Good day, and welcome to the Second Quarter 2020 Kilroy Realty Corporation Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Tyler Rose, Executive Vice President and Chief Executive Officer. Please go ahead.
Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy and several other senior members of our management team who will be available for Q and A. 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 in this call and in the supplemental.
This call is being telecast live on our website and will be available for replay for the next 8 days, both by phone and over the Internet. Our earnings release and supplemental package have been filed on a Form 8 ks with the SEC, and both are also available on our website. John will start the call with a look at our industry and markets, and then highlight 2nd quarter activities and our priorities as we move through the second half of the year. I will review 2nd quarter financial results, give an update on rent collections and then review our current financial position. Then we'll be happy to take your questions.
We are once again calling in from different locations, so bear with us if there are any delays in our responses. John?
Thank you, Tyler. Thanks everyone for joining us. We hope you are doing well in this extraordinary circumstances that we find ourselves today. It's always not easy to navigate. I've had to tell all my children, please disappear, daddy has got a phone call right now.
I'm sure many of you have to do the same. Here at KRC, we remain vigilant in guiding our organization through the current crisis and positioning it to outperform in the future. We are working from a strong foundation. Financially, we have $1,300,000,000 of liquidity, no near term debt maturities and a well capitalized tenant base. Our development projects are 90% leased and fully funded.
Operationally, we have a well designed, highly sustainable and young portfolio, and we continue to make great progress on reducing our exposure to lease expirations. We've reduced our average annual expirations through 2022 to 4% or approximately 575,000 square feet, which compares to 6% at the beginning of the year and 5% as of last quarter. We've received a lot of questions in recent months about how the pandemic could affect our industry, our markets and our company. So before I get into second quarter highlights, let me share some observations and thoughts. We are in constant contact with our tenant base up and down the coast, and they are focused on reestablishing their work environment and getting back to the office, while at the same time protecting the safety of their employees.
The next 12 months is likely to be a transition period. There's likely to be trial and error, experimentation and stops and starts as the pandemic runs its course. As businesses gain experience with what works best for them, the results could have some implications for our industry. For example, tenants will evaluate the quality of the physical workplace more than ever, with a particular focus on the ability to control their space, including lobbies, common areas and elevators to minimize physical interaction with outsiders and enhance security. Buildings with fewer stories to maximize elevator to minimize rather elevator usage, larger spaces with bigger floor plates, higher ceilings and larger common areas to accommodate social distancing, more flexible spaces that allow for greater creativity and how interior office space is laid out and how traffic flow is directed, Healthier spaces, including better HVAC systems, more natural light and fresh air with increased access to roof decks and other outdoor spaces and well capitalized landlords.
Those willing to invest in people or infrastructure in their buildings in order to ensure a safe environment for all tenants. While some of these considerations are driven by short term needs, it is our view that they have become industry norms continuing a flight to newer, higher quality properties and accelerating the obsolescence of older buildings. We believe these trends not only distinguish our portfolio from our peers, but further validate our development strategy and our commitment to sustainability and wellness. Specifically, we have one of the youngest portfolios on the West Coast with an average age of 10 years. 43% of our portfolio is fit well certified, the highest certification of any company in the world.
85% of our portfolio consists of low and mid rise buildings. More than 90% of our buildings have large floor plates allowing tenants greater flexibility for configuration and approximately 90% of our portfolio offers rooftop decks and other outdoor common areas. Another topic of discussion in this transition period is how prevalent work from home will become. It is still early, but our view is that workplace flexibility will become more common and it will be in conjunction with the office, not replace the office. We're seeing tenant study decrease density levels in the workspaces and consider additional kitchens, dining and common areas that require more space.
From a broader perspective, the offices we know has been around as long as the modern corporation and the role it plays in uniting a workforce around a common set of goals is as essential as ever. And while offices have evolved as organizational needs have changed, the successful corporate cultures that are in place today underscore the importance of communal workspaces and physical proximity. All of the most essential attributes to today's highly successful companies, effective collaboration, continued innovation, higher productivity benefit greatly from personal human interaction. A third question arising amid the crisis is how various real estate markets will perform. We believe that our West Coast markets are among the most attractive in the world.
Amidst all the uncertainty of the last several months, one thing that has become clear is the strength and resiliency of the technology, media and life science companies that drive our markets. These companies continue to grow their revenue, are well capitalized and are positioned for growth. The NASDAQ is near an all time high. The IPO market is open and M and A has resumed with Amazon and Uber announcing high profile deals in recent months. These key industries are concentrated in our markets, are hard to duplicate in other areas of the country and their success will help drive broader market recoveries.
