Kilroy Realty 2Q15 Earnings Call Notes

San Francisco’s CRE leasing market is hot

“San Francisco Bay area is once again on pace to outperform most U.S. real estate markets in 2015. In San Francisco, rental growth remains strong. The supply of large blocks of space is very limited and demand continues to grow. JLL reports that there are now more than 35 tenants in the market for office space greater than 50,000 square feet and only three available blocks of space of that size.”

“In the Silicon Valley venture capital funding continues fuel growth as the Bay area accounted for approximately 55% of total U.S. high tech venture funding. This ongoing tech expansion has driven Class A vacancy rates in the region down to 4.2%, the lowest in almost a decade. We are currently 98.9% leased in the Bay area.”

Seattle attracts tech companies too

“Greater Seattle continues to attract technology companies and workers, Oracle, Twitter and Facebook continue to aggressively grow the local headcount as technology accounted for more than 40% of Seattle’s tenant requirements in the second quarter.”

LA continues to grow thanks to entertainment industries and limited construction

“Los Angeles continues to strengthen the strong rent growth in the key submarkets of Santa Monica, West LA, Beverly Hills and Hollywood. Most of the demand is driven by the creative and entertainment industries and new construction remains limited. Google, Verizon and Snapchat have grown organically in the region and have been key drivers of office absorption.”

People are trying to get there office space needs right. It’s intense because there’s so little space coming through the pipelines

“people keep changing the amount of square footage. We have one tenant that want 300 and then they wanted 150, now they want 200, 250. There’re all trying to figure out what their long term needs are and that has become more intense because of the — due to some space available the tenants are really worried about getting it right because there is so little space coming through in the pipeline.”

Analysts always ask where we are in the cycle, I say we don’t see any signs of deterioration

“in the last couple of years you and other analysts, investors and so forth have asked the questions, that same question, where are we? And I’ve been probably wrong, I don’t know if it’s wrong or right but I said we don’t see any signs of deterioration, we’re not seeing signs of deterioration in fact we are seeing acceleration of tenants moving into the area.”

Who the heck knows where we are in the cycle?

“in terms of the bigger, in terms of where we are on the cycle who the heck knows? I mean it’s one of the reason why we operate with such a conservative balance sheet if you are going to do the development and so forth that we do, you want to make sure you are well insulated.”

San Francisco is small and tough to develop. Supply and demand says rents are probably going higher

“In terms of the question of how much in San Francisco, one thing about San Francisco remember it’s 45 square miles, a share less than 10% can be developed for non-residential and there is a [indiscernible] of development size that are good, and there’s increasing demand.

So you this incredible kind of economics 101 of supply demand imbalance, we like that. I am not a fan of the policy [indiscernible] because a bad policy but it is the law and it’s reality and we’re the recipients I think of that supply imbalance. So rents I think are going to continue to go up, where they’re seeing some non-essential users in San Francisco sort of smaller companies or older companies that have profit margins occasionally you see them move over to Oakland or somewhere else.”

Some of these companies will fail, but there is fantastic demand behind it

“We’ve always said, there is going to be some failures, the nature of — it’s just like baseball. Not everybody gets up and it’s a homerun and not every team with a winning season wins every game. I don’t mean to be queue here, except for there are going to be companies that fail, this is the nature of it. What is very important is that there are — it’s that there is just strong demand, just fantastic demand. So what happens is some of these companies reduce their footprint if they do they generally get snapped up by somebody else. So I think if anybody thought that all these companies are going to survive, they’d be smoked at some point.”

Companies that you would have called Unicorns have gotten stronger

“I think the quality is improved because you end up with some of the big name companies that have come in and with companies like Airbnb, or a couple of years ago you would have called those companies probably unicorns and today’s there’s real cash flow of big companies that have really strong financial wherewithal so that’s the other side of the evolution, the nature of evolution is some of them don’t make it and some of them become strong.”