Kilroy Realty Corp. is expecting lower occupancy in the coming year as it absorbs two sizable move-outs.
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“This year, we anticipate some challenges in office leasing,” Kilroy CEO and Chairman John Kilroy told investors on the company’s quarterly earnings call Thursday.
Kilroy is anticipating occupancy will be between 86.5% and 88% in 2023, a drop from 2022’s average of 91.2%.
“Most of this decline can be attributed to the Amazon and DirecTV move-outs, which occur in the first half of the year,” interim Chief Financial Officer Elliot Trencher said.
Amazon is moving out of Kilroy’s West Eighth property in Seattle. The e-commerce giant isn’t renewing its lease for about 375K SF, nearly 70% of the 539K SF building, which is set to expire in April. Amazon was a tenant for over a decade, according to the Puget Sound Business Journal.
A release announcing Kilroy’s $490M purchase of the West Eighth property in 2021 said Amazon was paying “rents significantly below market.”
“We planned for this possibility when we bought the building in 2021 and have begun implementing our plan to retenant the project and roll up the rents to market,” Kilroy said.
The other large move-out in Kilroy’s portfolio is in El Segundo, California. The parent company of tenant DirecTV had been in a legal battle with Kilroy because DirecTV wanted out of a large chunk of its space at one of the three Kilroy-owned properties on Imperial Highway.
The matter was set to go to trial in late 2022, but ultimately, Los Angeles County Superior Court records show a settlement was agreed upon and the case was dismissed in early January.
“At the end of the quarter, we came to a resolution with DirecTV in El Segundo,” Trencher said. “As part of the agreement, we took back approximately 150K SF effective at the beginning of the year.”
DirecTV continues to lease about 530K SF from Kilroy in El Segundo, Trencher said. According to Kilroy’s latest earnings report, DirecTV’s other leases expire in 2026 and 2027.
Kilroy’s net income in the fourth quarter of last year was $59.5M, up from $55.1M the same time in 2021. But its net income through the fourth quarter was $259.5M, less than half of the $658.9M Kilroy made through Q4 2021.
Kilroy executives said they expect occupancy to level out in the second half of 2023.
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