A recent Bloomberg analyst analysis rather of the nation's 100 largest metro areas came to a similar conclusion. San Francisco, Silicon Valley and Seattle all ranked among the top 5 regions best positioned for a relatively quick and strong recovery from the coronavirus recession. This strength is visible in our current tenant roster. 3 quarters of our annual rental revenue comes from technology, life science and media companies. Most of them are publicly traded and investment grade rated.
All of them rank among the world's most innovative and successful businesses and their collective presence is constantly attracting more innovation driven firms, building a deep reservoir of ideas and talent that is very difficult to replicate. Now moving to our 2nd quarter highlights. Overall rent collection remains strong across the quarter and into July. The average 2nd quarter rent collection rate for all of our properties was 95% and a strong 98% for office and life science. And July's collection rate was also 95% across the portfolio and 97% for office and life science.
Tyler will give a complete update in his remarks on these trends. We executed 286,000 square feet of leases in our stabilized portfolio, approximately 3 quarters were renewals at rental rates that were up 11% on a cash basis and 30% on a GAAP basis. This included 2 larger renewals, 1 in San Diego for 119,000 square feet and 1 in the Bay Area for 37,000 square feet, With the exception of an expiring Long Beach lease in the Q4 of this year, we have no expiration larger than 65,000 square feet until 2022. At the end of June, our stabilized portfolio was 96% leased. We continue to execute on our $2,000,000,000 of construction projects.
The total remaining construction spend across this pipeline is fully funded with existing liquidity and the office and life science components of these projects are 90% leased. When stabilized over the next 2 years, the 6 projects will generate aggregate annualized cash net operating income of approximately $145,000,000 I want to give a shout out to our development team at last month, the National Association For Industrial and Office Parks, NAOP, selected KRC as its 2020 Developer of the Year. This is the association's highest honor and a significant acknowledgment of our company's ongoing efforts to lead through innovation. On the disposition front, we selected a few smaller assets earlier in the year to dispose of. During the course of the year, we're unable to say exactly when these will take place because tours and lenders and things like that are unable to in fact come see the buildings given the restrictions.
To wrap up, let me reiterate a few points. Leasing activity has picked up a bit from March April lows, and we have not seen a material impact, if any, on economics. The company has never been better positioned to be both defensive as well as offensive. Our stabilized portfolio is young, modern, sustainable and leads the world in wellness. Our expirations are limited.
Our tenant base is largely healthy, well capitalized and poised for further growth. Our under construction development projects are fully funded and 90% leased. Our future development pipeline is diversified across product types as well as markets and has an attractive basis and our balance sheet is solid with significant liquidity, low leverage and no near term debt maturities. Lastly, I want to recognize the entire Kilroy team who continue to do a phenomenal job, whether it's working with our tenant partners, with the communities in which we operate or on internal corporate functions. Thank you all.
Now I'll turn the call back to Tyler. Tyler?
Thanks, John. For the quarter, we reported FFO of $0.78 per share. This reflects $0.17 per share in total severance costs and $0.05 per share related to our assessment of tenant credit and collectability of rent. Excluding the impact of these items, our underlying 2nd quarter financial performance was solid with FFO at $1 per share. Turning to same store results.
Cash NOI grew 10.9 3% in the Q2. Cash NOI growth was largely driven by higher rental rates and cash commencement of several large leases. GAAP NOI was impacted by the revenue reversals I just mentioned. Excluding the revenue reversal, same store GAAP NOI was up close to 2%. At the end of the Q2, our Save Life portfolio was 92.3% occupied and 96% leased.
Moving to our balance sheet. In April, we completed a debt placement of $350,000,000 boosting our liquidity to $1,300,000,000 That includes approximately $560,000,000 in cash and $750,000,000 available under our revolver. Our net debt to the 2nd quarter annualized EBITDA is 5.7 times, excluding the severance costs. This liquidity provides ample resources to fully fund our remaining $625,000,000 of current development spending over the next 2 years. We also have plenty of room under our bank financial covenants with more than 60% cushion or approximately $250,000,000 of NOI cushion.
Now let me give you some color on rent collection in the Q2 July to date. Across all property types, we collected 95% of 2nd quarter contractual billings. This reflects an average collection rate of 98% from office, 88% from residential and 32% from retail. And across July, our collection rate currently stands at 95%. This reflects a collection rate of 97% from office, 87% from residential and 46% from retail.
