Nick Yulico — MD, Scotiabank
Thanks. First question is, I guess, just turning towards some of the expirations you talked about getting addressed for 2026, and I know you had a higher also retention ratio this quarter. At a high level, are there any sort of thoughts you can give us on next year, how to think about retention for expirations and then also getting some benefit, as you talked about, from commencing occupancy on that gap right now between signed but not occupied space?
Angela Aman — CEO, Kilroy Realty Corporation
Sure. Thanks, Nick. This is Angela. I'd start with sort of going back to where we started with the 2026 expiration pool at the beginning of 2025. We were showing about 1.9 million sq ft when you take into account all the leasing activity and renewal activity that's been completed through the third quarter and the almost 150,000 sq ft of renewals that were signed subsequent to quarter end. We're down to a remaining expiration pool in 2026 of about 970,000 sq ft. As I mentioned earlier, I think there's a limited opportunity for additional renewals out of that pool.
We do expect that you're going to see move-outs in 2026 for the majority of what's left in the 2026 expiration pool, and we'll need to offset that through new leasing, right, both through a combination of, as you point out, a pretty healthy spread between signed and commenced occupancy that's already been executed and then additional new leasing activity that can take effect during 2026. I think, as we've talked about on prior calls, one thing I would note that's a little bit different in the current environment is across many of our markets, the interest that tenants have in getting into space as quickly as possible. We've seen it most notably in San Francisco, where there's a real demand, especially from some of the new business formation we're seeing in that market, to really compress the time between lease execution and occupancy commencement.
We've also seen it in other markets as well, including the Pacific Northwest and even in San Diego and Austin. Our spec suites program can be really meaningful in addressing some of that remaining expiration activity in 2026 or offsetting it. That's what we're focused on right now, is really driving some additional renewals out of the 2026 pool, but really focusing on new leasing and particularly the new leasing that can take occupancy during 2026.
Nick Yulico — MD, Scotiabank
Okay. Thanks. The second question is on San Francisco. If you could talk a little bit more about how you're seeing your space be competitive in the market versus other options, and also an update on competitive sublease space that's in the market and the depth of the tenant pool there overall. Thanks.
Angela Aman — CEO, Kilroy Realty Corporation
Sure. Yeah. I'll take the first part, and then I'm going to turn it over to Rob to talk about some of the more specific dynamics in the market. What we've continued to see in San Francisco is a real expansion of where tenants are looking for space in the market and, again, a real priority on landlords who can move quickly and deliver certainty in terms of compressing that time period between lease execution and rent commencement. When we talk about sort of where tenants are looking in the market, that's where we've seen a pretty remarkable sea change in activity from where we were nine to 12 months ago that's really captured our SoMa assets and, in particular, 201 3rd where, as I mentioned earlier, we've now completed three consecutive quarters of major leasing at that property.
We've now seen that activity expand further into SoMa and into assets like 360 3rd Street. We've seen really sort of a healthy dynamic as where tenants are willing to look has expanded. I think our vacancies are really well-positioned given that we're very focused on meeting those expectations and delivering space as quickly as possible.
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
Thanks, Angela. Hey, Nick. It's Rob Paratte. I guess I'd make a couple of points about the market. One is that larger tenants in San Francisco are starting to come back to the market and are touring. We're also seeing that in Seattle. I think one change we're noticing in our portfolio is that there's, I'd say, less demand for bargain space and more demand for impactful space. That impactful space ties directly to the return-to-office phenomenon that you're seeing, where San Francisco particularly has dramatically improved in the past couple of quarters. AI demand continues to be a very strong driver in the market. There's about $1.5 million sq ft of AI demand currently touring in San Francisco.
Relating to sublease space, over $2 million sq ft of sublease space has been basically taken off the market through either going direct, taken off the market by the sublessor, or being leased. That's a notable number. When you look at the Kilroy portfolio, we've had 200,000 sq ft taken off the market this quarter by tenants. All of that points to, I think, a sustained recovery. As the office fundamentals are improving and showing signs of sustained recovery, we're already at pre-pandemic levels, as Angela pointed out in some of the statistics. I'm pretty convinced that not only the momentum we're seeing here in Q4 will continue into Q1 and 2026.
