(Save the date: RealShare Los Angeles comes to the Hyatt Regency Century Plaza in Los Angeles, CA, on March 27, 2013.)
LOS ANGELES-GlobeSt.com reported last week about the spate of large-scale deals that Kilroy Realty Corp. has closed recently, including the complete preleasing to Salesforce.com of 350 Mission St., a 445,000-square-foot office tower in San Francisco that is still under construction; the disposition of its entire industrial portfolio and two small office projects for $355 million; and the acquisition of a 12-acre land site in Sunnyvale, CA, on which it will develop, own and manage a 587,000-square-foot office complex for LinkedIn Corp.The question on many people's minds is what's next for Kilroy, and how do they manage to complete so many large transactions in such a short period of time?
GlobeSt.com spoke with Tony Natsis—an attorney with Allen Matkins here, which represented Kilroy in the above-mentioned transactions—about Kilroy's business strategy and how the firm is able to be so nimble with such sizable deals. “Kilroy has three really big advantages that a lot of other firms may have, but they are not completely concentrated on the West Coast the way Kilroy is,” Natsis tells GlobeSt.com. “First, they have a lot of development expertise—Kilroy started with Kilroy Sr. in the '40s as a developer of high-rise buildings for the aerospace industry in L.A. They have a tradition that's 70 years long of building and developing, and a lot of other REITs are not historically as experienced in development.”
Natsis says Kilroy's second advantage is liquidity. “They're well-liked on Wall Street. Kilroy is stock offerings and bank debt that's untapped—they're sitting on hundreds of millions of dollars of money they could borrow and cash equivalents. “
Third, the firm's strong team of senior officers, including a senior officer in each western region—San Diego, L.A., Northern California and Seattle—at the EVP level, in addition to John Kilroy, adds up to nine or 10 “smart real estate guys at a high level that can transact, develop and lease. They're put together a great team.”
Natsis calls Kilroy's advantages, which led to the three recent monster deals, the “perfect storm” for the company. “There are not many people who can compete with them on a regional basis like that. Boston Properties is like them, but Kilroy has much more emphasis on the West Coast.”
As to whether there are more big deals in-the-works for Kilroy, Natsis says, “I think that not just for Kilroy, but for other people who have been very successful, you have to keep changing your game plan. My prediction is that if you do that your game plan will continue to work. Someone like Kilroy is built to continue to chase product in the market whatever it is because they have the wide range of skill and liquidity to do that.”
The triumvirate of advantages enabled Kilroy to buy 350 Mission St., tear it down and go spec because they knew they would be able to lease it to a strong tenant like Salesforce.com. The same is true for the Sunnyvale/LinkedIn project.
And what of the industrial dispositions? “Industrial is super labor-intensive, and it's non-conforming now because the bulk of the REIT is heading in the direction of urban high-rise or low-rise office,” says Natsis. “Northern California, Seattle/Bellevue and San Diego are all going urban high-rise. It's a great time to sell industrial in Orange County and redeploy that capital into what's more their drive train. It makes sense now that office is big for them.”
Natsis adds that high-rise office is where “everybody is going to head sooner or later. If you look at most successful institutional landlords historically since the '90s, they own high-rise office products in urban markets. It's the natural progression, and if you have the liquidity and the talent, that's the play everybody wants to make. Kilroy said, 'We're going to do that, but we'll hit it on the West Coast: L.A., San Francisco, Silicon Valley, Seattle/Bellevue and maybe one day Portland. That's where we have the most power and presence.' ”
The slow recovery of the office market doesn't bother Kilroy because it is focusing its efforts on properties geared toward media, social media and tech companies, Natsis says. “It's by design now that these are their tenants.”
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
