Southern California’s commercial real estate market is showing signs of recovery, driven by evolving tenant demands and strategic repositioning of high-quality assets. Kilroy Realty Corporation (KRC), a leading real estate investment trust (REIT) with a significant presence in the region, provided valuable insights into the leasing dynamics during its Q4 2024 earnings call. The call highlighted key trends, challenges, and opportunities shaping the market, particularly in Southern California.
Kilroy Realty reported a robust fourth quarter, with leasing activity reaching its highest level since Q4 2019. The company signed approximately 708,000 square feet of leases, underscoring the growing demand for high-quality spaces that align with tenant needs. Angela Aman, CEO of Kilroy Realty, noted, “The quarter was headlined by two significant deals, including a 274,000 square foot new lease in the San Francisco Bay Area with a global technology company.” This deal, along with others, reflects the increasing willingness of tenants to make long-term commitments.
In Southern California, Kilroy is focusing on re-entitling certain land parcels to alternative uses, such as residential, to address the acute need for housing. Aman emphasized, “In other cases, including some of our sites in Southern California, it is clear that the path to maximizing value will be a full re-entitlement to an alternative use such as residential.” This strategic shift aligns with broader market trends, as developers and landlords adapt to changing demand dynamics.
Kilroy’s portfolio includes several recently developed or repositioned assets, such as 2100 Kettner in San Diego, which are well-positioned to capture leasing momentum. Aman highlighted, “Vacant space at these assets alone represented 410 basis points of leased occupancy upside at year-end, highlighting an exceptional source of future growth for the company.” These properties, known for their quality, functionality, and market-leading amenities, are attracting significant tenant interest.
Rob Paratte, Chief Leasing Officer, added, “In markets like San Diego, we’re seeing strong demand for high-quality spaces, particularly from professional services, banking, and law firms.” This demand is driven by the flight-to-quality trend, as tenants prioritize spaces that offer modern amenities and flexibility.
While Southern California’s office market remains competitive, Kilroy is optimistic about the region’s long-term potential. Paratte noted, “Los Angeles is still, of our markets, probably the one that’s most still in recovery in terms of just demand for space on the west side particularly. However, we do have activity in Hollywood, which is encouraging.” The company’s ability to adapt to market conditions and reposition assets for alternative uses positions it well to navigate the evolving landscape.
Kilroy’s focus on re-entitling commercial land for residential development reflects broader market trends in Southern California, where housing shortages remain a pressing issue. Eliott Trencher, Chief Investment Officer, stated, “There remains an acute need for more housing in Southern California, and re-entitling commercial land is a logical way to address the significant and growing problem.” The company is in advanced discussions with residential developers for two sites in its future development pipeline, which are expected to generate over $150 million in proceeds.
Looking ahead, Kilroy expects leasing activity to continue accelerating, driven by historically low levels of new supply and increased workplace attendance requirements. Aman remarked, “Given historically low levels of new supply and increased workplace attendance requirements taking effect, our markets are demonstrating important signs of sustained recovery, and we expect these trends to continue to accelerate over the next several years.”
The company’s approach to addressing lease expirations and its focus on high-quality vacancies position it to capitalize on emerging opportunities, according to the earnings call. As Paratte noted, “The overall leasing environment in the Bay Area is improving for life science, and we’re seeing a broad swath of interest from tenants and brokers.” This sentiment extends to Southern California, where Kilroy’s strategic investments and repositioning efforts are expected to drive long-term value.
Kilroy Realty’s Q4 2024 earnings call highlighted the resilience and adaptability of Southern California’s commercial real estate market. With a focus on high-quality assets, strategic re-entitlement, and responsive leasing strategies, Kilroy is well-positioned to navigate the evolving market landscape. As Aman concluded, “Our continued focus on maintaining a flexible balance sheet, monetizing non-core assets, and delivering high-quality developments will allow us to drive long-term value while adapting to changes in market conditions.”
