Demand For Space In West Coast's Newest Office Projects High
Demand for office space in San Francisco and the West Coast remains high and vacant office space is leasing up quickly. Many developers with older office stock are putting more money toward tenant improvements to compete with the nearly 3M SF of office space hitting San Francisco's market within the next two years. Check out the latest leasing activity of some of the largest public real estate companies in the Bay Area and on the West Coast.
Kilroy Realty Trust
Kilroy Realty has made substantial progress on leasing up its under-construction developments during 2017. Kilroy’s net operating income increased 10.7% during Q2 to $128.8M (compared to $116.3M in the year-ago quarter) due to an increase in rental income of $1.1M.
100 Hooper in San Francisco is fully leased to Adobe and there has been increased interest in the project’s 86K SF of production, distribution and repair space, Kilroy Realty CEO John Kilroy said during a call with investors. Construction is on time and on budget, he said. The 314K SF project is expected to deliver in the first half of 2018.
Leasing activity at Kilroy’s The Exchange in Mission Bay has accelerated now that the buildings are visible, and Kilroy expects the office and life science facility to be largely leased by next year.
Construction continues at its mixed-use project One Paseo in Del Mar. Construction includes site infrastructure, 237 residential units and 96K SF of retail. The developer has made progress on leasing retail with key destination tenants, primarily food and beverage, Kilroy said.
Over the next two years, Kilroy Realty will deliver about $1.4B in projects with cash returns averaging 7% to 8%, according to Kilroy. The developer’s near-term development pipeline includes two projects in San Diego County and Los Angeles, which will total 1.2M SF.
During Q2, Kilroy Realty signed or renewed office leases totaling 490K SF, and its office portfolio was 93.9% occupied and 96% leased at the end of the quarter. Greater Seattle boasted the highest occupancy of Kilroy’s markets with 97% occupied, followed by the San Francisco Bay Area with 95.1% occupied. Occupancy rates were 94.7% in Orange County, 93.5% in San Diego and 91.2% in Los Angeles and Ventura counties. The company projects year-end occupancy across its portfolio to be in the 93.5% to 94% range.
Rents on the remaining 2017 expiring leases were about 15% below market. The remaining lease expirations total about 567K SF, of which about half has been re-leased, including 183K SF to a group health provider in Seattle. Four leases totaling 740K SF are set to expire through 2018.
Kilroy Realty's largest tenants at the end of Q2 were LinkedIn with 663K SF, DirecTV with 667K SF and Salesforce with 468K SF.
Boston Properties
Boston Properties’ tenant improvement costs increased during the quarter. Second-generation TIs increased to $63.96/SF in Q2 compared to $55.92/SF in Q1. Both tenants and the landlord are investing more capital into TIs due to three factors, Boston Properties President Doug Linde said during a call with investors. Production costs have risen since contractors are very busy. Code-related issues, such as those under Title 24, also have increased costs to build. Second-generation space also is competing with a lot of new construction, which often provides significant TIs. Boston Properties has increased allowances in some instances.
Regardless of this increased cost, same-property net operating income for office increased 4.7% during Q2 to $375.2M compared to $358.5M. Boston Properties’ San Francisco and Los Angeles portfolio, which includes over 7M SF and 40 buildings, is 90.4% occupied. This portfolio makes up 18% of its companywide NOI. Its San Francisco assets are 93.4% leased. San Francisco makes up the bulk of Boston Properties' West Coast portfolio with over 4M SF. Its financials for San Francisco do not include the under-construction Salesforce Tower.
Salesforce has leased 881K SF inside its namesake tower and was the developer’s biggest signed deal during the quarter. Salesforce Tower was 82% pre-leased by the end of the quarter, according to Linde. Current discussions involve law firms, co-working companies, private equity, venture capital, hedge funds and private foundations. If deals in negotiation are completed, the tower will be 90% leased. Salesforce will start moving into the building in early 2018 with its move-in spanning six quarters.
The developer also completed a 62K SF deal at Colorado Center, which it owns with Kilroy, in Los Angeles, bringing total committed space to 93%. Boston Properties is looking to expand its presence in LA following the success of the Colorado Center, according to Boston Properties CEO Owen Thomas. It is looking for opportunities in West LA, Santa Monica, Beverly Hills, Hollywood and El Segundo.
Columbia Property Trust
Columbia Property Trust’s 650 California St. in San Francisco is 90% leased. Notable leases during the first half of the year include a 12-year 61K SF lease with WeWork and an 86K SF lease with Affirm in April. An existing tenant also renewed and expanded its lease to 22K SF. Since the beginning of the year, Columbia has leased 188K SF. It also is in discussions with other prospective tenants, according to Columbia Property Trust President and CEO Nelson Mills.
Columbia entered into a JV with Allianz in July and will share ownership of University Circle in Palo Alto and 333 Market St. in San Francisco.
San Francisco is Columbia’s second-largest market based on net operating income. Its NOI for the region was $39.6M during the first half of the year, a 2% decrease compared to the $40M of NOI during the first half of 2016.
Hudson Pacific Properties
Hudson Pacific’s net operating income increased to $231.1M during the first half of the year compared to $198.8M during the first half of 2016. Revenue from its office properties increased 15.5% to $166.9M (compared to $144.4M for the year-ago quarter) due to an increase from rental revenue of $15.6M as well as increases in tenant recoveries, parking and other revenue. Rental revenue was driven by higher rents and occupancy throughout the company’s same-store portfolio, which includes Netflix’s lease starting at ICON and rents associated with various properties acquired in Los Angeles and San Francisco.
Hudson Pacific completed over 580K SF of deals during the second quarter, bringing its total activity to 1.1M SF year to date. This marks the sixth straight quarter of leasing activity over 500K SF, according to Hudson Pacific Properties President and CEO Victor Coleman.
San Francisco boasted some of Hudson Pacific’s largest leases during the quarter. Bank of America renewed its 95K SF lease at 1455 Market St. with about a 300% increase in previous rents. Under the renewal, 26K SF will expire in June with the remaining space expiring December 2024. GluMobile signed a 57K SF lease at 875 Howard through October 2027. DoorDash also signed a lease for about 51K SF through August 2023 at 901 Market St., backfilling space NerdWallet vacated in April. Host Analytics signed a lease for 35K SF through March 2023 at 555 Twin Dolphin in Redwood City.
Hudson Pacific’s properties in Silicon Valley remain strongly positioned, according to Coleman. The 16-mile BART extension has provided increased access to public transit at Hudson Pacific's properties in Milpitas, San Jose and Santa Clara. He expects San Jose and Silicon Valley to remain an epicenter of advanced industries, such as artificial intelligence, robotics, machine learning and virtual reality, which have been strong employment drivers.
Hudson Pacific executed 19 deals at Gateway, Hudson Pacific’s second-largest asset by square footage, totaling 76K SF over the last three months, according to Coleman. The 608K SF asset at 2001 Gateway Place in San Jose has another 140K SF of deals in the pipeline, which include negotiations or letters of intent. The developer also executed 25 leases totaling 95,400 SF in North San Jose within the last 120 days.
In Southern California, Hudson Pacific’s portfolio is dominated by media-related companies with Netflix grabbing another 48K SF at Sunset Bronson during the quarter. Demand has been strong from content creators for studio-adjacent office space. The developer is in conversations with prospective tenants with requirements for 125K SF to 300K SF for its EPIC development, expected to break ground in fall. It also has leases or is in negotiations for about 70K SF at Fourth and Traction, and a prospective deal for the entirety of 604 Arizona, according to Coleman.