Jana Gallen — Analyst, Bank of America
Thank you. Congrats on a great quarter. I wanted to follow up on the increased leasing outlook near term at KOP 2 and just the current demand in tours, whether that continues to be more traditional biotech or it's across the board.
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
Sure. Let me kind of frame up where we are with life science in KOP in South San Francisco. In Q3, there were slightly over 600,000 sq ft of leases signed, which is on par, again, with pre-pandemic levels. You know what we're seeing? I can only speak to our project. What we're seeing is that the best projects in the market are seeing the most demand. Our life science team, dedicated life science team, is nimble and creative, and they're really quick to respond, adding to this momentum, which gives me a lot of confidence that momentum will not only continue in Q4, the remainder of Q4, as Angela said, but well into Q1 and 2026. Life science demand rose over 20% from 1.8 million ft to 2 million ft in Q3, another very positive indicator.
I think the one thing that we've seen that's really changed, and again, as I mentioned earlier, in San Francisco, there are large tenants that are coming back into the market. Combined with the life science demand we're seeing, we're also seeing other sectors that have improving demand, including semiconductors, AI, and robotics. That's not just South San Francisco specifically. It's a trend moving from South San Francisco down through the peninsula.
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. I think, I mean, Rob's really hitting on the right point. We're thrilled to be at the point we are right now with 84,000 sq ft of leases executed at KOP. As you alluded to, we feel like we're very well positioned to exceed the goal we put out for ourselves last quarter of 100,000 sq ft by year-end. I also think, as we indicated last quarter, we're very pleased that the first wave of deals we're signing at KOP 2 have all been biotech, biotech-related. I think that's a really important point as we think about the future growth and evolution of this project in phases III, IV, and V down the road. Excuse me. We're being very intentional about creating the right sort of life science ecosystem at the project that can support that growth down the road as well.
Rob made a really important point, which is we have lots of, as we think about the pipeline going forward, there continues to be lots of demand from biotech and biotech-related companies as we look out at finishing this project. We are seeing really important demand that's giving us a little bit more leverage in leasing for the remainder of KOP 2 from other uses outside of life science as well. Overall, I think a really healthy backdrop as we think about leasing up this project and ensuring that it's going to be a net contributor of growth over the next several years. We've got a lot of options and a lot of momentum. Again, really pleased that we're able, with these first leases that are being signed, to take the first steps at creating that dynamic life science ecosystem on site.
Jana Gallen — Analyst, Bank of America
Thank you. Given the improvement and diversity in activity across the portfolio, should we think about that there'll be less reliance on the shorter-term leasing going forward?
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. I mean, this quarter, the shorter-term leasing, I think it was 129,000 sq ft. Most of that was renewal activity. I spoke to some of that in my prepared remarks. We're going to be flexible in this environment with tenants that need a little bit longer term, even if they're vacating, just to give us additional opportunity and time to backfill some of that space. There's probably some more of that short-term renewal activity over the coming quarters. I would say, as we think about the new leasing dynamic, we've signed very few actually new leases on a truly short-term basis. There continues in the city of San Francisco, as we think about some of this new company formation and AI growth specifically in the city of San Francisco, still a desire for leases that are shorter-term in nature than a traditional 10-year lease.
We are seeing that demand in sort of that three to five-year window for many of these AI companies. We do believe we're in a position to stretch those terms a little bit longer where we can provide a reasonable path to growth and expansion for some of those tenants over the course of that term. They're prioritizing that flexibility as it relates to the shorter lease term because they do believe their businesses are going to grow and evolve, and they want to make sure that they can have space over the next five to 10 years that's going to meet their needs. Where we can provide that flexibility, we have a chance at getting those terms extended a little bit longer. The truly short-term leases, again, have been almost all renewal activity. That's, in many ways, just a normal recurring part of the business.
