Kilroy Realty (KRC) Q3 2026 earnings call transcript

Thanks, Marina. Good morning, everyone. Thank you for joining us, and welcome to the Kilroy Realty Corporation third-quarter 2026 earnings call. On the call today are Angela Amund, CEO, and Elliot Trencher, EVP, CIO, and Interim CFO. In addition, Rob Ferrot, EVP, Chief Leasing Officer will be available for Q&A. Please note that some of the information that will be discussed during this call is forward-looking in nature. These refer to the company's supplemental package for a statement regarding forward-looking information on this call and in a supplemental. This call is being webcast live on the company's website and will be available for replay. The company's earnings release and supplemental package have been filed on a form 8K with the SEC and both are also available on the company's website.

And with that, I'd like to hand the call over to Angela.

Thanks, John, and thank you all for joining us today. We're pleased to report on an exceptional quarter of leasing activity with not only robust steel volume, but also some of the strongest lease economics reported over the last six years. Our activity this quarter underscores the breadth and depth of the commercial real estate recovery continuing to gain momentum across our West Coast markets.

As an innovation economy and supporting ecosystem experience record growth against a backdrop of shrinking high quality availability. This dynamic has not been lost on users. We're increasingly shifting from a flexibility and optionality mindset. The one that recognizes the need to proactively plan for long-term space needs, creating a renewed sense of urgency from tenants. During the third quarter, we executed approximately 815,000 square feet of new and renewal leases, substantially all of which were long-term in nature, bringing year to date leasing volume to over 1.75 million square feet, an increase of nearly 44% versus the first nine months of 2025. During the period, all five of our regions reported sequential improvements in leased occupancy of more than 100 basis ones.

With activity well diversified across 45 separate transactions executed with an ever expanding roster of new and existing tenants, including those in the technology, AI, robotics and automation, biotech, legal, financial and professional services industries. This quarter's releasing spreads were amongst the highest reported since before the pandemic, particularly meaningful given the large volume of activity this quarter. For all comparable leases signed during the period, gap rental rates were up 30.6% and cash rents were up 9.7%. When excluding leases signed on spaces vacant for longer than 12 months, releasing spreads improved further to 37.9% and 13.9% on a gap in cash spaces respectively. It's worth noting that year to date annualized capital per square foot per second generation deals with down 2.4% relative to the same period in 2025, despite an improvement in releasing spreads of roughly 2,000 basis.

The leasing strength as quarter has further enhanced the transparency of our future growth outlook. The spread between build and leased occupancy now stands at 610 basis points, and the total sign but not yet commenced pool is now comprised of more than 1.4 million square feet of executed leases, representing nearly $101 million of contractually obligated annualized base rent or ABR.

The ABR per square foot associated with the signed but not yet commenced pool is nearly $72, approximately 22% above our current portfolio wide average. In addition, 78% of the signed but not yet commenced pool is comprised of triple net lease structures versus 54% of the existing commencements from this pool will have a disproportionately positive impact on NOI as they occur over the coming years, providing strong visibility on future bottom line growth. Importantly, despite the significance of our third quarter leasing volume, our forward pipeline further expanded during the period with total square footage represented by pipeline transactions of 20% quarter over quarter. We remain focused on quickly converting the current pipeline into signed leases and look forward to updating you on our progress as we move through the balance of this year and into 2027.

With just over 6% of our total portfolio ABR expiring between now and the end of next year, we believe this pipeline activity, combined with an improving supply demand backdrop in our markets, positions as well for further net leasing gains.

Now turning to our markets, the San Francisco Bay area continues to lead the way both in terms of executed deal volume and forward pipeline activity. As we discussed last quarter, tenant demand across the market remains robust and optionality is quickly dwindling, resulting in both a strong new deal pipeline and an acceleration of inbound requests from large tenants looking to discuss early renewal opportunities to lock in their space requirements and what is quickly becoming an increasingly competitive environment. To that end, during the third quarter, we signed a 12-year 243,000 square foot renewal with box, crossing 900 in downtown Redwood City, and highly compelling lease economics, reflecting overall strength of the sub-market and further validating our conviction in the nearby 1900 Broadway development project we announced earlier this year.

