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Are Dividend-Paying Office REITs Finally Staging A Comeback?Kilroy Realty NYSE: KRC reported second-quarter funds from operations of $0.92 per diluted share and said leasing conditions continued to improve across its West Coast office and life science markets, supported by stronger tenant demand, reduced high-quality space availability and expanding renewal discussions.
CEO Angela Aman said the company executed about 376,000 square feet of new and renewal leases during the quarter, bringing first-half leasing volume to roughly 944,000 square feet, more than 40% above the comparable period in 2025. For comparable leases signed in the quarter, GAAP rental rates increased 21% and cash rents increased 6.1%.
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Excluding space that had been vacant for more than 12 months, GAAP and cash re-leasing spreads were 27.3% and 15.6%, respectively. CFO Jeffrey Kuehling said it was the first quarter in nearly two years in which both GAAP and cash re-leasing spreads were positive.
Signed Pipeline Supports Future NOI Growth At June 30, Kilroy had more than 1 million square feet of signed but not yet commenced leases, representing more than $78 million of annualized base rent. The annualized base rent per square foot in that pool exceeded $75, about 30% above the company’s current portfolio-wide level, according to Aman.
Further, 86% of signed-but-not-commenced leases use triple-net structures, compared with 53% of the existing portfolio. Aman said the lease mix should provide a disproportionately positive contribution to net operating income as tenants commence occupancy.
Portfolio occupancy, including Kilroy Oyster Point Phase 2, was 77% at quarter-end, down 60 basis points sequentially. Kuehling said occupancy was affected by two previously disclosed large move-outs, which reduced occupancy by about 140 basis points. New lease commencements partly offset that impact.
The company also completed about 75,000 square feet of renewals during the quarter on space it had expected to vacate. Retention was 27.9% for the quarter and 30% year to date, including subtenants. Kuehling said the remaining 2026 expiration schedule is more granular, with no expirations above 50,000 square feet.
San Francisco Demand Broadens Aman said San Francisco, Kilroy’s largest market, recorded its fourth consecutive quarter of positive net absorption. The market’s flight-to-quality trend has reduced competitive sublease space and direct vacancy in trophy and Class A properties, while average effective rents have risen about 15% year over year.
Active tenant demand in San Francisco has surpassed 10 million square feet, a level not seen since 2019, according to Aman. Artificial intelligence-related companies account for about one-third of that demand pipeline, though the company said interest is broad-based across industries.
Chief Leasing Officer Rob Paratte said 7.5 million square feet had been leased year to date in San Francisco, while availability had declined by 4.5 million square feet. He said the decline in large, available blocks is prompting tenants to make decisions more quickly, including tenants with lease expirations still several years away.
Kilroy said it has also seen improved activity in Seattle’s South Lake Union and Denny Regrade areas, suburban San Diego, Beverly Hills, Culver City and the South Bay in Los Angeles, as well as Austin. In Los Angeles, the company signed a 51,000-square-foot lease with Universal Music Group at Santa Monica Media Center, bringing that project to 100% leased.
Life Science Activity Picks Up at Oyster Point In life sciences, Aman cited improving sector conditions, including a more than 70% year-over-year increase in the XBI, open biotech IPO and follow-on equity markets, and active merger, acquisition and licensing activity.
At Kilroy Oyster Point Phase 2, the company executed a previously announced 38,000-square-foot lease with Olema Pharmaceuticals. Paratte said touring activity in South San Francisco and the Peninsula rose from 317,000 square feet in the first quarter to more than 800,000 square feet in the second quarter.
He said Kilroy has active interest in all unleased space in its multitenant Oyster Point building. The company’s final available spec suite has multiple interested parties, while two new floors of spec labs are expected to become available in December and January. Paratte also pointed to growing demand from robotics companies, including some requirements above 100,000 square feet.
Capital Recycling and Balance Sheet Actions EVP and CIO Eliott Trencher said Kilroy sold $348 million of assets year to date, including the previously discussed $202 million Los Angeles residential sale. The company has $165 million of land sales under contract, with roughly half expected to close late in 2026 or early in 2027.
Kilroy is evaluating additional land sales and acquisition opportunities, focusing on office and life science assets in its five existing markets. Trencher said the company would remain selective, generally seeking opportunities where leasing, capital investment or future lease-roll expertise can create value.
Regarding the Flower Mart site in San Francisco, Kilroy is working with the city on a revised plan that is expected to allow more flexibility in phasing and a broader mix of uses, including residential. Aman said the company expects to complete that process later in the fourth quarter. Trencher said current rents do not yet support either office or residential development economics, and Kilroy expects to stop expense capitalization at year-end 2026.
During the quarter, Kilroy increased its revolving credit facility to $1.25 billion and extended its maturity to July 2030. It also upsized its term loan to $250 million and extended its maturity to July 2031. In July, the company repaid $200 million of private placement notes with cash on hand ahead of their October maturity.
Kilroy affirmed its full-year guidance for FFO of $3.49 to $3.63 per diluted share and same-property NOI growth of 25 to 125 basis points. Kuehling said the third quarter will face a difficult comparison with the prior year, when the company recognized $4 million in restoration fees and net real estate tax refund benefits.
About Kilroy Realty (NYSE:KRC)Kilroy Realty Corporation NYSE: KRC is a publicly traded real estate investment trust focused on the development, acquisition and management of high‐quality office and mixed‐use properties along the U.S. West Coast. The company's portfolio encompasses major urban markets including Los Angeles, San Diego, the San Francisco Bay Area and Seattle. Kilroy Realty targets properties in transit‐oriented submarkets, blending workplace space with retail, residential and hospitality amenities to create vibrant, walkable neighborhoods.
Founded in the mid‐20th century by members of the Kilroy family, the company evolved from a regional landlord into one of the leading West Coast office landlords.
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