last year or so, with a property next to Maple Plaza selling to apparel retailer Fashion Nova for $118M in August 2024.
Executives were noncommittal about plans to buy additional properties.
On the disposition side, Kilroy completed the $365M Bay Area sale of a four-building office property to Apple it announced in July, and the company is on track to hit its goal of $150M in gross proceeds from sales, with a few land sales in progress.
“We do think we’re in a really unique window of time here where fundamentals, from a leasing perspective, are getting better across all of our markets, and we’re still early in institutional investor interest coming back to the market,” Aman said.
She added that valuations are “pretty compelling,” especially relative to other alternatives, which is helping Kilroy as it looks to sell.
Kilroy revenue reached $279.7M in the third quarter, down from $289.9M the previous year. Funds from operations were also down, hitting $130.6M, or $1.08 per diluted share, compared to $140.4M the year prior. However, net income was $156.2M, a significant increase from $52.4M the previous year.