More broadly across the San Francisco market, demand from growing technology and AI companies continues to accelerate. And over the last two quarters, we have also seen a meaningful uptick in activity from robotics users, particularly in the Peninsula and Silicon Valley sub-market. In Q3, we capitalize on this growing category of demands by signing a 65,000 square foot lease with Ulysses, an oceanic robotics company, at Oyster Point Tech in South San Francisco, in space formerly leased to 23andMe. In Seattle, where we experienced our largest sequential increase in lease occupancy during the period, a 220 basis point, we continue to see improving broad-based demand from a wide range of tech, included a 28,000 square foot lease at West Dates with Morris and Forrester, an international law firm who will join an expanding list of top-caliber tenants of the project over the last few quarters.

In San Diego, our concentration in suburban markets such as Delmar continues to provide opportunities to leverage our scale to meet the evolving needs of tenants. During the quarter, we facilitated the relocation of top-tier law firm Greenberg-Prowig from 1.50 to nearby Kilroy Center Delmar or KCDM in order to double their footprint while concurrently executing a direct new deal and expansion with an existing sub-tenant at 1.50, facilitating their growth into the space that will be vacated by Greenberg. While 1.50 remains over 99% leased, we have had vacancy at KCDM, which has recently experienced significant momentum.

During the quarter, we signed a total of four new leases at the project, including the lease with Greenberg, for a total of approximately 70,000 square feet. Blended releasing spreads across all of these transactions, total 38% and 12% on a gap in cash basis respectively.

In Los Angeles, the recovery remains more nuanced and sub-market dependent. In Beverly Hills and Culver City, we continue to experience broad-based demands from a wide variety of high-quality users. At Black Welder in Culver City, we signed two new leases during the quarter with well-capitalized tech and fintech tenants, building upon other successful leasing at the project earlier this year.

And while the south-based sub-markets remain slower, we are seeing the early signs of an uptick in defense, aerospace, and advanced manufacturing demand, which could be a meaningful driver of activity in the region over the coming years. And lastly and often, Indeed Tower is now over 90% leased, following a new deal with a media company during the quarter. Although the market continues to work through the significant amount of new supply that has delivered in recent years, tended to demand remains healthy, and strong execution activity continues to chip away at the backlog of competitive space, which is translated into increased momentum at the project.

With respect to the life science sector, public and private equity capital markets remain open, and the M&A licensing and approval landscapes all remain supportive, which is translated into higher levels of activity as we've moved through 2026. During the third quarter, we signed a 49,000-square foot full building lease with a life science company at 4,400 bohannons, a building within our Menlo corporate center campus that underwent a life science conversion project that stabilized about a year ago. Life science demand at the project has been negligible since conversion delivered, but due to improvements in biotech capital markets and the tightening of high quality life science availability across the Bay Area, we saw multiple parties competing for the space during the second and third quarters, ultimately driving a strong outcome for the project.

At Kivra Oyster Point Phase 2, the momentum that we discussed last quarter was continued unabated, with ongoing active negotiations for all remaining vacancy within our multi-tenant building, and a growing list of larger potential users for our full building on the campus. Our ability to accommodate a wide range of user size requirements within both Phase 2 and future phases continues to distinguish KOP from much of the competitive set. In particular, our remaining specs we serve a material advantage as we compete for larger requirements in the market, some of which are prioritizing the near-term availability of temporary space they can occupy while they customize and build out their permanent premises. We're excited about where we stand at KOP 2 and we look forward to providing additional updates over the next several quarters.

Lastly, on investment, while Elliot will discuss our thoughts on the current transaction environment in a moment, I do want to provide a quick update on the Flowermark project, where we continue to make meaningful progress on the finalization of the amendment to our project at an informational meeting in the planning commission, receiving constructive and supportive feedback on our proposal, which is aimed at enhancing the long-term flexibility of the site.

Based on our current expectations, we now believe the process will conclude at the end of January 2027, at which time capitalization will cease. We're grateful for the city's continued engagement in this effort and look forward to reaching our remaining milestones over the next several months.

In closing, I'd like to thank the entire Kilroy team for its continued hard work, dedication, and commitment. As activity across our regions continues to accelerate, our team across all departments is rising to the challenge and bringing renewed focus, energy, and enthusiasm to our execution on behalf of all stakeholders. Elliot?