Lastly, given the uncertainties generated by the coronavirus and its impact on the economy, we are not providing specific earnings guidance again this quarter. Instead, we can offer the following assumptions based on what we know today that may be of use in assessing our potential earnings results for the remainder of the year. We project remaining 2020 development spending to be between $250,000,000 to $300,000,000 Given the recent rollback on retail reopenings in our markets, we are currently in discussions with many of our retail tenants. As you may recall, last quarter we established a 2 month retail rent relief program, which included approximately 90% of our retail tenants. This had a minor earnings impact and from a cash perspective, 1 month of rent deferral for these tenants is approximately $1,500,000 We subsequently extended the rent relief program through July and expect to lengthen this program again.
Non contractual parking income totals approximately $1,500,000 of NOI per month. We expect to receive about a third of this amount until the shelter in place rules are lifted. At 333 Dexter in Seattle, we commenced revenue recognition on 312,000 square feet or 49% of the total project in June. The remaining phases are expected to come online next year. In July, we commenced revenue recognition on another 36,000 square feet of space at 1 Paseo office in San Diego, bringing the total revenue commencement of this project to 20%.
The project is leased to 8 tenants, so we expect revenue recognition in phases throughout the remainder of this year. Also in July, we delivered 146 residential units at 1 Paseo. This was the 3rd and final phase. As a reminder, we delivered the 1st phase, 2 37 units late last year and the 2nd phase of 2 25 units earlier this year. In total, the 608 unit project is now 38% leased and we've seen leasing momentum pick up over the last month.
We expect commencement of revenue recognition on the entirety of the Netflix on Vine project or 355,000 square feet of space at the end of the year. And with respect to the residential portion, living on Vine, that's scheduled for delivery in the Q1 of 2021. From a financing perspective, we take a conservative approach to managing our balance sheet and we will be nimble to ensure adequate liquidity or be opportunistic depending on market conditions. With respect to cash same store NOI growth, we've had a very strong first half of the year at 12.9%. We don't expect the second half to be as strong given some one time items in last year's numbers and the impact of the credit issues we have discussed.
While it's difficult to estimate at this point, we expect the full year to be in the mid single digit range. Lastly, we project G and A of approximately $18,000,000 per quarter for the remainder of the year. That completes my remarks. Now we'd be happy to take your questions. Operator?
The first question comes from Nick Yulico of Scotiabank. Please go ahead.
Thank you. I guess, first off, just Tyler, I want to follow-up on the same store NOI number that you just I think you said about mid single digit range on same store NOI for this year. I just want to be clear, is that a cash number? And then does that exclude any impact from any of the tenant deferrals that you've given?
It is a cash number and no, it's not we're not excluding the deferral.
Okay. So that's actually the deferral is a negative impact to your reported same store?
That's right. Yes.
Okay. That's helpful. Thanks. And then I guess just going back to the leasing markets, any more thoughts, John, on just how tech companies are sort of changing their views? I know, in particular, Downtown San Francisco was a very hot market ahead of COVID.
Heard rumblings of at least 1 larger tech company now not looking do a lease in San Francisco this year now. Is behavior changing towards San Francisco or other of your markets on a relative basis, how would you rank the strength of your markets right now?
I'm going to have Rob deal with that, if I may, but before he starts in, I think it's safe to say that all companies are focused on what's COVID doing to their businesses, how is it impacting their real estate, how is it impacting their ability to get back to work. So anything and everything that can be put on pause generally is being put on pause, just as I'm sure it is in your family or your businesses, it's just human nature. Rob, do you want to go through the markets here and start wherever you want and at the
last one? Sure, John. This is Rob Peratt. Hi, Nick.
I'd start by saying if I lump the Bay
Area and Seattle together that publicly traded tech companies, as you know, have led the stock market since the pandemic started. And those publicly traded tech companies, many of which are tenants, are pretty resilient. And they're the industries that are expected to come out faster and various sectors of the tech market like information services, software publishing, scientific and R and D, all of those are going to be leaders when things normalize. And I think kind of a broader answer to your question about what companies you're talking about and putting space on hold goes directly to what John said. So the large company you mentioned in San Francisco that they're on hold literally did that.
It's on hold until they can ascertain, I think a better forecast about when people do come back to work and how long that's going to take. And I think this all centers around when people can be vaccinated. It's one thing to get a vaccine, but people need to get vaccinated. Specifically up in Seattle, I'll just touch on this briefly, but notwithstanding what I said about the stock market, Bellevue is going through a major transformation, continues to during this pandemic where space is being absorbed. Amazon just recently signed a 2,000,000 square foot lease in downtown Bellevue.