Steve Sakwa — SMD, Evercore ISI
Yeah. Thanks. Good morning out there. Jeffrey, I don't know if you could provide a little bit more color on just the NeueHouse lease. I appreciate you for clarifying that that really was, I guess, in the quarter-end occupancy and comes out in the fourth quarter. Could you maybe just help size up for us kind of what the rent contribution was from NeueHouse in the third quarter so we could just kind of adjust the revenues appropriately for that?
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. Steve, we don't typically talk about individual rent commencements on a tenant-level basis. You've got the occupancy contribution, about a 50 basis points, 50 to 60 basis points impact in occupancy. I think the important point here is that we really held our average occupancy guidance flat despite taking that unexpected impact in the fourth quarter of this year. Rob and team, I'll let Rob comment on sort of the releasing backdrop for that space in a moment. We're really focused on releasing that space as quickly as we can. It's got a very high-quality build-out, and we think there are opportunities that will really help us minimize downtime as we look to reposition that space, which will address some of the concern you're raising.
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
Hi, Steve. Yeah. We started fairly early on looking at opportunities for the former NeueHouse space in terms of what can be done with it. I'm actually pretty pleased with the activity we've seen from a variety of sectors, including the hospitality and entertainment sectors. As you know, the space is very highly designed, very well designed. We own all the FF&E. There's a lot of advantage to what's in the space, not only from just an architectural point of view, but the existing facilities, including multiple food and beverage opportunities. I think a very important aspect is that the historic studio, the CBS former auditorium, can house up to 400 people. That's a very limited commodity in Hollywood. That does seem to attract quite a bit of attention and can generate revenue. We're seeing kind of a disparate group of interested parties right now that we're talking to.
Steve Sakwa — SMD, Evercore ISI
Rob, any comment just about kind of how the rent would maybe stack up to the prior rent? You know, would that be a roll-up, roll-down, flat?
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
Hard to say, Steve. It depends. Some of these uses may have more need for capital, depending on if it moves toward hospitality. It's really going to be very deal-specific, but it's quite a unique space. The thing I'd say is if you look in Hollywood to have historic space like this that ties back into the 1930s, 1940s, and 1950s at the prime of Hollywood, that cache carries a lot of value for future users.
Seth Berge — Analyst, Citigroup
Hi. Thanks for taking my question. I guess the first one, just to go back to the KOP leasing activity you've done, can you provide a bit more color on the lease economics you're achieving there and maybe touch on how those leases compare to your initial underwriting?
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
I'll start with the beginning, that the lease economics vary between whether it's a spec lab or whether it's going from shell construction. There's variability there. We're very attuned to what the market is and happy with where we're getting, where we're achieving our rental rates. TI has no doubt gone up since we originally underwrote the project. We're meeting the market in terms of where the demand is and providing that value that I mentioned earlier.
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. I think Rob categorized it exactly right, which is I do think rents have held in pretty well relative to our original underwriting, even on these first handful of deals we're executing, which you would expect to come in a little bit below. Rents are pretty much in line. Capital is higher, and that's a comment we've made on prior calls as well. One thing I would note, when you look at our disclosure around the lease executions and the second or for first-generation space in the supplemental, any deals that are signed for spec suites are burdened with 100% of the spec suite capital in those TI numbers, even though those tend to be almost by definition some shorter-term deals and that capital is designed to be easily reusable for future tenants.
That's just one element I would note as you think about some of the TI numbers you're seeing in the supplemental and will see on the spec suite deals going forward.
Seth Berge — Analyst, Citigroup
Thanks. That's helpful. Maybe for a second one, I believe in your prepared remarks, you mentioned 1.9 million sq ft of kind of 26 expirations that need to be backfilled primarily by new leasing activity. Can you just quantify what the tour activity you're seeing on those spaces is and maybe how it compares to last quarter or some way to benchmark it as you guys are seeing this recovery in demand?
