Good day and welcome to the second quarter 2021 Kilroy Realty Corporation earnings conference call. All participants will be on a listen-only mode, should you need assistance please signal conference specialists by pressing the star key followed by zero. After today's presentation there will an opportunity to ask question. To ask a question you may press star then one on your touch tone phone and to withdraw your question please press star then two. Please note that this event is being recorded. I w ould now like to turn the conference over to Ms. Michelle Ngo, Chief Financial Officer. Please go ahead.
Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Tyler Rose, Rob Paratte, and Eliott Trencher. At the outset, I need to say that some of the information we will be discussing is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next eight days, both by phone and over the internet. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC, and both are also available on our website. John will start the call with business conditions in our market and then review our operational and strategic activities. I will discuss second quarter financial results and provide you with earnings guidance for 2021.
We'll be happy to take your questions. John?
Thank you, Michelle. Hello, everybody. Thank you for joining us today. We've had an extremely active and productive period since our last call. We've signed several large long-term leases at strong rental rates. We've continued to expand our life science portfolio, and we've completed four acquisitions that continue to position us for future growth. Before I review the acquisitions, let me share our view on current market conditions. I'm happy to report that Kilroy's workforce is fully back in the office, and we are excited that more and more of our tenants are joining us. It is clear the U.S. economy is rebounding more quickly than expected. Every week brings more tenant leasing discussions and more requests for property tours. We are seeing strong job creation, high levels of capital investment, continued expansion, and healthy financial performance from our major tenants, and increasingly so from our mid to smaller tenants.
We continue to see high quality, well-located assets in our markets, that are commanding strong valuations with record pricing. These factors are translating into increased leasing activity in office and residential, as well as continued strength in our growing life science portfolio. Starting with office. Data on broader rent levels remains limited, but the information we do see suggests that office rents in our markets for premier quality properties and locations did not decline materially from pre-COVID levels, and some of our projects' rents are increasing once again. In San Diego, we recently executed the definitive agreement with a major technology company to develop and lease a 71,000 sq ft office project in a market where rents have reached all-time highs. Construction should commence later this year. We are also happy to report that the office component of our One Paseo project is now fully leased.
The recent lease rates reflect all-time highs for the market and have risen approximately 25% from our original underwriting. One Paseo and the 71,000 sq ft project demonstrates our ability to continue creating significant value by developing well-located world-class office projects. Finally, in Seattle, also in the second quarter, we signed a 57,000 sq ft, seven-and-a-half-year lease with a gaming company at our Key Center project at an all-time high rental rate for the Bellevue market. The rent was 25% higher on a cash basis and 55% higher on a GAAP basis compared to the prior lease. Bellevue remains one of the strongest markets in the country, anchored by Amazon, but with plenty of depth from other technology and gaming companies. Moving to life science. Fundamentals continue to outperform.
Starting in San Diego, vacancy rates in Torrey Pines and University Town Center are incredibly low at less than 2%, and rents are up 15%-20% year-over-year and are at all-time highs. The lack of availability in these two sub-markets has forced life science companies to expand into the adjacent areas of Sorrento Mesa, Del Mar Heights, and along the 56 Freeway. As an example, earlier this month in Del Mar Heights, we signed a 10-year, 96,000 sq ft full building lease with DermTech, a publicly traded life science company, at our 12340 El Camino Real property. The building will serve as the company's new headquarters as it expands its footprint in the market. We are in detailed negotiations on another 200,000 sq ft of life science transactions also in Del Mar Heights.
In UTC, we are in the final stages of lease negotiations with another publicly traded life science company for a 10-year, 51,000 sq ft full building lease at our 4690 Executive Drive project, slated for redevelopment in early 2022. These transactions are in properties to be converted to life science and will have mark-to-market rent increases of more than 50%, highlighting the low risk, high return conversion opportunities embedded in Kilroy's existing San Diego office properties. It's important to note that our success in these conversions is in part due to our intense focus on quality and buildings that have the right layout and physicality to accommodate different uses.
As mentioned, life science demand is moving north through Del Mar Heights and east along the 56 corridor, where a major life science company has committed to lease a 500,000 sq ft spec project nearing completion in close proximity to our Santa Fe Summit development project. As a reminder, we have full entitlements to build between 600,000 sq ft and 700,000 sq ft of life science product on Santa Fe Summit phases II and III. We are evaluating the commencement of construction on at least one phase for later this year. Moving to South San Francisco, life science fundamentals continue to tighten with vacancy rates less than 1.5% and rents at all-time highs. In June, we commenced construction on the second phase of our roughly 50 acres, 3 million sq ft Kilroy Oyster Point life science campus.
Phase II follows the successful leasing of phase I, a 570,656,000 sq ft project that was fully leased two quarters after commencement. Phase II will include just under 900,000 sq ft of space across three buildings and will represent a project total investment of $940 million. Approximately $160 million of that has already been invested. We believe we are ideally positioned with phase II and already in negotiations with several prospective tenants. In summary, we will be delivering 2.5 million sq ft of state-of-art life science projects across San Diego and San Francisco in the next five to 30 months. This includes four projects in San Diego, Kilroy Oyster Point phase I and phase II in South San Francisco, and beyond those, phases III, IV, and V of Kilroy Oyster Point will expand our life science portfolio by an additional 1.5 million sq ft-2 million sq ft.
Adding this all up and combining with our existing life science projects, we will have assembled a best-in-class life science portfolio of just under 6 million sq ft with an average age of three years in the best locations. Upon full build-out, life science could be 25%-30% of our total NOI. I'd like to provide an update on our residential portfolio. In San Diego, our One Paseo project of 608 units is now more than 93% leased, which is up from approximately 75% leased last quarter and exceeds our prior leasing guidance. Rent levels have increased 15%-20% since the beginning of the year. In Hollywood, our latest luxury tower, the Jardine, is now 30% leased just two months since its completion.