They themselves are transforming that market by adding 15,000 employees to the Bellevue area. And they're not the only tech company there. We have Salesforce and Facebook, etcetera. So I just think Seattle itself will do well when things normalize. And I think a lot of what I've just said applies to the Bay Area as well.
And when you layer into the Bay Area, the life science component, we're now demand is up to 4,000,000 feet. So it's almost 1,000,000 feet more than what we were tracking last quarter. I think everything bodes well for a recovery when people can get back into work. And as you know, in California, we've had several in fact, most cities have had to dial back their reopenings, which has impacted touring. Touring was up in May June and it's dialed back again, particularly in Los Angeles and San Francisco.
If you'd like, I'll just touch quickly on LA. LA is doing well in certain submarkets like Hollywood and Culver City, where there's pretty strong demand, record demand actually from content producers. So we feel very good about those 2 submarkets.
And if I could just follow-up, it's very helpful details. About San Francisco specifically, I mean the barge system was already running at overcapacity before COVID. Now imagine it's just a lot more challenging to figure out how you get employees back to work in San Francisco using BART. Does that change the leasing dynamic? Does it push larger tech companies to maybe increasingly look at Oyster Point instead of Flower Mart?
You want me to handle that, John? Yes, go ahead.
Yes. I think companies will be looking at a variety of factors like that, Nick. Bart and Caltrain, which are major modes of mass transit in the Bay Area, have undertaken really strict protocols in terms of cleaning and everything, just like the New York subways. And I think it's just too early to tell what modes of transportation people will use. And keep in mind, a lot of the Bay Area, particularly San Francisco employees are living in San Francisco.
So it's not for most of the areas and neighborhoods that the tech workers are living in, it's not a far bike ride or walk to most office spaces.
Okay. I'd ask you that. I do think that South San Francisco is very well positioned. We have a lot of life science that has demand and there is increasing demand from tech. Part of that was simply because it's a this is even a pre COVID thing.
If you look at what Stripe believes pre COVID, it's very accessible from both the city and from further south in the valley. In the Flower Mart, that's not even going to come on stream for a number of years. So I think it will do very well because of the fact that it is exactly the kind of product that companies are gravitating to, but more to come on that.
Okay. Thank you, John.
The next question comes from Emmanuel Korchman of Citi. Please go ahead.
Hey, everyone. Rob, maybe this is one for you. In Hollywood, it looked like you had a pretty sizable decline in occupancy. And I know in the last call, you talked about some co working tenants that you're working through deals with. Is that vacancy related to that same co working tenant?
If not, can you give us some more color as to what drove that increased vacancy in Hollywood?
Yes, I'll jump in on that Manny. Yes, it is not the co working tenant we discussed last quarter. They're still in occupancy. It's a marketing company in our Columbia Square project that had filed for bankruptcy. So, there was about 50 basis points of impact to our occupancy.
Great. Thank you.
And then, John, you talked about the resiliency of newer buildings or the demand that should be outsized for newer buildings versus older ones. Can you possibly in some way address sort of pricing gap between the 2? Are tenants just going to lease more actively in the newer buildings because it fits their needs better? Or is there going to be pricing that holds up in one class of buildings and less so
in the other?
Yes, I think I've commented on this at least inferentially in past calls and I'm happy to elaborate. My sense is that we are entering a period where there will be a more extreme recognition as sort of the haves and have nots. You either have the kind of buildings that the big companies want and you will command a significant premium and rent or you don't have those kind of buildings. And I think that you're just been subject to high tides because most companies, the big companies, if you're not the kind of product they want, they're not going to lease it at any rate.
Thank you. The next question comes from Steve Sakwa of Evercore. Please go ahead.
Thanks. I guess one question, may be a little difficult to answer today, but how do you guys sort of look at your mark to market on the overall portfolio? I realize market rents are a bit an enigma, but where would you sort of put that figure today?
This is Tyler. I'll start and then I can hand it over to Rob. Before this started, we were about across all of our markets about 20% under market and in a good position. And that was like 30% in San Francisco and different amounts throughout the portfolio. Rob, I'll let you sort of think of or respond to where you think things have changed since then, if we have enough data points.
Hi, Steve. It's Rob. I don't know that we have enough data points, but you heard on our Q1 call the leasing activity that kind of bridge the second and first quarter in San Francisco, particularly rates have held on direct space and Class A institutionally owned products. So a lot of the leasing that was done in that time period Q1, Q2 was done at over $100 a foot fully serviced. So those are pre COVID rates are holding, I would say, in San Francisco and Seattle, although there just aren't that many data points.
But if you look at some of the renewals we've done that John highlighted in his remarks, we've been able to increase our rental rates.