Thanks, Angela. I will start with a brief update on the transactions market and then go over our financial results and guidance. Starting with transactions, last night we announced the pending sale of our East Village land site in downtown San Diego through a residential developer for $19.5 million. This marks the fourth land sale we have put under contract and a continuation of our strategy to monetize parcels that have a higher and better use outside of office and life science. In total, we have $185 million under contract and we expect transactions to begin closing late this year. We will continue to explore opportunities to monetize additional non-core land sites as well as properties in the operating portfolio.

As it relates to property dispositions, our focus is on assets where we have maximized value, where there are anticipated capital requirements that are not a creative value. As we continue to rate disposition proceeds, we will consider all investment alternatives, including acquisitions, substantially pre-leaved developments, debt paydowns, and stock buybacks.

Turning to financial results, FFO for the quarter was $0.88 per diluted share, which includes roughly one penny of settlements and restoration fee income. Portfolio occupancy, including KOP2, ended the quarter at 76.9% down 10 basis points from the prior quarter. The strength in our leasing volume had a meaningful impact on lease percentage as we ended the quarter at 83% up an impressive 150 basis points from last quarter. Furthermore, our lease rollover between now and year-end 2028 has gone down by nearly 300 basis points.

Turning to the sign but not occupied or snow pipeline, total square footage increased to 1.4 million and ABR increased by 22 million to 101 million. The schedule on page 18 of the supplemental reflects the impact of the new leasing during the quarter as well as updated timing for deals in last quarter's pipeline. The substantial growth in ABR is a good reflection of how our strong leasing sets us up for growth in the coming years. Cached in property and OI decreased 1.5%.

Lower settlements and restoration fees and real estate tax refunds compared to the prior period resulted in a negative 170 basis point impact on same property growth. Moving to the balance sheet, in July, we elected to repay the outstanding $200 million private placement notes with cash on hand. Over the next nine months, we have three debt maturities which in total aggregate approximately 395 million at a weighted average effective interest rate of roughly 3.8%. We have over 1.2 billion of unused capacity between our line of credit and term loan that give us flexibility in addressing these maturities as we evaluate more permanent financing options in early 2027.

Turning to guidance, we revised our FFO guidance range to be between $3.55 and $3.59 with a midpoint of $3.57 of one penny from our prior estimate. The one penny increase can be broken down as follows. Add one penny from changes to same property and OI. The revised range of positive 0.75% to 1% is up 12 and a half basis points at the midpoint compared to the prior range. Drivers of the increase include earlier rent commencements and better parking revenue. Add two pennies from higher development and OI. The revised estimate assumes a $2 million improvement compared to the prior midpoint predominantly due to lower operating expenses at KOP2. Add one penny due to lower net interest expense mainly due to timing.

These factors are offset by two pennies from lower anticipated lease termination fees and one penny from higher GNA and lower non-cash adjustment.

The midpoint of the updated range implies fourth quarter FFO of 86 cents per share. To walk there from the third quarter deduct one penny for the previously mentioned settlement and restoration fee income and one penny for higher GNA. While we are not giving 2027 guidance until our fourth quarter call, we wanted to remind you of some factors that will impact earnings next year.

First, between the end of Q3 and year end 2027, leases in our snow pipeline totaling $48 million in an ABR are anticipated to come to commence, positively impacting occupancy and revenue.

Because ABR is an annualized number, you will get the full benefit of the $14 million expected to come online in the fourth quarter of 2026 and partial benefit of the $34 million anticipated to take effect in 2027.

Second, as mentioned earlier, our late 2026 and 2027 debt maturity is total approximately $395 million at a weighted average effective interest rate of 3.8%. We will evaluate options for these maturis, including unsecured bonds, bank debt, and disposition proceeds, but it is likely the forward-looking cost will be higher. Every 100 basis point increase above 3.8% as an annualized impact of roughly $4 million.

Third, as previously discussed, direct quarter of 2026 and the remaining 484,000 square feet expires at the beginning of the fourth quarter of 2027. Annual ABR for both tranches of this gross lease is $16 million or roughly $4 million per quarter. Direct TV has moved out of the 49,000 square feet and we expect them to significantly downsize or fully vacate the balance. As Angela mentioned, market dynamics in the South Bay are improving across an array of industries and to continue to explore a range of alternatives for the property as we focus on maximizing value post-leaves expiration.