To sum up our residential portfolio, we now have more than 1,000 luxury residential units between our two Hollywood projects and our San Diego One Paseo residential living. On the retail front, our rent deferment program ended in the second quarter, and we're seeing substantial pickup in people traffic as well as in leasing. To summarize our leasing performance, in the first quarter, we signed 200,000 sq ft of leases, of which 2/3 were renewals. In the second quarter, we signed 220,000 sq ft of leases, of which 2/3 were new leases. This is a good indication of a positive shift in market conditions. So far this quarter, we've signed a commitment of 170,000 sq ft of new leases. At this pace, we expect to return to our pre-COVID quarterly run rate later this year. With that update, let me review our capital allocation activities to date.
To recap, in the first quarter, we completed the sale of The Exchange for $1.08 billion or $1,440 per sq ft, which was nearly twice our total investment. It was a record price for commercial real estate in San Francisco and provide us with substantial capital for new investment. To date, we have reinvested $680 million across four value-creating projects that provide a combination of accretion, leasing upside, and development opportunity. As we previously reported, in late June, we closed on a $580 million acquisition of Indeed Tower, a newly constructed 734,000 sq ft Class A office property located in the heart of Austin's central business district. It is currently 57% leased, with 42% of the space leased through 2034 to Indeed, an investment grade rated global recruiting platform.
The acquisition immediately established KRC as the fifth largest Class A office owner in the CBD with arguably the best building in the greater Austin area and provides the opportunity to create additional value through the lease up of the remaining space in a strong and geographically constrained market. We are excited about our expansion into Austin, a city with all the characteristics and growth potential that we look for when entering a new market. It has a young, well-educated population and contemporary urban culture that is very popular with its large numbers of millennial residents. Austin's broad technology presence is an attraction and strong advantage for us. We know these types of companies.
We understand their space requirements, and we've already worked with many of them in developing or adapting properties to meet their needs. With the tech boom in Austin in its early stages, we see these trends continuing.
Apple, Tesla, Google, and many others are nearing completion of expanded office spaces, which will bring more jobs to the region and further enhance the technology ecosystem. The acquisition of Indeed Tower was the perfect way for Kilroy to enter the market. The 36-story property is a unique asset, a highly visible floor-to-ceiling glass tower situated on a full city block. In the several months since we began underwriting the opportunity, the market has only strengthened, positioning us to exceed our yield expectations. To sum up, the acquisition places us in a state-of-the-art property in a premier submarket of one of the fastest-growing cities in the country. It provides an excellent foundation, expanding the greater Austin market and builds a strong operating platform for further growth. It advances our opportunities to partner with many of the leading technology companies in the world.
Our second investment during the quarter underscores our confidence in the vibrant Little Italy neighborhood of San Diego, just north of the city's downtown. In June, we completed the acquisition of a land site at 2045 Pacific Highway for $42 million. This is a full city block directly adjacent to our 2100 Kettner project and within walking distance of the bay. It is currently entitled for up to 275,000 sq ft of office space and will feature panoramic water views from every floor. Combined with our 2100 Kettner project, it creates opportunities for us to offer greater scale and flexibility to the increasing number of companies attracted to this exciting area. Similar to the scale and flexibility we've created in Little Italy, we enhanced our land assemblage in East Village with the acquisition of an $8.5 million land site earlier this year.
With this site, we now control two full city blocks entitled for up to 1.2 million sq ft of office or up to 1,000 residential units or some combination of the two. Our fourth investment was the purchase of a ground lease underlying our 491,000 sq ft Key Center office property in Bellevue, Washington for $47 million. The purchase price equated to $96 on a per building foot basis in a market where vacant land has traded for double this amount. The ground lease had a remaining term of 72 years, and the ground lease payments were tied to the project's income, which would dramatically increase since the last adjustment. We have now eliminated that exposure. As we saw with our recent gaming company lease in this building, rents continue to climb in Bellevue, especially for high-quality projects like Key Center. We completed the acquisition earlier this month.
These four investments were all off-market, and in each case, reflect our disciplined approach to capital allocation decisions and our continued commitment to position our company and our portfolio for the future. To wrap up, we had a very busy first half of the year. We sold a billion-dollar asset and redeployed a portion of the proceeds into projects with meaningful upside and value creation potential. We are expanding our life science portfolio with state-of-the-art development and redevelopment projects that have the proper physicality and are in the best locations. While we expect market conditions to ebb and flow, there is far more enthusiasm today than any time since the pandemic began. Finally, after years of evaluations, we've entered an exciting market by acquiring the best project in the city of Austin. That completes my remarks. Now I'll turn the call over to Michelle.
Thank you, John. FFO was $0.88 per share in the second quarter, which was $0.05 higher than the midpoint of our guidance. $0.035 were due to better-than-expected operating results, including earlier than projected lease commencements and stronger leasing at One Paseo residential. $0.015 were due to one-time items, including repayment of owed rents and lease termination fees. We are also happy to report we did not have COVID-related charges in the second quarter. In our same-store results, second quarter cash NOI was up 4.9%, reflecting strong rent growth and the one-time items noted above, which contributed 130 basis points to cash NOI. GAAP same-store NOI was up 5.5%, which was driven by $4.5 million of revenue reversals in 2020 or 2.3%, excluding the prior year reversals.
