Kilroy halts projects in Santa Monica, San Diego

Developer pauses for “all-time peak in construction costs” to pass

Kilroy Realty CEO John Kilroy and 1633 26th Street in Santa Monica (Kilroy Realty, Google Maps, Illustration by The Real Deal with Getty)
Kilroy Realty CEO John Kilroy and 1633 26th Street in Santa Monica (Kilroy Realty, Google Maps, Illustration by The Real Deal with Getty)

After calling offices the “center of the work ecosystem” and decrying remote work, Kilroy Realty CEO John Kilroy is pausing development of two key office projects in Southern California and is looking to sell up to $500 million worth of real estate.

“It makes no sense” to build in this environment, Kilroy said on an earnings call last week. “You go out and start a building when you’re at your all-time peak in construction costs and labor costs — we think those will moderate.”

The price of lumber has actually dropped 62 percent from its peak in March to $534 per 1,000 board feet. Wages and salaries for civilian workers increased 5 percent year-on-year in June, according to data from the Bureau of Labor Statistics.

Kilroy is postponing starting its Santa Fe Summit project — a 600,000-square-foot office and life science campus in San Diego — as well its plans to build a 44,000-square-foot office building at 1633 26th Street in Santa Monica. Kilroy bought the land for $25.2 million in 2014 and has already secured entitlements for the project.

“We’re ready to go whenever we want to push that button,” Kilroy said on the call, but did not detail when construction would start.

The decision to pause some developments comes as Kilroy has struggled to lease up some of its newer projects. Kilroy still hasn’t found tenants for a 235,000-square-foot office and retail project at 2100 Kettner Boulevard in San Diego, which was completed last year.

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The company also has four large lease expirations next year, though the company did not detail which firms would be leaving.

“I don’t really want to give more color,” Rob Paratte, Kilroy’s head of leasing, said in response to a question from an analyst asking for more information on the expirations.

Also, Kilroy is hoping to sell between $200 million and $500 million worth of properties through the end of 2022, though the firm hasn’t sold anything this year.

“If it doesn’t make sense to sell, we’re not going to sell,” Kilroy’s chief investment officer, Eliott Trencher, said on the call.

With interest rates rising, commercial acquisitions have dipped over the last three months. CMBS issuances dropped almost 30 percent in the second quarter, compared to January through March of this year. And interest rates are set to continue to rise over the next six months, as the Fed continues to hike its benchmark rate.

On a conference call with analysts in October, Kilroy declared “the office will remain the center of the work ecosystem” and said hybrid work would have minimal effect on his business.