Finally, as mentioned on several prior calls, we intend to stop capitalizing the flower mart at the conclusion of our process with the city, which as Angela discussed is now expected to be January 2027. The annualized impact of stopping capitalization is roughly $32 million in additional interest expense and $5 million in additional operating expenses and taxes for a total of $37 million. While speculative development does not yet pencil in San Francisco, the market is strengthening day by day and high quality office blocks are becoming increasingly scarce. We believe our process with the city when complete will create real value and position the flower mart to capture more than its fair share of demand as San Francisco continues to grow.

In conclusion, we are thrilled with the results from the third quarter. Our leasing was strong, spreads were decidedly positive, and the snow pipeline continued to expand. The tailwinds we are seeing in many markets are exciting and positioned us well for the coming years.

With that, we're happy to take your questions. Marina?

The expansion we saw in the pipeline and the totality of the pipeline at this point really is pretty rattable across all of our markets, which does mean there's a higher concentration of the pipeline and deal in San Francisco, but still roughly proportionate to the amount of square footage we have in the various markets. Like you saw this quarter with a consistent improvement in sequential lease occupancy across all of our regions. I think the pipeline sort of speaks to that broad base demand across the portfolio.

Yeah, the only other thing I'd add to what Angela said across the platform, what we're seeing is that the resurgence of larger transactions in the market and potential transactions, and that's a very encouraging sign. And, you know, particularly in San Francisco, I mean, the way I would summarize things is that sort of with Angela's that on her inner script that, you know, San Francisco is supply constrained. AI has led the record leasing that we're having in San Francisco and premium large block spaces disappearing, and that's having an impact that's positive on South San Francisco as well, which is capturing the spillover from San Francisco. So we're seeing pretty broadening life science, robotics, and R&D across our markets.

The larger transactions are really helping drive down vacancy.

Yeah, I think that's exactly right. During the quarter, you saw some fluctuations in the FAD payout ratio that were pretty directly tied to some upfront capital associated with the significant volume of activity that we executed during the third quarter. I think as you, you know, look at the FAD payout ratio going forward, you know, given that we do believe we're pretty much at drop occupancy here, we have that 610 basis points of contractually obligated revenue to come online over the coming years. I think you will continue to see quarter to quarter fluctuations in the number, but excluding, you know, one of the larger payments upfront payments that was made during Q3, the FAD payout ratio, would have been kind of in the mid-80 percent range.

I guess I would say that, you know, I don't want to predict, but I feel very strongly about the pipeline we've got and where we are in the negotiations, and I would characterize it as, you know, we're well beyond the letter of intent stage. So, you know, more to come, but we're feeling very good about the prospects we have and the depth of the pipeline both multi-tenant as well as larger users.

Yeah, I think that's exactly right. I mean, it's consistent with what we said last quarter. Last quarter, we really saw a pickup and tour and kind of proposal activity. Those deals have continued to move through the pipeline. So, while there weren't co-p2 executions in the third quarter, things have continued to move at a really healthy pace of the project.

The space we have remaining in the multi-tenant building, like we said earlier, is effectively spoken for with some of the demand we're seeing now. So, we're just trying to continue to work those deals through the pipeline and have seen more larger format deals that would take all or potentially larger components of that remaining full building opportunity on the campus.

So, I really do think that the activity we've seen from a broader life science, capital markets perspective, M&A activity in the space, I think some, you know, really important scientific milestones shown in some cases for some companies, all of it sort of led to a real improvement in the quality both the breadth and depth of the pipeline at projects like KOP2.

So, all of those factors are going to influence the kinds of returns that we're going to target. I think the best thing we can do is kind of point you to 1900 Broadway and how we approach that. And we talked about that as sort of a low to mid-9 stabilized yield on cost with a 60% previous project, so with a good quality tenant. So, I think that that's a good framework to start from, but obviously all these dynamics are going to change as market dynamics change.

Yeah, I would just add, I mean, remember the entire process we're going through with the City of San Francisco is meant to give us a lot more flexibility around phasing this project. So, instead of needing to build what was our original entitlement of 2.4 million square feet all at once, effectively, due to some of the restrictions in that original development agreement, we will be able to build this in more discrete pieces to respond to tenant demand when it really does materialize at the rate we need it to materialize that to move this project forward. And then, just hitting on the second piece of direct-TV, we are looking at a whole host of options which could include anything from leaving up the space to some sort of monetization, a partial monetization, full monetization, and we're really trying to explore as many options as we can as quickly as we can.