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. Let me make a point of clarification, and then I'll turn it over to Rob. 1.9 million sq ft was the 2026 lease expiration tower we were facing at the beginning of 2025. Over the course of the last three quarters and with some renewals signed subsequent to quarter end, we're now down to 970,000 sq ft of remaining 2026 lease expiration. We've substantially addressed that original tower. That's translated into about a 40% retention on the original 1.9 million sq ft with additional vacancy or potential move-outs being addressed through disposition. We've actually been very successful at addressing the original 1.9 million ft. I'd just say tour activity across the board and the pipeline across the board looks really very strong right now. We mentioned specifically in San Francisco, a 170% increase in tour activity in our SoMa properties in particular, where we do have vacancy. We're seeing really great momentum.
I'll let Rob comment on the broader pipeline and tour activity.
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
Yeah. Seth, the only thing I'd add to what Angela said is that it goes beyond the market we're talking about. It's just that demand is across the board increasing. Of the 900,000 ft remaining, there's always a chance someone, you know, a lot of times things pop up at the end where somebody wants to hold over. It could end up in short-term or it could end up in a longer-term lease. As Angela said, I think we've harvested most of what we can get. That said, we have marketing and business plans put together for all that vacancy for the 900,000 ft that remains. We're really positioning it early on to start leasing it and are in conversations on some of it already.
Anthony Paolone — Executive Director, JP Morgan
Great. Thanks. I just want to go back to KOP and revisit the prior question a bit, just a two-parter there. You know, one, at the rental rates you're achieving and what you're seeing out there, what would the yield be on your cost? The second part of that, the $1.025 billion, remind me, is that fully loaded for tenant improvements, leasing commissions, pre-builts, all that?
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. I'll make a couple of comments. We're 10% leased on this project right now, right? We've got 84,000 sq ft leased on 875,000 sq ft or thereabouts. I think it's a little premature to talk to the total economics of the project overall. I think as we continue to execute on this project and we demonstrate further progress on the leasing, it'll be the right time to take a step back and talk about the overall economics of this project. Doing so on the first three leases I got executed is just a little bit premature. The numbers we have in the supplemental do reflect our original expectations as it related to capital. At the right time, and again, as we get through additional leasing activity, we'll update as appropriate.
Anthony Paolone — Executive Director, JP Morgan
Okay, you mentioned the capital running a little bit ahead of plan, rents kind of more or less in line. Does that mean it likely has to bump up a bit, or still too early to tell?
Angela Aman — CEO, Kilroy Realty Corporation
It's still too early to tell. I think we'll continue to evaluate as we get additional leases signed and hope to have additional updates over the coming quarters.
Brendan Lynch — Director, Barclays
Great. Thanks for taking my question. You mentioned some of the components that I will feed into this, but guidance calls for a 1% contraction year-over-year, but same property NOI was up 1.4% year-to-date. Maybe just walk us through some of the considerations that we should keep an eye on in the fourth quarter.
Jeffrey Kuehling — EVP, CFO and Treasurer, Kilroy Realty Corporation
Yeah. Thanks, Brendan. The big, I think, kind of bogey is just a difficult comp in the fourth quarter from last year. We did recognize about $6.7 million of restoration fee income. When you look at the sequential decline, at least for the fourth quarter, you should see a pretty big rundown or expect to see that.
Brendan Lynch — Director, Barclays
Okay. Thank you. That's helpful. You mentioned strength in all your markets. Maybe just to hone in on Austin, looked like you had a lot of leasing progress there at the Indeed Tower. Maybe any extra color that you can provide there and an update on the ground floor space that's available.
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
Sure. Brendan, the ground floor space is exactly what I wanted to talk about, which is, I think, a really monumental accomplishment by our Austin team, leasing what we call the POST, which is a freestanding historic building on the project site. We're not at liberty to disclose the tenant, but I'll say that they're a nationally recognized, successful operator of food and beverage venues across the country and had many successful startups and built several chains through that entity. This amenity, it's really an amenity, but it's not only an amenity for the building. It's suited for the tenants in the building, which we think is really going to improve the foot traffic and demand on the 6th Street corridor where we are. It's also a really important amenity. It's big enough, meaningful enough that it's a big enough amenity for the overall Austin CBD.