At the end of the second quarter, our stabilized portfolio was 91.8% occupied and 93.6% leased, which were both up 30 basis points from the prior quarter, reflecting additional lease commencement. Overall rent collection in the second quarter was 97%, with office and life science rent collection of 98%. Turning to the balance sheet. After funding the acquisitions that totaled approximately $680 million, our liquidity today stands at approximately $2 billion, including $860 million in cash and full availability of $1.1 billion under the new revolver. With respect to Indeed Tower, you will note that we included the project in our development pipeline with a total estimated investment of $680 million. This total reflects our purchase price of $580 million, which includes $35 million of tenant improvement credits related to in-place leases and an incremental $100 million of leasing and carry costs to stabilization.
We have no material debt maturities until 2023. Our net debt to Q2 annualized EBITDA was 5.8x . Let's discuss our 2021 guidance provided in yesterday's earnings release. To begin, let me remind you that we approach our near-term performance forecasting with a high degree of caution, given all the uncertainties in today's economy. Our current guidance reflects information and market intelligence as we know it today. Any COVID-related restrictions or significant shifts in the economy, our markets, tenant demand, construction costs, and new supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis. Projected revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancies. With those caveats, our assumptions for 2021 are as follows.
Cap interest is expected to be in the range of $77 million-$82 million, driven by the acquisition of Indeed Tower and 2045 Pacific Highway. We expect to end the year with net debt to EBITDA of approximately 6x . Same-store cash NOI growth is expected to be approximately 2%-2.5% for the year. At this time, we expect revenue recognition on the remaining 51% of our 333 Dexter development in 2022, given tenant improvement work timing. We expect year-end occupancy of approximately 91.5% for the office portfolio and 75%-80% for residential. Our guidance does not assume a material increase in transient parking, but as we've noted on prior calls, we expect to pick up roughly $1 million a month to get back to pre-COVID levels. We do not have any additional acquisitions in our budget.
Taking into account all these assumptions, we project 2021 FFO per share to range between $3.71-$3.82, with a midpoint of $3.77. To help you get to this midpoint, we deduct first-half actuals of $1.86 from the $3.77, which implies second half results of $1.91 or a $0.05 increase over the first half. The $0.05 are driven by the following major items: $0.13 of NOI loss from the sale of the Exchange, offset by the following positive items. $0.10 from higher capitalized interest and NOI from the acquisitions of Indeed Tower, 2045 Pacific Highway, and the Key Center ground lease. $0.05 from revenue recognition of KOP phase I in the middle of the fourth quarter, and another $0.03 from our stabilized portfolio, including contributions from One Paseo office and residential.
Lastly, as a reminder, these assumptions reflect COVID restrictions and circumstances as of today. That completes my remarks. We'll be happy to take your questions. Operator?
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Nick Yulico with Scotiabank. Please go ahead.
Great. Thanks. Hi, everyone. Maybe a first question for John or Rob. If you could just talk a little bit more about the activity of leasing in your markets for traditional office versus lab space. Maybe if you can just go through some of your markets and talk about kind of stronger and weaker points, please.
You want to do that one?
Yeah, sure. Hi, Nick. Good afternoon, everyone. Let me just touch on our markets. I'll go directly into San Francisco. Leasing activity in San Francisco, I'm speaking about office, has nearly tripled quarter- to- quarter. As John said in his remarks, there's a much different mood and attitude on the part of brokers as well as tenants. Many tenants we're seeing that during the pandemic had put their plans on hold for expansion or relocation, have now dusted off those plans and are back in the market. In the quarter in San Francisco, there were 15 transactions over 100,000 sq ft completed. I think interestingly, 12 of those 15 are relocations or expansions. Right now, there are about 118 new tenant searches that have materialized in the past five weeks or so. JLL is tracking about 2 million sq ft of transactions that are in LOI.
I would take a break right here to say that when you look at the sublease number, for example, of just under 9 million sq ft in San Francisco, no doubt still a daunting number, but the data is backward-looking, and there are transactions that have signed that tenants have not yet occupied that will bring that number down. I think most notable in San Francisco is the Macys.com space, which we have talked about throughout all of our quarterly calls. That space came on the market prior to the pandemic, and they signed 106,000 sq ft sublease with a company called Benchling, which is a relocation and expansion. Again, this goes to one of the themes John has talked about continually on our calls about flight to quality. The Macy's space is an excellent location, and the build-out is exactly what tech companies want.
There's another transaction pending that we can't go into or name the company, but it's a tech expansion that I think everyone will find interesting that we expect to close in the third quarter. Jumping to Seattle, again, I think Seattle is actually starting to really wake up and actually busier than San Francisco is. Sublease space in Seattle declined about 17% in Q2. There are right now about 196 active requirements in the market. Brokers are tracking about 4.4 million sq ft of demand, and that's about an 80% increase over Q4 2020. I think another very specific indicator of the health of the Seattle market is the Rainier Square project, which is fully leased by Amazon. As everyone knows, they've been subleasing that over time. They right now have about 200,000 sq ft of signed leases year to date, and they've got only 150,000 sq ft left.
Again, this speaks to the quality of the asset, quality of the build out, and the location. Before I leave the Bay Area or jumping to life science, let me just touch on the Bay Area one more time. Life science, again, continues to be extremely robust in the Oyster Point area. We're tracking over 4 million sq ft of demand from tenants. Developers that have product up and visible on the skyline, meaning steel is up and starting to close in buildings, have over 1 million sq ft of pending transactions that we expect will be signed between Q3 and Q4. KOP, as you know, started construction, and as we go vertical, we expect the same sort of activity at our project. Los Angeles is a little mixed. Again, you really have to look at the markets that we operate in.