Yeah, Steve, it's a really good question. It's pretty early for us to understand exactly how the transaction market within our regions is really going to respond to what we're seeing from a rate environment standpoint we're watching and listening carefully for signs of what's happening to some of the deals that are out in the market right now. But it's just a bit early. All I would say is it relates to sort of the strategic direction of the portfolio and our ability to continue to upgrade the portfolio.

We're going to be active and the plan has been to be active on sort of both sides of the equation, right? So we can even at a higher rate environment sell properties and either require properties, also at better commensurately better pricing or execute on debt paydowns or buybacks, all of which may be a bit more attractive given the environment. So I think the business plan overall is balanced and actually allows us to continue to execute on our strategic goals even in a more dislocated transaction environment.

Hey, Steve, it's Rob. I'll tackle that one. You know, again, I'd like to focus on the markets that we operate in and not the broader LA market for a variety of reasons and primarily because there are projects. But when you look at Century City, vacancy now is at 15% in Century City and trophy quality product is at 9%. And that's having a real direct impact on our leasing at Maple Plaza where we're really having great success.

It's also having a spillover effect in Culver City where you're seeing leasing activity that Angela mentioned in her script. In fact, Culver City posted 129, almost 130,000 square feet of positive absorption in the quarter. So that's a very promising market. The west side, you know, on that the west side is muted and there are, you know, just a variety of factors that are driving that kind of slower market. But we are seeing more tour activity and so more to come. But I think, you know, what we're really happy with is the performance in Culver City Long Beach is actually a pretty busy project for us on a weekly basis. And we also have some activity in our Hollywood project at Columbia Square.

So, Blaine Nizelli, there is a chance of a renewal in some form. I think the way we characterize it is expect a full vacate or a meaningful downsize. But we are trying to say there is a possibility that they stay in some capacity. On the second part of your question, I think that's the process that we're working through right now. And, you know, I think we're open about what the pluses and minuses are about that market. And we're trying to make an assessment of not just how much capital it would require, but what sort of ROI would anticipate if we were going to spend that capital. So, more to come, but I think suffice to say that if that is the path we take, it's because we get comfort that there is an acceptable return of spending capital to enhance and redevelop that property.

Yeah, I mean, I'll take it. And Rob, we'll jump in if he wants to put on any additional color. I just say, you know, we're very reticent to speak about deal economics on an individual tenant perspective. We did say in our prepared remarks, we thought the least economics here were highly compelling for the company and for our shareholders, but pretty consistent with what we've talked about in the past, in terms of other space we've leased at crossing 900 over the last few years, and certainly, you know, the rent comp that was set by us, the Cooley lease at our 1900 Broadway Development Project. We've been very enthusiastic about, you know, the stability that that downtown Redwood City submarket has experienced over the last 10 or 15 years.

The fact that occupancy has stayed pretty high, especially at projects like crossing 900, and that you've seen pretty consistent rent growth. So I think this was a crystallization of the fundamentals we've talked about in downtown Redwood City over the last, you know, couple of years.

Yeah, it's still early. I think for some of the later in the year, explorations, the teams in conversations on many of them. So, you know, over the next quarter or two, we'll have a much better sense. My sense in 2027, you know, we talked about this before, there's the direct TV exploration. There's another, you know, under 100,000 square foot, we call it 80 to 90,000 square foot exploration in Long Beach to the tenant that was about double that size and chose to vacate the project to own their own building. And so they already vacated that first tranche and the second tranche expires in 2027. Outside of that, all the part of why it's just a little bit early to talk more specifically about what that looks like.

I think in totality, you know, you're still probably going to be just if you look at the 2027 explorations a bit below the company's kind of pre-pandemic average in the 40 to 50 percent range, but again, it is early to tell. And the two things to think about here is, you know, that can be true on the pool of 2027 explorations as we laid out in the supplemental, but we also highlighted and you sort of saw it play out this quarter in particular, the dynamic where we have early renewal activity from 28 or beyond that's going to improve the retention ratio as reported in the supplemental in any given quarter. And we're certainly seeing a lot of that activity, particularly in the San Francisco Bay area with tenants sort of appreciating how quickly availability and optionality are tightening up and approaching us about potential early renewal activity.