Okay. And then maybe sort of a 2 parter, just on sublease in general, it's clear that San Francisco is seeing a pretty big uptick in the sublease space. And in particular, I know one of your large tenants, Dropbox, put close to 275,000 feet on the market, albeit for maybe a 5 year period. So can you maybe just speak to the sublease market in general and what sort of pressures you might see as more of that comes to market in places like San Francisco?
Sure, Steve. Let me set the table with just some numbers. The sublease space in the market right now is about 5,000,000 square feet, 2,300,000 was added during COVID. And to put that in perspective, the direct vacancy rate in San Francisco right now is about 5 point 4% and sublease is 2.5% of that. To compare that to the dotcom bust, direct vacancy was 6.8%, excuse me, was 8.3% and sublease space was 6.8%.
So, very different dynamics between dotcom and today. Of the sublease space that was added in April June about the relative length of lease term is about 2.5 years. And according to JLL, what they refer to, 30% of that space is lift and shift space, which means basically tenant has it's a preplanned move where the tenant is moving into new facilities and subleasing the old. And I think that 2.5 year term corroborates that. As I mentioned earlier, rents in Class A assets are maintaining their 1st year rental rates.
And I think that would include in well placed sublease space like the macys.com space. I don't want to comment on any of our specific tenants and the subleasing that you mentioned with respect to Dropbox. I don't want to comment on their business. But the last thing I'd say about sublease space in San Francisco is that 60% of what's on the market expires in the next 3 to 4 years. And that space will then, if it's not leased, become direct space again.
And I just believe with the institutional landlords, quality landlords with Class A product, there's not going to be the pressure because of the lack of direct inventory to drop rates. The last piece of information which might be interesting for you is that in Q2 850,000 feet of sublease space was either removed from the market, which means the sub landlord decided not to sublease it or it was actually sublet. So there is activity. And I think a lot of tenants, as John said earlier, a lot of tenants are trying to plan on uncertainty. So when there's 2 to 2.5 year or 3 year space, that provides the flexibility that I think can get tenants through this uncertain time.
Okay, thanks. And just last question. I mean, John, you mentioned you've only got about 4% of your space rolling through 2022. So pretty minimal rollover exposure, including up in San Francisco. But are you doing things differently today to address that?
Are you trying to pull forward more things or tenants coming to you more proactively? Sort of where is that discussion?
Steve, we've always tried to manage things pretty well. You can't always do what you like. But in this case, we've had the view that let's work with tenants that want to extend early. There's just not enough data points really. In some cases, on some of the recent renewals, these tenants, in one case, had an option, in one case, I think, didn't have an option, both wanted to stay.
1 tenant, the larger one was very concerned about it going to arbitration because it could end up being a rate that could have really gotten out of beyond their expectation. And we just decided that we'd have a negotiated transaction where they could live with it and we could live with it. So that just happened to be it's very circumstantial. We're not actively going out endeavoring to sign up people that have 6 years left on a lease to a 10 year lease. We're having some requests to do that and we'll evaluate each one of those independently.
Okay, thanks. That's it for me.
The next question comes from John Kim of BMO Capital. Please go
ahead. Thanks. Good morning. I was wondering if you could share your views based on discussions you've had with tenants on the impact of this pandemic to the more secondary tech markets outside of
the West Coast, or not
you think tech tenants are going to expand further or conversely pulling back?
Yes. Rob, do you want to cover that one? I'm not sure we have enough data.
Yes. I don't it really hasn't
come up in the conversations we've had, John. I mean, as I said earlier, every company, I think John said this too, is focused on how to get people back to work in the facilities they have. And I think that you've seen tech expand dramatically in other markets like Austin and back east, etcetera. And that trend will likely not change because they just can draw on talent from a wider network.
Based on the strong demand from life science tenants, can you discuss your willingness to start any spec developments in life sciences or maybe even convert some office plan development to life sciences?
Yes. I don't know that we're looking at converting anything that's on the drawing board. But as you know, many of our buildings that we have developed recently have been developed to be sort of a hybrid where you can do life science or office. Dropbox was 1, Stripe was another. The building that we leased at 9,455 Town Center down in San Diego was just became a major tech company, but it was designed for life science.
So, we're sort of doing more of that where we can go either way, where the market is robust for both kinds of users. But John, with regard to development, there's nothing I've mentioned this in prior calls, there's nothing that we can start that we physically can start before I think it's the Q1, maybe the end of the Q1 of next year and that would be Phase 2 of Kilroy Oyster Point, which is life science. And that's the next one up, again subject to market conditions and all the other things that we always talk about. But we're seeing strong demand from life science there. We're seeing strong demand from tech there.
