Kilroy Signs 815,000 Square Feet of Leases as Office Occupancy Stays Below 77%

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Kilroy Realty signed approximately 815,000 square feet of leases in the third quarter, one of its strongest leasing periods since 2019, but the West Coast office landlord still ended September with nearly one-quarter of its stabilized space unoccupied. Tenant commitments are picking up faster than rent-paying occupancy.

The Los Angeles-based real estate investment trust reported October 22 that its stabilized portfolio was 76.9% occupied and 83.0% leased at quarter-end. The 6.1-percentage-point difference represents space under lease where rent had not yet commenced. That pipeline may eventually strengthen revenue, but signed leases can require substantial tenant improvements and other spending before they generate cash.

Revenue declined to $271.6 million from $279.7 million a year earlier, or about 2.9%. Net income available to common shareholders fell to $15.5 million, or 13 cents per diluted share, from $156.2 million, or $1.31 per share. The prior-year quarter included $110.5 million in gains from sales of depreciable operating properties, which did not recur this year. The headline net-income comparison therefore exaggerates the change in recurring rental performance.

Funds from operations, a real estate investment trust measure that excludes certain property-sale gains and real estate depreciation, fell to $104.6 million from $130.6 million. FFO per diluted share declined to 88 cents from $1.08. FFO is a non-GAAP measure and is not interchangeable with cash available for dividends or capital expenditures.

Leasing outpaces occupied space

Kilroy signed about 345,000 square feet of leases on previously vacant space, 127,000 square feet on already occupied space and 343,000 square feet in renewals. The renewal total included a 12-year agreement for approximately 243,000 square feet at Crossing 900 with software company Box. Short-term leasing accounted for about 12,000 square feet of the quarter’s total.

For second-generation leases, the company reported a 30.6% increase in rents measured under generally accepted accounting principles and a 9.7% increase on a cash basis, excluding short-term leasing. Those figures apply to leases executed during the quarter, not to the entire portfolio. Free-rent periods and scheduled rent increases can cause GAAP and cash leasing spreads to differ substantially.

The overall occupancy figure includes Kilroy Oyster Point Phase 2, a South San Francisco project added to the stabilized portfolio earlier this year. Excluding that development, the portfolio was 80.7% occupied and 84.8% leased. That distinction matters when interpreting vacancy: part of the reported gap reflects a newly stabilized development rather than deterioration across all older buildings.

Chief Executive Angela Aman said leasing momentum had accelerated across the company’s five operating regions. That is management’s assessment. The published occupancy figures still leave significant space vacant, and signed leases do not eliminate the time and cost required to convert commitments into paying tenants.

Financial guidance and debt

Kilroy narrowed its full-year 2026 Nareit-defined FFO guidance to $3.55 to $3.59 per diluted share from $3.49 to $3.63. The revised range raises the lower bound while reducing the upper bound; it remains a forecast. Updated assumptions put average full-year occupancy at 77.0% to 77.5%, compared with the prior 76.5% to 78.0% range.

The company also narrowed its outlook for same-property cash net operating income growth to 0.75% to 1.0%, from 0.25% to 1.25%. Even after the busy leasing quarter, management is projecting modest cash income growth on comparable properties. Leasing spreads on new deals and actual portfolio cash flow describe different parts of the business.

In July, Kilroy repaid $200 million of 4.35% private-placement senior notes. It also disclosed an August agreement to sell land at Kilroy East Village in San Diego for $19.5 million, subject to a nonrefundable deposit. The company anticipated closing in the fourth quarter; the proceeds should not be treated as received until the sale closes.

The board paid a quarterly common-stock dividend of 54 cents a share on October 14, an annualized rate of $2.16. Dividend sustainability depends on cash generation and future obligations, including leasing and development expenditures, rather than on the declared rate alone.

In another part of the office market, WRE News reported Brandywine Realty Trust’s property sales and debt reduction. Kilroy’s leasing pipeline presents a different operating challenge; the companies’ portfolios and financing structures should be evaluated separately.

The results illustrate the uneven recovery in West Coast offices. Tenants are committing to substantial blocks of space, including long leases with established technology companies. Investors will be watching how much of that activity translates into occupied buildings and recurring income over the next several quarters.

Source: Kilroy Realty third-quarter financial report, furnished to the SEC October 22.