So retention of the 2027 pool is one thing, but do expect you're going to see kind of an improved, you know, profile from a reported standpoint of some of those early renewal occur.

Yes, I mean, for the existing multi-tenant building where we have spec suites that are built out, you know, depending on the tenant we're talking to and what their requirements are, there's certainly an opportunity to get revenue turned on more quickly in that building as we get leases executed over the coming quarters. That full building opportunity is, you know, in shell condition. So leases that are signed in that full building opportunity are going to take more time to build out, but we'll know more as we execute with specific tenants and understand what their space planning needs and design needs are.

Anthony, it's Rob. I'll tackle that. You know, what we're seeing, particularly in San Francisco, is that there's a real constraint in terms of what robotics companies need versus the space that's available because it is pretty specialized space. So that is why I made the comment earlier that we're starting to see a spillover effect into KOP. However, the robotics companies we're talking to at KOP are related to life science, but you also have a wide swath of automobile related robotics, battery creation of new types of batteries and things like that. And so, you know, we think we're watching it very carefully. And it's almost identical to what happened with AI starting out a couple of years ago.

It's just accelerated. Right now, there's about 500,000 square feet of AI flash robotics. And when I say AI, I mean, directly related to robotics. There's a lot more demand for just pure AI. There's about 500,000 square feet looking for space in San Francisco. And, you know, our 100 Hooper project can address a lot of that because we do have PDR space, which is designed for that kind of use. I just said, we're also seeing some of that robotics demand in the South Bay and in Los Angeles, where, you know, you've got sort of a concentration of aerospace and defense and those kinds of other uses. So there are definitely corollary robotics demands that you're seeing, you know, pop up amongst those companies and to help service those companies also.

Hey, Tony, it's Elliott. I think that while it's reasonable to point to an elevated rate environment as increasing risk, there's nothing that we've seen from our discussions with all the counterparties that we're working on, those transactions to suggest that the risk is any higher tonight.

Sure. Hi, Caitlyn. It's Rob. The first comma I'll make is that our cross-sock form, our leasing team, is unparalleled. And that's largely the result of what you're seeing in terms of the 800 plus 1000 square feet of leasing that we've done. Every region is actively engaged in negotiations. And I feel like the pipeline we've got for the large deals that we signed in in the quarter. We're starting to see large deals again come up in the fourth quarter. So I'm really confident between our life science leasing as well as our office leasing in terms of just the pipeline itself. And it continues to actually grow. So without being real specific in terms of numbers, hopefully you can hear it in my voice.

We're pretty confident about what the future holds.

Yeah, I'd say a couple things just to add to what Rob said, all of which I agree with. The pipeline is, you know, the majority of the pipeline is on the New Deal side, which you would expect based on our early comments about retention in 26 and 27. Certainly some early renewal type activity in the pipeline as well. But it is primarily on the New Deal activity side. Again, pretty broad based and spread out across the regions and kind of ratable based on our concentration in the different markets. So that's exciting. The only thing I would say, you know, I think it's great given the 815,000 square feet sign during the quarter to see a 20% expansion in the pipeline.

I think as you would expect, the pipeline is a bit earlier staged right now, given how much of the later stage deals going into the third quarter were executed. So feeling really optimistic about what we're seeing, the continued conversations we're having, we have not at this point seen, you know, any impact negatively, you know, in the pipeline or otherwise in the transaction market related to the increase in rates or, you know, any broader macroeconomic concerns. So, you know, we feel good about continuing to progress things through how that looks on a quarter to quarter basis. We'll see. Stay tuned.

Hey, Caitlin, it's Elliot. We're looking at a bunch of things. I think that as you can imagine, there's a range of opportunities out there, some interesting, some less interesting. And it's really about picking and choosing spots where we think we can create value. We think that we see something that maybe other people don't see or we have some sort of competitive advantage that we can bring to the table. And we found some of those opportunities last year. And we'll see how the rest of the year plays out. But we're certainly spending some time on it.