Q2 leasing activity is moving closer to pre-pandemic levels, I would say. Nowhere is that more evident than in the Westside, where Hulu, Snapchat, and others have expanded in significant chunks of pieces of space. The last market I'll just touch on briefly because I think John covered it really well in his remarks. San Diego is benefiting both from an influx of large tech as well as the continuing growth of the life science market. Our 2100 Kettner project will be shell and core complete next month. Tour activity is up there from a variety of tenants, and I think that's one of the real appealing parts about this location, is that we not only are attractive to tech, but we're attractive to the more typical FIRE category tenants in the market.
We're very pleased with the activity there and couldn't be happier with One Paseo at 100% leased. That, Nick, is an overview market -by- market.
Very helpful. Thanks, Rob. Just second question is a follow-up on the new leasing activity. I think John, you did say earlier that 2/3 of the leasing in the second quarter was new leases, so new leasing activities picked up. I thought you said something about back half of the year getting closer to pre-COVID. I don't know if I heard that correctly. I just wanted to also be clear that these were comments that were applicable to traditional office and not just lumping in some of the lab space leasing that you're getting done.
Yeah. My comments were in terms of square footage leased. We were sort of doing a $2 million-plus run rate annually for the two or three years before COVID. I don't have in my mind, Nick, how much of that was office and lab and new space and so forth. We could submit or send you all that. I think what I was trying to say is that the leasing activity has really picked up. Down here in San Diego, with the exception of Kettner, that is just going to be delivered here in another month or so, every square foot we have that we've announced starting construction on, or that we have in the portfolio, is leased.
Okay, great. Just quick follow-up. Does any of the recent news on Delta and now some more indoor mask potential in California, some delays in return to office, does that maybe throw a bit of a slowdown into leasing in the market?
Yeah. How do we know? I can tell you that I happen to be taking this call from our San Diego office. The others are up at Westside Media. If you go up to San Francisco, you see people on the street, you see people in restaurants. You didn't see any of that two months ago. Will this slow down again as a result of Delta? I'd be guessing. San Diego was much more open throughout the entire pandemic than the parts north. People wore their masks and all the rest. It was much more vibrant. I think that's going to continue to be the case. We just have to wait and see. That's why I made in my comments that there's going to be some ebb and flow. We can't say for sure, but what we can say is that the people are back to business.
They're making deals. We're having regular meetings, tours, expansion discussions. People are sharing with us what they're doing in other cities, what they're doing in Austin, and so forth. It's a whole different dynamic, certainly things could slow down if this Delta variant becomes bigger than it's become. Well, it's big now, I don't know how to answer much further. I'm stumbling a little bit because I'm not seeing anything but positive signs, more to come.
Yeah, I appreciate it. Thanks, John.
The next question will come from Manny Korchman with Citi. Please go ahead.
Hey, everyone. John, others, especially in the life science space, talk about the difficulty in conversions and how that's going to help to control some of the oversupply or potential oversupply in the space. You seem pretty confident in converting your spaces and building a whole lot of new life science. Can you help us think about either what we're missing or what they're missing in terms of supply, and why supply from others doesn't really worry you? Thanks.
You can never say supply from others doesn't worry us. What I've said in prior conference calls is that just because you call something life science or say you're going to convert it to a "life science," doesn't mean they'll come. I've seen a lot of people buy stuff down here in San Diego, as an example, with the idea that they're going to convert to life science, and we wouldn't touch it. We wouldn't touch it because the adjacencies are wrong or because the physicality of the buildings, even when you convert it, doesn't lend itself to high quality. If you think about life science, at least, there are startups, which are always a different beast. Life science companies want the same thing that other technology companies want.
They want a place where they can have more of a campus, where they can have scalability, where they can have the amenities and the environment that attracts and retains their best people. That's where we're very focused. When I mentioned the conversions in UTC and the conversions in Del Mar, those are already strong life science markets. We just happen to have buildings that are relatively new, that have the right kind of floor plates and the right kind of ceiling heights and structural and so forth, that lend themselves in already established life science locations to be excellent candidates for conversion. I think there's a lot of people that are going to get their clocks cleaned that are playing this life science conversion game, a lot of them.
I think there's been too much money raised in that space by a lot of companies that don't know what they're doing. We see it every day. Almost everything we see, it's some old dog building that they've been flogging for the past three or four years, now all of a sudden, it's a life science play. I just think there are going to be a lot of people that are going to get burnt.
That's what's driving the question. John.
Yeah. Put it this way, you can go buy a Volkswagen Bug and say that you're going to haul freight. I don't think you're going to do a very good job making money, because you got the wrong vehicle or in this case, a lot of these buildings. I've gone out and looked at some of these things, and I go, "You got to be kidding me. This is a waste of time. Why are we here?" I think there's just some silly money out there.
Just thinking about your own acquisitions, given that capital chasing the life science space, maybe a little bit less capital chasing the office space, are you more focused on finding office opportunities to use the proceeds that you have left to use up, or do you think you might actually end up buying some life science space?
We've not found any life science space, to my knowledge, that we've bought since we bought the Tech Center. I think that's what it's called, Oyster Point Tech Center, next to our Oyster Point development project, which we bought, had some life science in it, and it was right next to our property, and we bought it with the idea we'd convert it to a higher and better use as a phase V. Other than that, correct me if Tyler or Eliott, I don't think we bought anything that was life science or to convert to life science in the past five, six years, have we?
Yeah, that's right. I think the last acquisition, as you said, was Oyster Point Tech, which was in early 2018.
