Kilroy Realty (KRC) is present in some of the West Coast’s premier office sub-markets. The company operates in the coastal regions of Los Angeles, Orange County, San Diego County, the San Francisco Bay Area, and Greater Seattle.
As of September 2015, the company has the largest presence in the San Francisco Bay Area with 30% of the total portfolio. It was followed by San Diego County with 25%, Los Angeles and Ventura Counties at 27%, and Greater Seattle at 16%. The presence in these high-growth markets offers a strategic advantage to Kilroy Realty.
San Francisco has the strongest market
A report from property research company Jones Lang LaSalle shows that San Francisco and Silicon Valley have experienced the strongest demand for leased space, created by the technology companies. Jones Lang LaSalle data also shows that rents in Silicon Valley and the San Francisco Bay Area averaged $73.29 per square foot, much higher than the US average of $30.59. The rising demand and higher rents bode well for Kilroy Realty, as they boost the company’s revenue growth.
Market concentration risk
As mentioned above, the company has a heavy concentration in the California and Greater Seattle markets. A slump or lack of growth in the industries in these regions could result in a decline in demand for office space, leading to pressure on the company’s top line. A geographically diverse portfolio could help mitigate the risk of portfolio concentration. In addition, the California market is considered as more litigious and more highly regulated with higher tax rates than many other states, which could hinder strong business growth in the area.
Other major office REITs such as Alexandria Real Estate Equities (ARE), SL Green Realty (SLG), and Boston Properties (BXP) are following the portfolio diversification strategy. The SPDR Dow Jones Global Real Estate ETF (RWO) invests ~0.6% of its portfolio in Kilroy Realty. In the next part of this series, we’ll discuss Kilroy Realty’s tenant management.