All I can say is it's a complicated project. It took a long time. We have a multi-floor building that's historic that was in shell condition and will truly be special space. I think all of us at Kilroy Realty Corporation really look to our Austin team for having the perseverance and patience to go through that and execute it. What that leaves us with is our office space. We continue, again, I can't speak to the competition. I can only speak to what we see. As Angela said a couple of times, we're seeing a lot of activity on our spec suites. Oftentimes, as they're under construction, they lease. We're continuing on that program. We don't have much contiguous space left for larger tenants, but we do have two floors that we're marketing. We're really pleased with the activity we're seeing at Indeed Tower.
We think this POST enhancement will also lead to increased activity. I think long-term, just a great investment in that project.
John Kim — MD, BMO Capital Markets
Thank you. I had a couple of questions on your leasing pipeline at KOP 2. If you could maybe provide some more color in how large that pipeline is today versus last quarter or the last time you provided an update. How many of these tenants are growing within the South San Francisco market versus just upgrading space within the market or musical chairs?
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
Hey, John. It's Rob. I'd say our demand, I mean, we've said this for maybe three quarters now, that our demand has continued to increase. At least we've seen an uptick and continuous uptick in tour activity. Suffice to say what I said earlier, that we're confident in the pipeline we have in the remainder of Q4 and the executions that Angela talked about. I think that our momentum is strong enough that Q1 and Q2 and well into the rest of the year is going to be quite strong. The project, I've said this on a couple of calls, is attracting interest from across the Bay Area. We have a very concerted, focused marketing effort. The project can accommodate tech as well as life science. The bulk of our activity is in the life science space because it's purpose-built life science, but other entities are also interested in it.
I'm very confident in the pipeline we've got. I'm sorry, the second part of your question was, are they seeking?
John Kim — MD, BMO Capital Markets
Some other places.
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
Can you not answer?
John Kim — MD, BMO Capital Markets
If they're seeking additional space within the market or is it just upgrading space?
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
It's both. It's leases expiring, plus you know they're seeking upgraded space.
John Kim — MD, BMO Capital Markets
Okay. On the 970,000 sq ft of potential move-outs next year, can you provide color on why these tenants are not renewing their space, and your ability to backfill that space next year, either through leasing or extending the current leases?
Angela Aman — CEO, Kilroy Realty Corporation
Yeah, I mean, I guess I'd go back to the comments I made earlier. When you think about the 1.9 million sq ft we started the year with and look at just what's been released on a long-term basis within that pool, we've achieved a 40% retention rate or a little bit over 40%, which is a material improvement since any year through the pandemic. Actually, on a total retention basis, those numbers are very strong. I think what you're seeing is normal course activity in the portfolio in any year, even close to pre-pandemic level of retention. It's just a combination of tenants with shifting needs. We mentioned one example in my script that was a tenant moving to owner-occupied space. There's been some of that activity in the portfolio, but it really does just run the gamut.
Again, at a 40% or better than 40% retention rate, we think we're back to pretty historical levels of activity from a move-out perspective.
Upal Rana — Analyst, KeyBanc
Great. Thank you for taking my question. I wanted to get your thoughts on your capital allocation strategy and priorities going forward, especially with the recent Maple Plaza acquisition and the expectation of getting some space back next year. Thanks.
Eliott Trencher — EVP, CIO, Kilroy Realty Corporation
Hey, Upal. It's Eliott. As we mentioned, we're looking at all different alternatives that are out there. You know our general alternatives are anything from investing in an asset, be that an office asset or a life science asset, or buying back stock. We just sort of evaluate the opportunities as they present themselves. Overall, we've been encouraged at the types of opportunities that are out there. We were fortunate enough to be successful in closing on Maple Plaza. We'll see what else comes out. We're definitely spending time looking at all of the above.