Yeah. I guess my point, Manny, is we're extremely disciplined with regard to what locations we want to be in and with regard to the physicality that works. What's nice for Kilroy is, we've made comment on this time and time again, that the average age of our portfolio is, I think it's under 10 years old. We've been building the buildings that have the kind of structural and have the kind of floor height and all the rest as office buildings. If they happen to be in a life science market, they convert easily because they're physically already a long way towards what you need to accomplish. Whereas the average office building has all kinds of problems, and you start adding the mechanicals and the floor loading and all the rest, and they just don't comport to that.
I don't have any sights on acquiring a life science property, meaning an existing operating building, at this time.
Great. Thank you, everyone.
The next question will come from Blaine Heck with Wells Fargo. Please go ahead.
Blaine?
Perhaps you're muted.
Sorry about that. Can you hear me?
Yes. Now we can.
Now we can.
Gotcha. Okay. Good morning out there. Probably for John or Eliott, can you just talk about your appetite for additional investments in Austin at this point? Whether you're looking for core acquisitions, value add acquisitions, or development opportunities, and maybe even whether you're actively pursuing anything at this point.
Yeah. You want to take that one, Eliott?
Sure. We are, as you can imagine, pretty positive on the Austin market. We are looking to grow there. I'd say the profile of deals is across the spectrum. We tend to do most of our acquisitions on the Value-Add side or developments, but we have in the past occasionally bought a core deal. At this point, there's nothing that is imminent and worth discussing, but the expectation is that we'll continue to grow there over the next several years.
Great. That's helpful. Then just to follow up on that, Austin clearly fits the type of market you guys are interested in, and a tenant profile that you guys know very well. I think you could potentially argue the same for some other Sun Belt markets or sub-markets. Can you talk about whether or not you have any interest in additional markets in the South or Southeast?
This is John. I'm not going to go there. We're going to be opportunistic when we think it's in the best interest of our shareholders and where we feel that we could have the right blend of demand and where we can have scale. With Indeed, as I made note of in my comments, we were able to buy best in class. It's very much a Kilroy kind of building. If it's a 10, I don't think there's a seven in that city right now. There's some coming with some of the new buildings. It really gave us a building that's representative of the type of thing that we do ourselves. To further Eliott's comment, I don't see us buying core unless for some reason it is leased at a real low rent, and we have an opportunity to pop the rent significantly in the future.
Value-A dd's been our game for many years, and development, of course, has been a very strong component of our activities. Whether that will take us beyond Austin at some point, I don't know. Right now, we're very focused on the five markets we're in, with Austin being the latest, and we'll be assembling a team there. We're in the process of that. We've made some real strides, both with existing Kilroy people who will be transferred, as well as some new hires. You will see us be a player there.
Got it. Okay. That's really helpful color. Maybe if I could sneak one more in, just shifting gears a little bit here. We've clearly seen an increase in the cost of materials and difficulty in procuring some of the raw materials for construction. Given that you guys are commencing on a pretty major project in KOP phase II, can you talk about how you guys are dealing with the cost side of things and making sure you have all of the materials to avoid delays?
The materials have gone up, and labor's gone up. I think that one of the things we're watching, Blaine, is the, and it may have passed today, I don't know, the infrastructure bill that Congress is doing. All these things compete for hammers and concrete and wire and all the rest. What we do is, as active as we are, we work with all our contractors, we work with our architects, we work with our vendors with regard to what they're saying, what they think we should be forecasting. We put in a lot of contingency, and we put in a lot of projected cost increases. Excuse me for a second. I do not have COVID, but I've got my first cold in two years, as you can probably hear, so forgive me for coughing. We have been right on the money.
In fact, we've tended to be overly conservative in our forecasting. I can't tell you specifically what's going to happen at any given time, but we've converted, I think I mentioned this in the last year on conference calls. We're basically domestic sourcing everything that we can, as opposed to buying from China or wherever. We're trying to make sure that we have within the supply chain control and that we have more visibility with regard to costing. We have people embedded on the factory floors where things are being manufactured, whether it's window wall or elevators or whatever, to make sure that we understand whether people are on schedule and all the rest. We have a pretty advanced model by which we manage this stuff, and more to come.
There is a lot of competition right now for materials, and that's going to be exacerbated by this infrastructure bill.
The next question will come from Steve Sakwa with Evercore ISI. Please go ahead.
Thanks. A lot of my questions have been asked and answered. I guess I just wanted to circle back, John, to the land parcel you did in San Diego. I couldn't tell from your comments if you thought that that was important to control in order to land a larger tenant in Kettner, or if that's just kind of complementary and you like the area, and you think that'll kind of be two different projects.
I think it's both, Steve. It stands on its own. We have a lot of interest in Kettner right now. If we broke it into a multi-tenant building, I think we'd lease it up very quickly. We also have a couple of big users that we're talking with that are coming back out of the woodwork. In the big case of big users, they do require more scale. We think we're going to impact positively the value of the Pacific Avenue side. We call it the car wash because that's what it is. We might even name the project The Car Wash. I think it stands on its own. We're positively impacting the value of that. These are the only two office buildings that can really be built in Little Italy.
The 2100 Kettner, I think is going to get probably the highest rents in the city. This particular piece of property, one of our [uncertain] that's one of our stars, knew the people that owned it and was able to convince them for us to buy it from them. It gives us the opportunity to work with a big company and provide them with scalability up. It allows us to reap the benefits that accrue to that site from the development of 2100 Kettner. It's kind of both.
Got it. Thanks. That's it for me.
Okay. Thank you.
The next question will come from Craig Mailman with KeyBanc Capital Markets. Please go ahead.
