Kilroy sees comeback for SF office

Points to lower availability rate as general indicator but reports no lease deals in city

San Francisco /
May.May 02, 2022 08:30 AM
Kilroy Realty's John Kilroy and Indeed Tower in Austin (Kilroy Realty)
Kilroy Realty’s John Kilroy and Indeed Tower in Austin (Kilroy Realty)

Count Kilroy Realty as a steadfast fan of San Francisco as an office center even if the city hasn’t contributed much to the company’s bottom line lately.

Kilroy’s head of leasing, Robert Paratte, reassured investors on an April 28 earnings call that the San Francisco office market is coming back to life — even as total office availability hit 29 percent in the first quarter, according to CBRE.

“Sublease space has dropped to about 6.5 million feet from a high of 9.4 million during the pandemic,” Paratte said. “So we’re seeing a good uptick in activity in the street.”

Kilroy did not report any lease deals across its San Francisco properties, and Paratte acknowledged that the market has yet to see “big tech making big moves” to bolster the trend.

“Traffic is up–public transportation is more crowded,” Kilroy CEO John Kilroy said the earnings. “Cities are cleaning up and starting to feel more vibrant. Many of our largest customers started returning to the office in recent weeks, the effects of which are tangible in our markets.”

Los Angeles-based Kilroy reported $59.3 million in net income from January through March — a 25 percent increase from the prior quarter, Kilroy said in an earnings release this week. The company also reported $1.16 per share in funds from operations, up from $1.05 in the fourth quarter of last year.

Despite the jump in profit, occupancy across Kilroy’s portfolio dipped slightly by almost 1 percent. Around 91 percent of the company’s real estate was occupied in the first quarter.

Kilroy signed 183,000 square feet of new leases and renewals in the first quarter, including a sizable deal in the Bay Area, where robotics and delivery vehicle maker Nuro signed a 114,000-square-foot lease renewal and expansion at 1290 Terra Bella Avenue in Mountain View. Nuro previously leased 56,000 square feet at the building.

The deal accounted for just under half of the new leases and renewals Kilroy signed in the fourth quarter, according to the company, which said in its “late-stage negotiations” to lease more than 350,000 square feet of office space.

Kilroy is betting on continued demand for life science space, especially in San Diego. The company started construction on two redevelopments in the California market — a 209,220-square-foot property in Del Mar and a 47,800-square-foot building in University City.

About 30 percent of the company’s total net operating income could come from life science projects, Kilroy said on the earnings call.

On the heels of the company’s $580 million acquisition of the 36-story Indeed Tower in Austin, Kilroy also bought three acres in the Texas city for $40 million, with plans to build 493,000 square feet of new office space. Kilroy said the firm plans to spend $700 per square foot on that development.

Kilroy is still looking to expand in Austin, the CEO said on the earnings call.

But the firm still hasn’t fully leased Indeed Tower. Around 254,000 square feet — 35 percent — of the building is currently available for lease, according to CBRE’s online listing of the property.





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