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. Just to add to that, you know we're a net seller this year so far of about $200 million. You know we continue to evaluate what we think are a growing number of opportunities in the market. A point Eliott made earlier, which I just think is really important, is that we do think we're in a really unique window of time here where fundamentals from a leasing perspective are getting better across all of our markets. We're still early in institutional investor interest coming back to the market. We're seeing it happen across San Francisco, certainly, but really all of our West Coast markets. That can change quickly and change the dynamic quickly in terms of what's actionable for us from an acquisition perspective. It certainly helps us on the disposition side.
We'll continue to evaluate all opportunities and execute where we do feel like we're in a unique period of time where valuations are pretty compelling and compelling relative to other alternatives.
Upal Rana — Analyst, KeyBanc
Okay. Great. That was helpful. As a follow-up, could you talk a little bit more about Flower Mart? Could you share any recent conversations you've had with the city on that project? You mentioned continuing to cap interest there until June 2026. Any additional color there would be helpful. Thanks.
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. Sure. I'll take it, and we can certainly dig more into it. Justin's here as well to talk about it to the extent you have follow-up questions. As I mentioned in my script, we submitted to the planning department recently, I believe in early September, additional potential paths forward for the Flower Mart that included a broader mix of commercial and residential uses. We're going through the exercise with the planning department to understand what's achievable on the site and how that would lay out and what the ultimate path forward will look like from an execution perspective. As I said earlier, we're pretty early days in those conversations, but everything to date has been constructive and encouraging. I think we are aligned with the city in ensuring that whatever ultimately gets approved here meets the needs of the San Francisco community as it continues to evolve.
Caitlin Burrows — VP, Goldman Sachs
Hi. I guess maybe just as a follow-up on the Flower Mart point, it seems like over the, call it, year-to-date, the amount of activity that you've been able to continue doing has changed and your own expectations have changed. Can you just go through what those changes are and what the current expectation is for June 30th? How much visibility do you have on that, or is it kind of up to the city and that's causing the changes? We'll see as it gets closer to June if that changes again.
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. Thanks, Caitlin. As you might remember from prior calls, the path we're taking here on the Flower Mart and what we're looking for in terms of additional flexibility and optionality that will help us maximize value on the site is unique relative to the way San Francisco has historically approved projects. The timeline and the path forward hasn't been completely clear, which is why we've tried to do the best job we can of being transparent with investors about what we know at different periods in time and then updating those expectations as appropriate. With us filing the additional proposals or additional potential paths for the Flower Mart with the planning department in September, we have greater clarity on that process, that step of the entitlement process, and believe that'll take us through the first half of 2026.
As we continue to work through the process and get additional information, we'll update that assumption as appropriate.
Caitlin Burrows — VP, Goldman Sachs
Okay. Maybe a minor point on the Silicon Valley sale. Could you guys give us more detail just on when that closed in September, if it was the beginning of the month or the end of the month?
Rob Paratte — EVP, Chief Leasing Officer, Kilroy Realty Corporation
It was the very end of the month.
Michael Carroll — MD, RBC Capital Markets
Yeah. Thanks. I wanted to quickly circle up on the Flower Mart. Are you able to have discussions with potential partners as you kind of re-entitle that site if you're going to build, resi, and/or sell off certain sites? Or is it just too early to tell? You can't have those discussions because you just don't know what the city is going to be willing to give you yet?
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. I think it's a little too early, right? I think if you take a look and it's been reported in the press at our application to the planning department, you see a wide range of uses for different potential paths that include a full commercial program like we're currently entitled for, a fully residential program, a mix of different uses on site as well. I just think what we're looking for right now is making sure that we have all the flexibility and optionality with our existing entitlements and with the development agreement to execute on whichever one of those paths is ultimately going to maximize value for the site.