Hey, everyone. Michelle, maybe just on guidance, you'll notice there's no acquisition assumed in guidance. Does that mean on the remaining $300, I know it's getting close to when you have to decide on the special dividend? Is that what's in the plan for the remainder of the proceeds that you guys didn't shelter yet?
Yeah. This is Tyler. Maybe I can take that. We're still working through that. We have till the end of September to sort of finalize the 1031 plans. Then there's other ways to shelter the gain as well. More to come on that as we work through the year.
Okay. Just separately, John, you mentioned 20%-25% of the portfolio could be life science at some point soon. You guys have had a lot of good value creation in what you've done so far, but the stock doesn't seem to be getting maybe the valuation that maybe ARE or some others with life science have gotten. What would be the plan if you get to that 25%, you guys are still trading at a similar NAV discount to today to kind of narrowing that and getting people to understand the value of that life science piece?
Yeah. I think it's incumbent upon us to make sure that the investment community and the analyst community do give us recognition, do recognize that value. I think they will. We got to make sure they understand it. I think if they take a look at the quality of the life science that we have, they're going to see that we're a notch above most.
Would you ever spin it out or do something separate to realize that value?
Well, I'm not going to say one way or the other, but you just saw us sell a state-of-the-art office building in San Francisco that was only a couple of years old. If you'd asked me a couple of years before, would we see in the future, or in the relatively short-term future, to sell that asset, I would've said very unlikely. Who knows? If you look at the resi, if you look at our resi right now, that stuff would trade in the 3%s. If you look at our life science, I think that would trade at a very low cap rate as well. In fact, office right now, let's face it, until people know more about back to work and office demand characteristics, the office companies are going to lag. One thing we have is the best product.
There's nobody in the office area that's public or with a scale similar to ours that has the quality of locations and the quality of product and the newness of product that Kilroy has. I'm confident we're going to end up with that being valued as we sort through things over this next year or two.
Great. Thanks for the color.
You're welcome.
The next question will come from Jamie Feldman with Bank of America. Please go ahead.
Great. Thank you. I think, John, in your opening remarks, you had commented that you're increasingly seeing small tenants active in the market for leasing. Can you just talk more about maybe what's changed this quarter or even in the last month or so in terms of the types of tenants that are looking for space and which markets?
Okay. Rob, you want to take that one?
Sure. Hi, Jamie. Let me start with San Francisco. I think one of the most interesting things going on in the city right now is that a great bulk of the tenant activity that's going on in the market, aside from the larger deals I had mentioned that it signed, are the tenants in the 15,000 sq ft-35,000 sq ft range are very active. They had pretty much been on the sidelines for a year and a half.
Including coming out of the pandemic. I think that's a really important precursor or indicator of what the future will be because these smaller tenants are typically the ones that you read about if they had a lease expiring, they'll just not renew and have everyone work from home and all that sort of thing. We're starting to see that sort of pick up in the market. I think also, if you look at our Long Beach project, where we have about 46,000 sq ft in leases right now in discussions. Those are primarily smaller tenants, and several of them, over half of them are new deals, not renewals. You're seeing a pickup in the smaller tenant market. Some of its tech and VC-backed, but also some of it's just private sector, architects, et cetera, that use space and occupy urban areas.
Okay, thanks. I guess, sticking with San Francisco, we keep hearing about safety issues, crime, homelessness. Are tenants holding off to see if things improve, or that's not really impacting the leasing market at this point?
It's not impacting the leasing market. I would say that as John mentioned, the city is much more full than it was six weeks ago. As people are reoccupying the city, and this isn't just San Francisco, but other urban areas. The more workers that are back in the city, it is having a sort of displacement effect on the homeless. They are being kind of moved out of the financial areas, if you will. Probably on their own volition, we haven't seen any pullback. In fact, the major tech companies that are in San Francisco, including Google, continue to remain bullish on it and continue to invest in space and expansions.
I'd offer a little different twist, if I may, Rob. We might not see eye to eye on everything here. I do think the homelessness issue is a serious problem for some people. If you have those folks camped out in front of your building, it's going to impact you. Rob's right that as things have returned more towards normal, but certainly not normal, that the homeless thing has been pushed off to different areas. We just have a real fundamental problem in California with the homeless situation. It stems from the fact that a couple of years ago, the citizens voted for a proposition to decriminalize drug use. Therefore, they let out tens of thousands of drug users and drug sellers. A large portion of those folks ended up on the streets.
Then we've had the decriminalization of drugs, the decriminalization of drugs has unfortunately come with decriminalization of drug sales. We have these idiot district attorneys in L.A. and San Francisco, much like you have back in your neck of the woods. They're absolutely stupid individuals, and they're misguided in my mind. Homelessness is an issue that we have to deal with. We have to deal with it. We have a recall going on in California right now to recall Governor Newsom. That's on the ballot here shortly in September. If that is voted for, concurrently, they're voting for who will be the next governor. My view is get Newsom out of here. He's an idiot. We got to solve these problems. Jamie, the reality is homelessness does hurt, notwithstanding we're seeing increased leasing and whatnot.
I don't want to be Pollyanna-ish about homelessness. It is a real problem in this country. It's a real problem in California.
All right. I appreciate your thoughts, and hopefully we can fix it everywhere. Obviously, a major issue in a lot of cities.
Yeah.
Can you talk about maybe the net effective rent side? I know markets are clearly stabilizing and even starting to improve. Are you seeing any change on the net effective rents? Can you talk maybe about how you think your mark-to-market looks now based on pretty big leasing spreads in the quarter?