That's likely to be the next start, again, subject to market conditions. Phase 2 is 3 buildings. It's roughly 900,000 feet plus a parking structure. We have the entitlements in place. We're going through the building permit process now, and we should be in a position if we want to start in the Q1 of next year.
Okay. And then finally, I realize it's a one off event, but the termination payment for Jeff Hawken was surprisingly high this quarter. And I'm wondering if you could elaborate on how you and the Board concluded this amount?
Yes. Well, it was pursuant to the agreement. His legacy contract and we paid what was pursuant to the contract. And we heard very clearly from the marketplace that they wanted us one way or another to solve, in essence, to get rid of the contract. And Jeff rightfully so, he was in a position where he didn't have to do anything.
He had an evergreen contract with a stated amount in terms of what the payment was to get out of it. And so we went forward with him and concluded pursuant to the terms of the agreement. The Board didn't we didn't have any choices.
Are there any remaining legacy contracts like that?
No, not in our company.
Okay, great. Thank you.
You're welcome.
The next question comes from Blaine Heck of Wells Fargo. Please go ahead.
Great, thanks.
Can you talk about any movement you're seeing in construction costs recently and whether you think maybe potential decreases in construction costs could keep pace with or even outpace any potential decreases in rents such that some of these future development projects can still pencil out to an acceptable yield or even maybe look better than what you might have had pro form a?
Yeah, that's a good question. We monitor that monthly with all the pricing we do with major contractors. If you look at the the short accurate answer is, I don't know. But we will obviously, time will tell. If you look at the construction starts around the country, they're down tremendously.
If you look at the book of business that the major contractors have, they're down tremendously. If you look at the book of business, then I forget the names of the publications that our team monitors, but if you look at the book of business that the architects have, it's down tremendously. So you're seeing a big contraction in construction starts and in projects that are being designed for the future, which all of which would suggest that commodity pricing as well as labor will end up being less expensive. And if history serves correctly, that's what we're likely to see. Your supposition about rental going down and construction costs going down and yield perhaps remain the same, and I'm kind of paraphrasing.
I'm not sure the rents are going to go down for new construction. People like us make the decision if we're going to start something, do we feel comfortable that the rents we need to have, we can get. And if we don't feel comfortable, we don't start. There's always the case where you start spec and you find that the markets change and you don't get what you want and that can happen. I do think construction costs will go down.
Labor never likes to talk about it going down because they're just that's something they don't like to acknowledge. It's just too early to tell, but a lot of things can throw these things off. If all of a sudden there is a massive $1,000,000,000,000, 2 $1,000,000,000,000 infrastructure bill passed by the federal government, then commodity pricing is likely to not come down as much. So too many variables to give you a specific answer, but I think it's a good question and one that we will continue to speak about on these calls.
Got it. That's helpful. And I think that makes sense. Quick one for my second. Last quarter, you guys mentioned being in discussions with a large credit tenant to backfill at least some of the 130,000 square foot move out in Long Beach.
Just how have those discussions progressed? And as negotiations stand now, what are the prospects of getting that backfilled quickly?
Hi, Blaine, it's Rob. I don't want to get into too many specifics because a lot of people listen in on these calls. We have discussions going on right now with 3 different entities for space in that vacancy. And we feel good about the prospects for getting at least up based on just the activity we see in the market. That's the best quality asset in the Long Beach market.
And it's well recognized. And I just without predicting more, I just feel good about our prospects in terms of the activity we've got.
Got it. Thanks, guys.
The next question comes from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.
Thank you. I'm wondering, have you guys thought about redesigning any of your future developments based on new wellness standards or just what you think tenants might want post pandemic?
Well, we're always thinking about it, Jamie, and we've been the leader. As I mentioned in my comments, we are the world's leader in wellness, the world's leader. We're the world's leader in sustainability. I think we're probably the world's leader in rooftop decks. We as a company have a culture and a mission to make sure that we are producing the very best of what people want and that withstand have a long runway in front of it.
Contrast that with older stock that frequently can't physically change enough to be as modern as tenants want them to be. So we're doing that. We're already doing that. If I don't want to give any of our competitors any of our inside information on how we go about it. But we have a team of people, both internally and that we work with externally that is really cutting edge.