No, definitely. I mean, tenants are having to look at a broader range of options that's south of moisture point. So North Peninsula does quite well because it is, you know, there are amenities there and, you know, it's not as robust a life science market as moisture point is, but definitely seeing tenants looking throughout. In fact, Silicon Valley, a lot of robotics uses that are really heavy manufacturing or related R&D are, you know, are in South Silicon Valley where the opportunities are because, you know, there's a lot of R&D buildings down there.

Right. As I said earlier, it's all life science. You know, we do have an AI, you know, there are AI users, but they're related to life science, as I said earlier. And that's really becoming a broadening tenant-based AI, building with life science, speeding product to market is the goal.

So AI right now in San Francisco itself is roughly about 40% of the demand. And so there is a lot of demand from, you know, law firm and fire category tenants. So the city, as I've said on previous calls, the city has a pretty balanced tenant mix, even though AI has, you know, gotten all the headlines.

Yeah, I think of your question specifically on what we're seeing from some of the more traditional big tech users. Obviously, there's a lot of overlap now in terms of where they might be growing space needs, you know, tend to be user groups that would be focused on some of their AI initiatives as well. But that's really what we've seen over the last couple of quarters. I think it was last quarter. We talked about one of the big tech firms pulling a significant amount of space off the sublease market in Silicon Valley. We definitely seen that happening and that same big tech company looking for some pretty significant additional new space in the city of San Francisco, not to replace space in the valley, but really to continue to grow and expand and, you know, have a home for other components of their talent base.

So we've continued to see, you know, when we talked about over the last several quarters, a bit of a disconnect between some of the headlines around, you know, hiring and headcount at some of the big tech companies and what their actual space needs are at this point in time that's become a bit dislocated. And we've just seen that trend continue, certainly layoffs across the big tech ecosystem have have abated over the course of last few months in the third quarter. I think they were lower, but we have continued to see, you know, sort of space needs and expansion kind of across our regions as a result.

To add a little bit to what Angela said, you know, just some statistics, I guess, right now, there are 31 requirements over 100,000 feet in San Francisco. Of those 21 are AI companies and institutional quality, which I think is really an important thing to note because the quality of the tenant, even though there's been a lot of AI startups, the quality and institutional level AI interest is really burgeoning. And you know, with what we're tracking and the deals that are in the market right now, 100,000 square foot opportunities for tenants could fall by as much as 50% over the next two quarters. So things are very dynamic and changing really rapidly in San Francisco and therefore the other Bay Area markets.

Yeah, it continues to evolve. I would say kind of across the board, office utilization is improving, you know, even still on the margin with the tenants that have been back in office. I think you're saying, you know, not just requirements, but but interest in being back in the office kind of improved across a lot of the markets. When we look at the statistics for our own portfolio, especially in markets like the San Francisco Bay Area, you know, utilization appears to be improving. In some cases, significantly, as we had, you know, certain leases that were on the sublease market where the existing tenants weren't actually occupying the space that are now being effectively sublet by tenants that are bringing employees back into the space.

So I think there's a lot of healthy underlying dynamics, but it is kind of across the board. AI companies, particularly in San Francisco Bay Area, continue to be want to be in office and are in office four to five days a week. And so that really has driven a lot more foot traffic kind of across the CBD market and definitely encourage other tenants and other asset classes to kind of bring people back as well.

Definitely. I mean, we're already seeing it thus far asking rents in San Francisco are up 7% from order and it's it is a tightening market, but again, it's a very bifurcated market. There's some space that hasn't transacted for more than five years and that space is not in the competitive pool. If you look at our class A vacancy in San Francisco, it's 15% for the type of product that Kilroyo owns. And as I've said and Angela said also, opportunities are dwindling quickly. So tenants are having to be pretty focused on, you know, what their space needs are and where they're going to locate.

Yeah. So I think it's going to vary a little bit based on the project and the scope and the size. You're probably somewhere between, you know, 13 and 1,700 a foot depending on the specifics. And then, as we talked about earlier, depends on what your return threshold is. But I think if you use that 1,700 square foot range, that'll give you a sense of where replacement rents need to be. You're talking about still call it 20 to 40% rent growth from where we are today relative to where in place second gen rents are. But as we've talked about in the past, second gen rents don't need to get there in order for it tenant to say they're willing to pay a premium to be in a first gen property.

So I know that's a lot of different dynamics, but that's how we're thinking about it.

