Persistent Headwinds Will Erode West Coast Office Values

Key Takeaways

• Weak office market demand and tenant shifts toward digital workspaces are causing persistent leasing challenges and undermining Kilroy’s occupancy rates and income growth.
  
• Heavy exposure to volatile tech-centric West Coast markets, coupled with high operating costs and oversupply, increases risk to profitability and asset values.
  
• Rising AI sector demand, asset monetization, and ESG-focused high-quality properties position Kilroy for enhanced leasing, revenue growth, and strong, flexible financial performance.

Catalysts

Kilroy Realty Corporation (NYSE: KRC, the “Company”, “Kilroy”) is a leading U.S.

• The ongoing shift to remote and hybrid work models is reducing overall demand for office space, causing persistent vacancies and putting downward pressure on rental revenues across Kilroy’s core West Coast urban markets; this structural headwind is likely to lead to lower occupancy rates and stagnant or declining leasing income in the coming years, directly impacting top-line revenue growth and long-term net operating income.
  
• Rapid advancements in digital collaboration tools and AI adoption are making physical office and lab spaces less essential for tenants, resulting in structurally weaker leasing pipelines and softer tenant demand over the long run; this trend risks sustained negative re-leasing spreads and chronic underutilization of Kilroy’s premier assets, with material negative implications for rental rate growth and earnings power.
  
• High geographic concentration in tech
• and life sciences-heavy West Coast gateway cities exposes Kilroy to elevated risk from local economic downturns and tech sector volatility, as evidenced by recent large tenant move-outs, bankruptcies, and impending lease expirations; this vulnerability is expected to undermine occupancy stability and further erode net margins and cash flow reliability.
  
• Persistent oversupply of high-end office space, especially in San Francisco and Seattle, has intensified leasing competition and forced landlords to offer aggressive concessions or below-market rents; the resulting downward pressure on rental yields and higher tenant improvement and leasing commission costs will compress overall profitability and delay any potential recovery in net effective rents.
  
• Elevated capital expenditure requirements for building upgrades—driven by tenant demands for amenitization, ESG retrofits, and regulatory compliance—are likely to increase operating expenses and erode operating margins, while climate-related risks and rising insurance costs in coastal urban markets further threaten long-term earnings and asset values.

Kilroy Realty Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kilroy Realty compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kilroy Realty's revenue will decrease by 0.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 17.6% today to 9.0% in 3 years time.
• The bearish analysts expect earnings to reach $101.1 million (and earnings per share of $0.41) by about July 2028, down from $198.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 50.1x on those 2028 earnings, up from 22.5x today. This future PE is about the same as the current PE for the US Office REITs industry at 50.1x.
• Analysts expect the number of shares outstanding to grow by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

Kilroy Realty Future Earnings Per Share Growth

Risks

• The rapid expansion of the AI sector and return-to-office mandates are driving significant increases in leasing activity and tour volume, particularly in San Francisco and Seattle, which could result in higher occupancy rates and increased rental revenue over time.
  
• Across Kilroy’s West Coast portfolio, leasing pipelines have expanded, showing a 40% portfolio-wide and 60% San Francisco-specific increase in tour activity year-over-year, indicating strong forward visibility into potential revenue growth and improved net margins if these tours convert to leases.
  
• The company’s ongoing asset sale and land monetization strategy provides liquidity and capital flexibility, enabling potential stock buybacks or debt reduction, which could boost earnings per share and support net margins if redeployment is exercised effectively.
  
• Kilroy’s recognized leadership in sustainability and focus on high-quality, amenitized buildings align well with tenant demand for ESG-compliant office space, likely supporting higher rental rates and occupancy while controlling expenses, thus positively impacting both revenue and net margins in the long term.
  
• A strong balance sheet with substantial unencumbered assets and well-laddered debt maturities gives Kilroy the financial flexibility to navigate market volatility, pursue opportunistic acquisitions, and withstand local economic downturns, supporting stable or increasing long-term earnings.

Valuation

• The assumed bearish price target for Kilroy Realty is $33.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kilroy Realty's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $59.0, and the most bearish reporting a price target of just $33.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $101.1 million, and it would be trading on a PE ratio of 50.1x, assuming you use a discount rate of 7.9%.
• Given the current share price of $37.83, the bearish analyst price target of $33.0 is 14.6% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.