It's basically a war room kind of discussion of where are things going, how do we test it, and it's proven to be a tremendous asset for Kilroy and it's one of the reasons we embraced sustainability and became the world's leader and we embraced wellness and became the world's leader. And I think we're doing the same thing with regard to working with our tenants, with regard to reintroduction to the workplace and the changes that may need to be made. And of course, with regard to the buildings that we have underway, we have made some changes on some. With regard to the Flower Mart, we've broken that into smaller components so that we can it's sort of increments of anywhere to 400,000 to 500,000 seats rather than starting one building. 1 of the buildings was about 1,400,000 feet.
We've broken that into smaller components that can be joined. So things like that, we're constantly working on how we create greater flexibility and optionality with regard to what we have to start, how we can break it up between tenants. I mentioned in our last call that I think tenants are going to gravitate the bigger tenants more and more they already have, but gravitate more and more to wanting to have absolute control of their premises. And that is easier when it's a single building where they occupy all of it as opposed to being a portion of much taller building. And I made in my comments earlier this morning or this afternoon, depending on where you're located, that we're very geared toward low to mid rise.
We only have 2 buildings that are over 25 stories in the portfolio. So we're doing all the things you're asking about.
Okay. Do you think there's going to be a meaningful change to construction like the cost in terms of the types of goods you'll put in the buildings?
That will cost more? Well, you've seen our construction costs that if you were to go and I don't look at other people's construction costs, but if you were to look at the supplementals or whatever you all look at to see what costs are for our buildings versus other buildings. I know we build to a higher level of quality than most of our competitors do. And I'm not speaking just about REITs, I'm speaking about anybody who does stuff we do with more flexibility and optionality. And yet I think our cost structure has been pretty much in line with most others.
I remember my dad used to say to me that there's engineering, which is how you engineer costs out of something and there's art and that is how you end up building a better mousetrap, but trying to keep it at the same level of cost. And art is that is an artful thing and we do a pretty good job at it. We by no means build the cheapest buildings. But we have as you've seen, almost always we've been the market leader on rent. And it's because we're delivering what people want.
That makes sense. And then at the beginning of the call, you talked about having lots of conversations with tenants and what different tenants are thinking about. Would you say there's a meaningful difference between sectors in terms of who's thinking about work from home and who's thinking about the hybrid model and just curious if there's any kind of differentiation there?
Well, life science people, it's hard to do life science from home, right? So that kind of speaks to itself. With regard to this, if you're a small tenant and you occupy 2000 or 3000 feet and you've got to work from home right now by law, why would you renew your lease? You just wait for there's always 2,000 feet available somewhere. I think the smaller tenants are likely to be less inclined to renew leases than big tenants.
So Rob, why don't you take that one because you spent so much time.
Yes. Hi, Jamie.
I'm just I think John hit the nail on the head. It's just that the smaller tenants are probably more susceptible to what's going on today and that they can save money by not renewing a lease, but we're not really seeing a sector by sector change. Everybody is talking about, I think a fact is that work from home will be more acceptable and predominant than it had been in the past, but it's going to be a blend of work from home and office. And I know again, I think I said this on our Q1 call, but just our own employee base, I know people are dying to get back to work. We're not really a tech company, even though we work closely with them.
And I know that that sentiment is echoed by a lot of companies. They're in fact CEOs and executive teams are working hard to put programs together that make employees comfortable coming back to that workspace. So it's health screening, it's biometrics, it's all sorts of new technology that frankly a lot of our tenants are developing in order to make the workspace safe so that the employees feel comfortable coming back. But I can't I think even fire category tenants, I think there's probably going to be some flexibility in work from home versus coming to work, but it's going to be balanced.
And are you seeing any pickup in demand for offices closer to where people live, like more of a distributed office footprint?
Yes, I think that's going to that was a trend in the past and I think it's going to continue. I just think that no one other than being shut in their apartments, none of the young tech employees in San Francisco are talking about moving out. I mean, they want to get back out with their friends and they want to get back to work from what we're hearing. And it's also why a lot of the facilities managers and corporate real estate executives that John and I talked to are reluctant to put space on the sublease market because they need the flexibility and they're afraid that if put something on the market and it gets sublet, when things normalize, they're going to be short on space. So there's just a lot of dynamics going on right now.
And like John said in his remarks, there's going to be kind of some moves forward and maybe some moves backwards as we sort through this for the remainder of the year?
We're in discussions with a couple of tenants that are in the portfolio now that have needs for significant expansion and some of that's driven by increase in workforce and some of it's being driven by reconfiguration of space. I've had a lunch not too long ago with well pre COVID, but with a I guess we had a virtual lunch, that's right, where they had recently taken an entire building in one of the cities in which we operate, and it was several 100,000 feet. And he said, now with the elevator situation in that particular high rise, they need twice as much space because they can't operate in that building the way their protocols require them to operate and they wish the heck now they hadn't taken that particular building, but they need more they need to double up was his comment, double up in terms of the amount of space. So we're going to see this kind of fits and starts. Some companies are going to put on hold that those decisions that they don't need to make.
