Office REITs and the Path to Recovery: What Kilroy's BofA Presentation Reveals

The commercial real estate sector, long shadowed by the lingering effects of the post-pandemic shift to remote work, is showing signs of stabilization. Among the most compelling narratives is the resurgence of office Real Estate Investment Trusts (REITs), particularly those with strategic positioning in high-demand markets and a commitment to sustainability. Kilroy Realty Corporation (KRC), a West Coast-focused office REIT, has emerged as a case study in resilience. Its participation in the Bank of America (BofA) 2025 Global Real Estate Conference underscores a broader industry reckoning with the future of office space. By examining KRC's strategies alongside BofA's sector analysis, we can discern why office REITs may yet prove to be a compelling long-term investment.

Strategic Positioning: Kilroy's Resilience in a Transformed Market

Kilroy's portfolio, spanning 16.4 million square feet of office and life science properties, is anchored in premier West Coast markets such as San Francisco, Los Angeles, and San Diego. As of June 30, 2025, its stabilized office portfolio reported 80.8% occupancy and 83.5% leased, reflecting steady demand despite broader sector challengesKilroy Realty Corp (KRC) to Participate in Bank of America 2025 Global Real Estate Conference^[1]. This performance is underpinned by a strategic pivot toward high-growth sectors, including artificial intelligence (AI) and life sciences, which have driven over 400,000 square feet of leasing activity in Q2 2025 aloneKilroy Realty Corp Reports Strong Q2 2025 Financial Results^[2].

The company's emphasis on sustainability further differentiates it. Kilroy has maintained carbon-neutral operations since 2020 and has been recognized with accolades such as the GRESB five-star rating and the ENERGY STAR Partner of the Year awardKilroy Realty Corp (KRC) to Participate in Bank of America 2025 Global Real Estate Conference^[1]. These credentials align with a sector-wide shift toward environmentally responsible buildings, as tenants increasingly prioritize wellness and sustainability in their workspace choices2024 REIT Market Review and Performance Drivers for 2025^[3]. Kilroy's CEO, Angela Aman, has explicitly linked this trend to San Francisco's recovery, noting that AI-driven economic activity is fueling demand for premium office spaceKilroy Realty Corp Reports Strong Q2 2025 Financial Results^[2].

Sector Trends: BofA's Outlook and the Path to Recovery

BofA's 2025 analysis of the office REIT sector paints a cautiously optimistic picture. The bank projects that vacancy rates will peak by early 2026, with leasing activity gradually improving as companies adapt to hybrid work models and the return-to-office trend gains momentumInside REITs: Will Growth Ramp Up?^[4]. Crucially, the report highlights a structural bifurcation in the market: high-quality, well-located properties are gaining favor, while lower-quality assets face obsolescence2025 Global REIT Outlook - Illuminating Opportunities Worldwide^[5]. This dynamic positions REITs like Kilroy—those with disciplined capital allocation and a focus on premier assets—to outperform peers.

The firm also notes that office REITs are benefiting from declining new supply, which should support occupancy growth over timeInside REITs: Will Growth Ramp Up?^[4]. Kilroy's selective asset sales, including properties in Silicon Valley and Los Angeles, exemplify this strategy. By generating liquidity for reinvestment and debt reduction, the company is optimizing its balance sheet while maintaining a strong presence in key marketsKilroy Realty Corp Reports Strong Q2 2025 Financial Results^[2]. BofA's Jana Galan, a REIT analyst, emphasizes that capital allocation and NOI growth will be critical metrics for sector resilience, a focus that Kilroy has clearly embraced2025 Global REIT Outlook - Illuminating Opportunities Worldwide^[5].

Challenges and Opportunities

Despite these positives, challenges persist. Kilroy's total assets as of June 30, 2025, stood at $10.86 billion, a decline from the previous year's $11.54 billionKilroy Realty Corp Reports Strong Q2 2025 Financial Results^[2]. This reflects broader economic pressures, including elevated interest rates, which remain a drag on valuation growth. BofA's 2025 outlook acknowledges that while REITs are projected to deliver 9.5% total returns, earnings growth will remain modest, with FFO/AFFO growth estimated at 4.8%2024 REIT Market Review and Performance Drivers for 2025^[3]. For office REITs, the path to recovery hinges on their ability to navigate these headwinds while capitalizing on structural shifts.

Kilroy's approach—combining sustainability, strategic reinvestment, and a focus on high-growth sectors—positions it to do just that. Its Q2 2025 FFO of $1.13 per share, which exceeded expectationsKilroy Realty Corp Reports Strong Q2 2025 Financial Results^[2], demonstrates the potential for earnings resilience even in a challenging environment. Moreover, the company's development pipeline, including stabilized office properties and residential assets, offers a long-term growth catalyst2025 Global REIT Outlook - Illuminating Opportunities Worldwide^[5].

Conclusion: A Case for Long-Term Confidence

The office REIT sector is at an inflection point. While the transition to hybrid work models has disrupted traditional demand patterns, it has also accelerated the evolution of office space into a more flexible, technology-driven, and sustainable asset class. Kilroy's performance at BofA's conference and its operational strategies highlight how strategic positioning can turn these challenges into opportunities. For investors, the key takeaway is clear: office REITs with strong fundamentals, a focus on quality, and alignment with macroeconomic trends—such as the AI revolution—are well-placed to deliver value over the long term.