Office landlords across the country have spent the past few years dumping properties at steep discounts in a desperation-fueled frenzy intended to get troubled assets off their books. Now, however, improving market fundamentals have meant some property owners have gained the upper hand.
West Coast landlord Kilroy Realty is leveraging those dynamics as it plans to capitalize on increased interest in markets such as Los Angeles and Silicon Valley by extending its sales pipeline. The Los Angeles-based real estate investment trust has so far this year landed deals, or is currently under contract to sell, a handful of office properties across its nearly 16.5 million-square-foot portfolio as it looks to take advantage of strengthening capital markets.
"Institutional interest in West Coast office assets continues to improve," Kilroy CEO Angela Aman told analysts on the firm's earnings call Tuesday. She added that the brightening market outlook has helped boost "every facet of our business" with factors such as accelerating leasing momentum helping to create an environment to land the best possible deals for some of the properties it has bookmarked for sale.
Kilroy's optimistic disposition outlook echoes sentiments among some of the country's largest landlords — even those with portfolios concentrated in pandemic-battered markets.
For Kilroy, that has meant over the past several months finalizing a $40 million deal to sell the roughly 79,000-square-foot office building at 501 Santa Monica Blvd., a property the REIT has owned since the late 1990s. Seattle investment firm Washington Capital Management was the buyer, according to local property records.
The landlord is also in the final stages of selling 1633 26th St., a nearly 45,000-square-foot office building in Santa Monica, California, that is expected to generate about $41 million once and if the deal closes in early 2026.
Along with the Southern California disposition plans, Kilroy is also nearing the finish line on plans to sell a four-building campus it owns in Silicon Valley. The roughly 663,000-square-foot portfolio is expected to close sometime before the end of September and will generate about $365 million in gross sales proceeds.
Additional details about the buyers' identity for either of the two pending transactions has not yet been publicly disclosed.
“West Coast office fundamentals continue to solidify,” Aman said. “We’re seeing early indications of an improvement in the transaction environment as both buyers and sellers appear more prepared to execute, an encouraging signal that market participants have greater conviction in the path of the West Coast office market recovery.”
Improving fundamentals
A rosy combination of higher cap rates and the widespread stabilization of the national office market's availability rate has not only helped lure back wary buyers across the country, but has also triggered a rapid spike in lending, with more companies willing to bet on the market's upside potential.
That trajectory has been pushed along by employers returning to the office as well as a decline in the total amount of available office space. What's more, tenants have adopted a less defensive stance to their corporate real estate portfolios, helping to drive a 10% bump in national office leasing over the back half of 2024 that has set the stage for continued momentum through the remainder of this year.
All of that combined optimism has meant a surge in commercial mortgage-backed securities loans tied to office properties to $11.4 billion in the first quarter of this year, more than triple the amount issued throughout the first quarter of 2024.
It has taken a while for many of those trends to take hold in West Coast markets such as San Francisco and Seattle, but landlords have said the renewed demand for office space and extended leasing pipelines are beginning to translate into recovery.
For Kilroy, that helped generate nearly 425,000 square feet of leases across the second quarter ended June 30, with new deals accounting for more than half of that total volume. That represents a healthy pickup from the roughly 250,000 square feet of new and renewal deals the landlord signed in the first quarter of the year, bolstering the notion executives have made that leasing activity will only continue to build.
In San Francisco alone, the landlord has benefited from the AI boom, recent return-to-office requirements among some of the city's largest employers, and a crime rate that has fallen to a near quarter-century low. These factors have created the foundation for San Francisco's office market rebound and helped the company see a 60% spike in year-over-year tour activity, Aman said.