Kilroy Realty Expects Its Office Occupancy to Keep Falling

No new developments this year, L.A.-based REIT says

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Kilroy Realty reported more unused space in its portfolio after 2023, and expects occupancy to dip further this year with large office tenants set to move out.

The Los Angeles-based real estate investment trust saw occupancy rates at its office and life sciences properties fall 6.6 percentage points to 85 percent throughout last year, according to its fourth-quarter financial report. Kilroy saw office occupancy fall in Greater L.A., San Francisco and Seattle, but increase 2.4 percentage points in San Diego.

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The firm anticipates the overall rate of the 17 million-square-foot portfolio to drop again this year to between 82.5 to 84 percent, Kilroy Chief Financial Officer Eliott Trencher said during an earnings call Tuesday. 

Kilroy completed $750 million in new development in 2023, which is largely attributable to the completion of the $690 million Indeed Tower, a 759,000-square-foot office building in Austin, Texas, which is 65 percent occupied. Kilroy’s president, Justin Smart, said the firm won’t be adding new projects to the pipeline this year.

“We do not anticipate starting any new developments in 2024,” Smart said. “We intend to continue advancing entitlements and design on all pipeline projects in order to maximize future optionality.”

Kilroy still has almost $1.1 billion in development underway, Smart added, most of which is related to the second phase of the Kilroy Oyster Point life sciences development in south San Francisco. The pipeline includes two life sciences projects totaling nearly 1 million square feet of space.

Despite the dip in occupancy, Kilroy said it signed 588,000 square feet of new and renewal leases during the fourth quarter, the highest quarterly volume in almost four and a half years. The firm finished 2023 with $551.1 million in funds from operation, but anticipates less next year: between $493.4 million and $511 million expected in FFO in 2024.

Kilroy also manages approximately 1,000 residential units in Hollywood and San Diego. Those had a quarterly average occupancy of 92.5 percent.

As anticipated, John Kilroy retired as CEO on Jan. 21, and Angela Aman assumed the role.

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.