Some companies are going to have to reconfigure their space in a way that requires them to take more space. In some cases, we'll see companies that will reduce their footprint. And I think there's going to be a combination or a variety of all that stuff. While we're all tired of COVID, I know with bunch of kids at home and so forth, I think everybody would for all the reasons want to get through this thing. But the fact is it hasn't been that long.
It's been 3 or 4 months. And everybody is trying to figure out how to move forward in a constructive way. And we're going to see that manifest itself in all the ways I just mentioned.
Okay. All right. Thanks for your thoughts.
You're welcome.
The next question comes from Dave Rodgers of Baird. Please go ahead.
Yes. Good morning out there.
Just a couple of cleanup questions
for me. With regard to the severance, John or Tyler, were there more than just Jeff in that number? I mean, have you taken a little bit of a cut at just different parts of the organization? If so, where? But just wanted to clarify on that versus just Jeff.
Well, yes, we have reduced our workforce some. And we're always going to be trying to right size. One of the things I always find is tough and I'm involved in some other entities beyond Kilroy. And the big challenge that everybody has is nobody if you think of game of football, there's 100 yards, you know where the goal line is or you know what the timeline is. It's an hour game, it's 100 yards, the goal line is down there.
And so there are some visual aids, if you will, how you're doing and what decisions you should make depending upon the time you have left. The thing about COVID is nobody knows how long it's going to last. Nobody knows where the goal lines are. Nobody knows how long the game is going to be. And I don't I shouldn't use the word game because it's a very serious issue.
And so, how do you know what the right size of your organization is? My view is always to make sure that you have the talent you need to play offense and defense and adjust at the margin to make sure that you're not have excessive excess. And you saw us back in the what was it, 2,008, 2,009, we made some pretty drastic headcount reductions. But there we could see that there were going to be a couple of years of significant downside and so that much of the development, if you go back to that chart that I frequently show about when we acquired, when we developed, when we disposed of assets. The thing I like about that chart is it shows that there are times when you're not doing any development and therefore you reduce the number of development people.
There's times when you're not doing any acquisitions and therefore you reduce the number of acquisition people. We're going to be mindful of that as we navigate the months and years ahead.
Thanks for the color on that. Maybe for Rob, John, the utility or utilization of your office buildings today, maybe kind of probably was down in the low single digits at some point. Have you seen that recover at all or not? Where is that at today?
Hi, Dave. It has recovered, but keep in mind for most of California, we had to, as Governor Newsom calls it, adjust the dimmer switch downward again. So it's also changed again. But in May June, there was definitely an uptick, I'd say probably up to 25% to 35% occupancy just based on our parking garages and that sort of thing and part access information. But again, once in California right now is spiking as you know, it's kind of like New York was.
So people are not in the office as much as they were, but they're definitely wanting to get back. It's just a matter of again feeling safe and also government restrictions. Same thing for LA.
Okay. And then I think Jamie asked a little bit about this. I don't want to beat the dead horse, but on the new tenant activity, 5 deals I think you signed in the quarter about 10,000 square feet each. It sounds like you guys were saying nothing much to conclude from that. It's obviously a small subset, but is there any directionality from that that would kind of give you clarity on where we head in the Q3 and beyond?
I think if you're asking, I think that what we're going to see for the remainder of the year, probably Q1 is more emphasis on renewals than new space. But again, it's very market oriented. For example, in San Diego County, there were 40 deals over 20,000 feet completed 80% of those were new deals, not renewals. So there's net growth in San Diego in that example and then other areas you're just going to see, I think renewal. So in San Francisco, it's about 55% right now, 50% to 55% renewal versus new for the activity.
So again, very market specific. Hollywood and entertainment, you'll see, I think, absorption.
All right. Thanks for that. And then maybe Tyler, last question for you. On the tenant in Hollywood that you mentioned, the marketing firm that went bankrupt, that impact, was that covered in the prior reserves? Or did you take a special impact or were you able to go back and maybe get some kind of credit enhancement on that post their departure?
Any thoughts around that would be helpful.
But obviously going forward, assuming they don't recover, we'll have an impact in the second half of the year. But from an earnings perspective, there was really no material impact in the Q2.
Okay. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Tyler Rose for any closing remarks.
Thank you for joining us today. We appreciate your continuing interest in KRC, and we wish you all remain healthy and safe. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.