As we execute during the second half of this year, we intend to capitalize on growing levels of tenant activity while remaining mindful of the positive inflection in supply-demand dynamics. As we look ahead, we're focused on two primary data points related to the future growth potential of our portfolio. One, the magnitude of our signed but not yet commenced pool, and two, the size and quality of our forward leasing pipeline. As a result, average commencements from this pool will have a disproportionately positive impact on NOI as they occur, providing important visibility on future bottom-line growth.

In addition, over the last quarter, we've seen a material expansion in the size of the forward leasing pipeline. Many tenants continue to prioritize move-in-ready spaces and buildings or sponsors that can provide a seamless path to growth as the needs of their businesses rapidly evolve. As a result, rent growth has returned to the market, with average effective rents increasing approximately 15% year-over-year. Looking forward, active tenant demand has now surpassed 10 million square feet, a level not seen since 2019, which was one of the strongest leasing execution years in San Francisco's recent history.

Encouragingly, the composition of demand is broad-based, supported by both traditional occupiers and the continued expansion of the AI ecosystem, which represents approximately a third of the active tenant demand pipeline in the market. Now we're seeing tangible interest migrate across our multi-tenant assets in the South of Market or SoMa sub-market, which saw a sequential increase in tour activity during the second quarter of nearly 65%. Our team has done an excellent job of driving consistent activity and capturing more than our fair share of leasing demand. In Los Angeles, we are cautiously optimistic as green shoots appear to be emerging with ongoing broad-based demand in Beverly Hills.

What went well
  • Both GAAP and cash re-leasing spreads turned positive at 21% and 6.1% (and 27.3% and 15.6% on space vacant 12 months or less), the first quarter in nearly two years that both measures were positive, on approximately 376,000 sq ft of leasing that lifted year-to-date volume to about 944,000 sq ft (up more than 40% year-over-year).
  • The forward leasing pipeline expanded materially, up 34% quarter-over-quarter with LOI and late-stage activity up roughly 77%, while the signed-but-not-commenced pool held above 1 million sq ft and over $78 million of ABR at more than $75 per sq ft (30% above the portfolio average) and 86% triple-net.
  • San Francisco posted a fourth consecutive quarter of positive net absorption with active tenant demand surpassing 10 million sq ft (a level not seen since 2019) and effective rents up about 15% year-over-year; a 51,000 sq ft Universal Music Group lease brought Santa Monica Media Center to 100% leased.
  • Strengthened the balance sheet by amending and extending the unsecured credit facilities (revolver upsized to $1.25 billion to July 2030, term loan upsized to $250 million to July 2031, pricing improved 20 bps) and repaying $200 million of private placement notes early, leaving about $1.6 billion of available liquidity.
  • Cash same-property NOI grew 1.5% and retention improved to 27.9% in the quarter (30% year-to-date) as roughly 75,000 sq ft of tenants previously expected to vacate instead renewed, and management affirmed full-year FFO guidance of $3.49-$3.63.
What went wrong
  • FFO was $0.92 per diluted share and included a $0.05 per share 23andMe bankruptcy settlement, leaving underlying earnings roughly flat and modest.
  • Portfolio occupancy including Kilroy Oyster Point Phase 2 slipped to 77%, down 60 basis points sequentially, as two previously communicated large move-outs cut occupancy by about 140 basis points.
  • Quarterly retention of 27.9% remained low, reflecting the ongoing wave of legacy move-outs still working through the portfolio.
  • Management flagged a difficult third-quarter 2026 comparison because the prior-year period had recognized about $4 million (230 basis points) of restoration fees and net real estate tax refund benefits.
  • Life science lease-execution timelines at Kilroy Oyster Point Phase 2 remained elongated and hard to predict, and Flower Mart still did not support development economics, with expense capitalization set to stop at year-end 2026.

More on Kilroy Realty Corp

Reported 2026-07-28 · figures from the Kilroy Realty Corp Q2 2026 earnings call.

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