We need to get a little bit further through that process to better understand it, to continue to evaluate economics in the market as those shift and change as well, to be able to really determine the best path forward. You know, stay tuned. We're continuing to work through it. I'm really pleased with the progress we've made to date, but we have some significant work still to do.
Michael Carroll — MD, RBC Capital Markets
Okay. That's helpful. Just related to the other land sales that you mentioned in your prepared remarks, are these really going to be focused on the parcels that have been pre-announced, or are there other potential sales that could be announced that are new that we haven't heard about yet? I mean, are these a near-term type of event, or are these going to be a longer-term, multiple-year process to wind down that land book?
Eliott Trencher — EVP, CIO, Kilroy Realty Corporation
Yeah. I think to get to the $150 million, those are things that are actively being worked on right now. I think that that should be more near than long-term. We've really focused our efforts on where we thought there were actionable items within the land bank. As markets continue to recover, I think that the opportunity set can really broaden. We've tried to take it in phases, and the $150 million is kind of that first phase. We'll reassess as to what the right next thing is to do with what remains.
Angela Aman — CEO, Kilroy Realty Corporation
To be clear, the $150 million includes both what has already been announced and some expectation of things that haven't been announced quite yet. I mentioned in my remarks, we hope to have additional announcements to get up to that $150 million number over the coming quarters. As Eliott said, pretty near-term. Stay tuned.
Omotayo Okusanya — MD, Deutsche Bank
Hi. Good afternoon, everyone. Just a quick one around just some of the quarterly numbers. Eliott, could you again just walk us through the straight line bad debt reversal, exactly what that was, and also what drove the fairly large increase in tenant reimbursements for a quarter?
Jeffrey Kuehling — EVP, CFO and Treasurer, Kilroy Realty Corporation
Hey, there. It's Jeffrey. Straight line bad debt, it's just an assumption related to a tenant moving from cash to accrual. We had to unwind the previous adjustment we made in a prior period. From the reimbursement income, from our perspective, we look at it from a net number. We'll take into consideration operating expenses, real estate taxes. When we look sequentially Q2 to Q3, it's about a $1.5 million change. It's not a huge driver quarter-over-quarter.
Omotayo Okusanya — MD, Deutsche Bank
Gotcha. Okay. That's helpful. On the whole side in regards to just potential office demand from AI, and Angela, you kind of made a couple of comments earlier on. I guess from our end, how does one really kind of think through how large of an opportunity that is for KRC? I mean, you know, could we kind of see some AI companies in some of the KOP 2 cards? How do you kind of think, help us kind of think through that a little bit more about kind of real kind of new leasing that could come from that driver?
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. I mean, I think if you look at, and I mentioned the total requirements in market in the city of San Francisco right now being about 9 million sq ft, which is a dramatic increase relative to even just last quarter when we were totaling and had been hovering around 7 million sq ft for quite a while. A big driver of that is AI-related companies. I think it's probably over 30% of tenants in market at this point are AI or AI-related. We've definitely seen that be a driver of leasing activity across our portfolio. It wasn't, interestingly, a huge driver of leasing activity in our San Francisco portfolio in Q3, where we had just broad-based demand from a wide range of users. That's definitely come back in the San Francisco market as well.
Certainly, even in Q2, where we signed the 93,000 sq ft lease with Harvey AI, it has been a driver of activity, particularly in our SoMa portfolio. We would expect that to continue. As I mentioned earlier, we've worked really hard to understand what those tenants need from landlords and how we can really hit that demand and that need. A lot of it has been from understanding their need for very near-term occupancy. Getting tenants into space as quickly as possible, reusing existing improvements, as we did in the case of Harvey AI, building out spec suites, trying to get in front of some of that demand, all those things were really impactful in our ability to capture an outside share of AI demand going forward.