Sure. Jamie, it's Rob again. Up in Seattle, let's just start with Bellevue. I think you're going to continue to see net effective rent growth, probably in the mid to high single digits. Seattle itself, I think you have the opportunity to see some rent growth starting in the CBD, especially for high-quality space. San Francisco, if anything, it's probably slightly off. If you look at the trophy quality assets that have space, for example, the Bank of America Center and Embarcadero Center, One Market Plaza, they have transacted during the pandemic and continue to transact in the $112-$115 fully serviced rental rate range. Those are pre-pandemic rates. I would say for trophy quality view space, rates are holding and may uptick.
There's a real shortage right now of view space, and it is in high demand in San Francisco, which again goes back to John's previous comments about this flight to quality that we'll see in all of our markets. I think, Oyster Point, and I don't want to get into predicting rent growth there, but with what I said earlier about 1 million sq ft of transactions that should close in the next two quarters. We think there's continued pressure on rents there. Los Angeles, again, I think is probably, I would call it even. There has been quite a bit of activity on the West side, which is good to see because of the large movements by Hulu and Snapchat and others. San Diego, again, I don't like to generalize on rent growth. It's very specific. UTC, you're going to see significant rent growth.
I think Del Mar, Carmel Valley, you're going to see rent growth. I think, as John was saying earlier, as you see tenants migrating into the I-56 Corridor, you're going to see rent growth there as well. Austin, frankly, I think there's some real movement in rent and that tenants are coming back. Big tech is back. Apple, as John mentioned. The big ones that are there already, Apple, Tesla, Oracle are all, aside from the fact they have major campuses, they're expanding now. They've just started expansion plans for facilities there. Austin is going to have, I think, a pretty good run-up of rental rates, particularly in the CBD, because young people are coming back into the Central Business District.
Yeah. Jamie, you asked about mark-to-market. I think we said our overall portfolio pre-COVID was roughly 20% below market, and given the limited data points, but given the momentum in transactions, I think if we were to guess where it is today, we'd say it's ±15% or so.
Okay, great. Thanks, both of you, for your thoughts and color.
The next question will come from Frank Lee with BMO. Please go ahead.
Hi. Morning, everyone. Rob, you touched a bit about this. I want to ask about tenant sentiment in Austin versus San Francisco. On one hand, you have Austin leading the U.S. in terms of office utilization, while SF is near the bottom. Are you seeing any notable trends in terms of how tenants are evaluating space needs or tenants making quicker decisions? I'm basically trying to get a sense if there's any significant correlation between higher utilization rates and leasing demand or timing.
Not really seeing the correlation. The tenant sentiment in Austin. Keep in mind, a lot of the tenants in Austin are also tenants in the Bay Area, Silicon Valley, Seattle, New York, et cetera. The large tech companies are very optimistic about Austin. We spoke a lot to our clients in our due diligence and looking and exploring Austin, and all of them have plans that are there to stay and grow. Just by a statistic that I think you might find interesting, the Economic Development Corporation has 267 different companies looking at moving to Austin or expanding in Austin from other areas. It's a very vibrant market, a very business-friendly market. We found it relatively easy to penetrate the business community and really get to know who the movers and shakers are there.
We're very excited, as John said, about just the whole outlook for Austin. Back to your question, I just don't see a correlation between the two. I think, if anything, San Francisco return to office has been slower than other urban areas, and so that does impact how quickly tenants can assess how their space is going to be used and what their space needs are.
Okay, thanks. You mentioned the 170,000 of leasing already in the third quarter. Is the majority of this quarter's leasing also largely new leases, maybe outside the life science deal at El Camino? Do you have a sense if these new tenants are upgrading their spaces or just simply relocations?
Well, on the latter part of the question, they're upgrading their spaces. We're seeing tenants investing money, whether they're renewing or expanding, investing quite a bit of money into their premises. The one constant throughout everything has been recruiting and retention of talent, and the companies we talk to are essentially doubling down. There's a lot of news in the press about Google, et cetera, making major investments in their space to further make it attractive for people coming back to work.
Yeah. Frank, on the 170,000 of leases signed quarter to date, those are all new leases.
Okay, great. Thank you.
The next question will come from Dave Rodgers with Baird. Please go ahead.
Yeah. Maybe John or Rob, I just had a question. You talked about the smaller leases being more active, larger tenants still a little bit more hesitant to make decisions. I guess, what gets those larger tenants to make decisions on the West Coast here in the near term? Is it COVID related? Is it something else? It seems like there's plenty of hiring that's been coming back. Maybe the second part of that question is as you've built bigger spaces, KOP phase II and Kettner, kind of north of 200,000, how do you think about kind of Flower Mart and where that then fits in in the long run and when the demand comes back for something like that?
John, do you want me to handle part of that or do you? Okay.
Yeah. Oh, sorry. Sorry, I was on mute. To start off on, I don't think we wanted to indicate that big tenants are sitting. It's little tenants and mid tenants that are active. My comments were that the big tenants, there's many examples of them growing substantially, but we're also now seeing mid and smaller tenants do the same. Rob, you go ahead.
Yeah. I think I can't name names and I just wish I could to give more color, but large tech are focusing on expansion and, particularly in San Francisco. We talked about Seattle. I think you're going to see a lot of or hear a lot of announcements in the next quarter to that effect.
Fair enough.
The last thing I'd say, Dave, is that companies are, there's no doubt there's a hybrid work model, right? On the other hand, there's no doubt hiring has continued during the pandemic with tech. What companies want to do is assess how that lays out on an office floor, and they're not really going to be able to do that efficiently or understand it until people are really back to work. What does the hybrid model mean? It can be all over the map, and it's going to be, as John said, sort of an ebb and flow, but no doubt, week by week, month by month, more people coming into the office and into the cities.
