Key Takeaways: Following several days of circulating rumors, West Coast office landlord Kilroy Realty (KRC) announced last night that it would be acquiring the 730ksf, 36-story, newly-constructed Indeed Tower in Austin, TX for $580 million or just under $760psf inclusive of an adjacent 36ksf historic post office. The per-pound price undoubtedly reflects a non-stabilized value as the office tower is just 57% leased (42% leased to Indeed through 2034), indicating that the fully stabilized value could approach $1,000psf despite a long-term ground lease encumbrance, with KRC in position to capture value through lease-up. The asset encompasses a full city block in the CBD, and is highly amenitized consistent with newer product in KRC's portfolio.
It is hard to overstate how significant this move is for the strategic signaling of KRC, which for years had positioned itself as the best-in-class operator and developer of modern and creative office product in Los Angeles, the Bay Area, Seattle and San Diego, as well as for the Austin office market itself. While the asset is KRC's first in Austin and represents just a small fraction of KRC's ~14msf portfolio, we believe this is classic case of "skating to where the puck is going." The use of language such as "platform for future growth," "scale in the market," and "office market that is strengthening" likely means that KRC will look to add to its presence in Austin, but more broadly seek to diversify away from California given outbound population migration, relative unaffordability versus pretty much everywhere, a relatively unfriendly business climate vs. Texas and other Sunbelt states, and the perpetually nagging questions around Prop 13/tax policy in California. With that said KRC also announced a $42 million purchase of a land site in San Diego, and any shift will be a multi-year lift, but it is possible that we see a somewhat meaningful portfolio mix shift over the next ~5 years.
Finally an un-related update: our next Black Book on the Industrial/Logistics REITs will be held on Tuesday, 7/6 at 12:30pm ET. At that point we will be actively covering over ~20 stocks across three REIT subsectors on an ongoing basis, and will shift to "sharp-shooting" one-off ideas in the Office subsector and elsewhere. Longer-term looking into 4Q21, we will be looking to the Data Centers as well.
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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