As it relates to KOP and other projects in the portfolio, including other markets like Bellevue and South Lake Union, we're seeing demand from AI tenants across the board. We've definitely executed some on the AI side in the Pacific Northwest. We've seen some of that demand at KOP. We'll continue to work through and find ways that we can continue to capture that demand while also ensuring that our tenant profile overall remains broad-based and reflects a wide range of potential uses that will help us continue to maximize cash flow durability and growth over time.
Dylan Burzinski — Analyst, Green Street Advisors
Great. Thanks, guys, and good afternoon. Eliott, just going back to your comments around the capital markets and transaction environment improving in terms of owners bringing their or being more comfortable bringing their properties to market, are you seeing more of these types of assets that are being brought to market more similar in risk profile to a Maple Plaza, or are you seeing more stabilized core deals come to market? As you guys are evaluating these opportunities, given the existing level of vacancy in the market, are you guys more focused on maybe more stabilized type transactions, or is it purely a project-level risk reward analysis that you guys are doing?
Eliott Trencher — EVP, CIO, Kilroy Realty Corporation
Yeah. We're really seeing all of the above. We've seen core deals, core plus, value add, and then heavy repositioning opportunities. I think that speaks to just the overall trends. As far as where we try to spend our time, it's more bottoms up than top down. We're looking at the dynamics at that particular asset in that particular submarket and then how it relates to other risks that are already existing in the portfolio. We want to make sure that we're smart and thoughtful about the kind of risk that we're taking and not necessarily doubling down on existing opportunities that already exist with vacancy that we have elsewhere in the portfolio. In the instance of Maple Plaza, we were not in that submarket, but we spent a lot of time studying it and getting comfortable with the leasing trends.
We thought we could underwrite it in a way that gave us enough runway to be able to execute on a lease-up plan. So far, we feel encouraged by what we see.
Angela Aman — CEO, Kilroy Realty Corporation
Yeah, I'd just add to that. I think our cost of capital has improved on both the debt and equity side over the last three to six months, which we're encouraged by. We're still trading at a discounted cost of capital, and as a result, we're probably not the best buyer for truly core, stabilized properties. We need to find opportunities where all of the core competencies on the Kilroy platform can be brought to bear to really drive value and create value through those acquisitions. I think we found that in the case of Maple Plaza. That's how we're continuing to think through and look at opportunities across the board.
Dylan Burzinski — Analyst, Green Street Advisors
Great. Appreciate that context, guys.
Angela Aman — CEO, Kilroy Realty Corporation
Sure. Thank you.
Caitlin Burrows — VP, Goldman Sachs
Hi again. I feel like we've talked a lot about the leasing volume, but not as much on the pricing side. It looks like the leasing spreads you guys report did get better in the third quarter. As you guys look out to 2026, do you have an idea of if you think the year-to-date results or the third quarter results would be more telling of what could happen in the future? Any comment on what you expect on the pricing side? Thanks.
Angela Aman — CEO, Kilroy Realty Corporation
Yeah. I think it's a really good question, Caitlin. I think it's a little bit difficult to answer when you think about how we report our spreads. There's no cutoff in terms of how long a space has been vacant. We're showing you basically a complete population. It's really going to depend on where the new leasing activity happens across the portfolio in 2026. You know, from a market-by-market perspective, we have markets where we believe we're below market and where leasing in those markets is going to result in pretty positive spread dynamics. Then there are markets, including the city of San Francisco, where we're probably still reporting a step down in rents as we release space.
I think the most important thing to consider about San Francisco and the overall dynamics in that market is that, obviously, as we all know, that's a market that really was challenging, very challenging even 12 months ago. There's still a lot of vacancy in the market that's starting to be addressed. We're getting more stability on the occupancy side. You're seeing it through new leasing activity and, as Rob mentioned earlier, sublease space coming off the market. Occupancy is starting to stabilize, starting to firm up a little, and starting to move in the right direction. As occupancy moves in the direction, there will be inherently more pricing power in the market. I think we're at the beginning. I think all the pieces are in place, including that growing demand picture for things to continue to get better in San Francisco.
Leases signed over the next year probably, on average, in that market are going to be negative releasing spreads.