Okay. Yeah, fair enough. Thanks for the added color. Maybe just two quick follow-ups then. With respect to Austin and your plans for expansion at some point in the future, are you open to all the sub-markets there, or at least are there key sub-markets you'd look at? Would you consider The Domain? Are you focused primarily downtown? The second question, maybe just for Michelle, you've covered in your guidance the capitalized interest and NOI for Indeed, but when do you expect GAAP revenue recognition for Indeed to begin?
Yeah, I guess I can take that technical question, and Eliott or John can take the first part. On Indeed Tower, we're expecting roughly 100,000 sq ft of tenants to move in towards the end of the year. Indeed, will depend on when they build out their TIs, and we think that could start sometime in the second half of next year.
On Austin, I think that our strategy is similar to other markets, where we're kind of focused on more urban, but in particular, amenitized sub-markets. I think that you hit on some of them. There are some others. We're generally focused on areas where there are a lot of walkable amenities that kind of fit with the balance of what we've done across our other locations.
All right. Thank you.
The next question will come from Daniel Ismail with Green Street Advisors. Please go ahead.
Great. You mentioned a variety of potential new developments and redevelopments during the call. I'm just curious on the funding side, just how you plan to fund those, whether it's through accelerated dispositions or presumably common equity is not a consideration given the stock trades today.
Yeah, this is Tyler. We have over $800 million of cash and full availability on our bank line, as Michelle mentioned. In the near term, we have plenty of capital to fund the development we talked about. Also, we have, as you say, disposition opportunities, and all the other alternatives we've always had. Equity is always an option. It's not our first choice at this point, for sure, but right now it's a cash use.
Great. A few of your peers have become more bullish on spec office starts in the Sun Belt specifically, and then also one in Silicon Valley. I'm curious, just given the resiliency of Trophy and Class A office rents, as well as the demands by tech tenants, if that's changed your plans or moved forward plans on Flower Mart than it was, say, last quarter?
John?
John?
You want to handle that? He's on mute.
I'd handle it, except for I thought I was talking without being muted. I didn't hear but every other word in the. You were really pretty quiet to my ear. Could you just restate the question, please? If you have heard it, Rob or Eliott, you guys can go ahead and handle it, but I just couldn't hear it.
Yeah, sure.
Yeah.
Don't mind just restating. It was based on spec office starts. A few of your peers have become more bullish on speculative office starts, particularly in the Sun Belt, and then one of your peers potentially looking at going spec on a Silicon Valley office development. I'm just curious, given the resiliency of Trophy and Class A office rents across your footprint, if you've considered doing that, or if that's changed plans on the Flower Mart.
No. At this point, the Flower Mart, what we've done, and I think cleverly so, is to sort of reimagine the Flower Mart. We now have the ability to do four distinct phases that are all plus or minus. They're all within 100,000 sq ft, 200,000 sq ft size-wise of one another, and they all could stand on their own. We were able to work with the city and work with the architects and work out that, so that originally, we thought we were going to have to do a first phase that was roughly 1.2 million sq ft. Roughly half the project. We now have, don't hold me to this exactly, Daniel, because I don't have the numbers in my head, but they're all roughly 500,000 sq ft, 600,000 sq ft phases.
We think we made the project more attractive from a standpoint of development and risk management, and the ability to have it be more individualized for companies that want to have their name on a building. In terms of starting the project spec, I think we need to see San Francisco clean up its act and also see the return to work and get a few solid quarters under our belt, before Kilroy would consider doing a spec project in the city. That's my view. We have plenty of places to invest that are, at this point, a more certain bet. That's not to suggest in any way, shape, or form that Flower Mart is something that has cooled our interest. It's just that timing is everything.
If I know the fish are biting in these two locations, and they may not be as evident a third, where am I gonna cast my line?
Got it. Appreciate the color. Maybe just one last one from me. We've seen private market values for Class A and Trophy office, hold pretty firm across the U.S., I'm curious how you viewed land values change since the start of the pandemic. As you're going out there and looking to acquire land sites, how much do you think those values have changed for good development opportunities across your footprint?
Yeah, I think they've changed a lot. If you look at some of the transactions, and I'm not sure all these have been announced yet, but we take a look at everything. We bid on some. The order of magnitude, Eliott, feel free to correct me here, but order of magnitude over the last couple years, we've seen Bellevue land prices on an FAR basis more than double. I think you're gonna see that in a lot of different markets. It's a function of demand and supply. Obviously, we need to start to throw in the importance of walkability and of transportation access, and so forth. There's reasons why certain sites command much higher value. Obviously, they produce, it causes the overall project cost more, and of course, you got to have a higher rent to justify.
For most of the big tech companies and others with high profit margins, real estate is not their big expense. It's their people. Real estate, that's not to say they don't want to get a good deal, but we don't see anybody arguing about rental rates in most of the markets we've been reporting on today where they're at record high rents. It's more about, can I get the building and location I want? I will say that in the case of the buildings that we've mentioned, where we've leased them down here in San Diego since the last quarter, in all cases, we had two or three deep letters of intents with people bidding on the sites. In some case, people had a ROFO and they exercised it. This is a phenomenon that's going on.
It's why we've heard us say before, just as there's a bifurcation between high-quality buildings that really comport to the modern user and older style buildings that may not, it's the same, very similar characteristic in various locations. That's gonna translate to higher land value. Land is scarce.
Got it. Appreciate the color, John.
Yeah.
This concludes our question-and-answer session. I would like to turn the conference back over to Michelle Ngo for any closing remarks. Please go ahead.
Thank you for joining us today. We appreciate your interest in KRC. Goodbye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.