Yeah, it's primarily mixed related. As we look at the portfolio, there hasn't been necessarily an intention to try to move different markets that may have different conventions in terms of growth versus lease to net leases. But given where the activity has been, some of the projects it's been at and where the pipeline, the sign, but not yet, commence pipeline is, it really does reflect more mix. That doesn't negate the point that as that space comes online, not only do you see the over $100 million of contractually obligated based rent, there's also going to be a nice pickup in recovery income associated with those leases. We just want to make sure that people don't miss as they think about the economic power and the N. O. I. generating power of that time, but not commence pipeline.

Well, the original project was 2.4 million square feet of office. So this was originally contemplated as an entirely or nearly entirely office focused project. The process we've gone through with the city over the last few years has really been oriented around sort of realizing more flexibility and optionality on the site without committing ourselves to one specific plan. And that has been intentional given, you know, sort of the volatility you traditionally see in the San Francisco market. And the belief we had, even going back a few years, that we could go through a re-entitlement process for a specific plan, whether it's a specific mix between resi and office or a full residential entitlement plan, only to get to the end of that process and realize the original office plan may have in fact been the best one.

So we've left ourselves, I think, with a lot of room to really be responsive to market dynamics and the way that things are improving, and they are improving on both the commercial side and the residential side. Both still, to Elliot's earlier point, neither residential nor commercial pencils today, but that gap does continue to close quarter in and quarter out. And so we're just watching and being very mindful about that evolves over the coming months. But until we get closer on one of those things, or until we have, you know, a significant office tenant, you know, sort of appear and want to pay the kind of rent that we'd kick off a substantially pre-leased component of that development project, we're going to be in a bit of holding pattern as we wait to assess which of those two uses or potentially other uses is actually going to make the most sense on the site.

Yeah, I'll just make a global comment and Rob will jump in on a specific field perspective. But I would say, you know, it's important to kind of look at the TIs and LCs, not only on a per square foot per year basis, but really over longer timeframes. You're going to have fluctuations in any one quarter. And, you know, here are the remarks. If you look at the annualized TINLC per square foot for all year-to-date activity relative to the same period in 2025, we're actually down to almost two and a half percent, even though spreads are materially better than they were during that same year-to-date period last year.

But Rob. Hi. What I'd add to that is that just on a deal-by-deal basis, it's going to depend, you know, on the condition of the space. It's shell space, for example, at KOP or as a, you know, second-generation space. And one thing I would say across our markets, mostly other than LA, I guess, I think that we're having a lot more leverage, both in terms of rent and as well as tenant improvement packages. So, particularly in San Francisco, we're focused on that.

Yeah, I think we're reluctant to comment on any tenant in particular. You know, what I would say is just point back to the commentary we've given a couple times on this call that certainly in the San Francisco Bay area, given what has been a pretty quick tightening up of some of those larger availabilities that were in the market. We're definitely having, across the board, more early renewal conversations with tenants as they think about, you know, that flexibility and optionality they might have felt was important in a market that was in decline, sort of shifting to one where people are very focused on making sure that they have the ability to ensure their future space needs, given the tightness of the market.

Yeah, I think the process is going really, really well. We're excited about the quality and the caliber of candidates we're seeing, the interest in joining the team and all the exciting things that I think are going on here at Kilroy. So I feel really good about sort of where the search is at and how things are trending. We're very well supported on the finance and accounting side. Ellie, it's done a tremendous job in stepping back into the inter-M CFO role. Shawnee Delaun, our chief accounting officer, stepped up in a really meaningful way that I'm very grateful for. But the entire accounting and finance team have just really done a great job through this transition. And I think we haven't missed a beat at all.

So I feel really good about that and where we're at. Jeffree's departure, you know, was Jeffree had a really great skill set in depth in a lot of data analytics and, you know, the way information moves across the organization. And the work he did over the first couple of years that he was here provided us with a tremendous amount of additional visibility on our business. And, you know, analytics that really do help drive better outcomes across the board. And I'm incredibly grateful for everything he contributed while he was here. At the same time, you know, we collectively kind of evaluated the needs of this role going forward and decided together that, you know, it was time for a transition.

So again, really excited about the candidates we're seeing, believe given the strength and depth on the finance and accounting side of this team. Well, we obviously want to move as quickly as possible. We also really do have the ability to be methodical with this search process and make sure that we find the best possible candidate for the organization.