[crosstalk] I'm Mike Griffin with Citi Research, and we're pleased to have with us Kilroy and CEO Angela Aman. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC25 to submit questions. Angela, I'll turn it over to you to introduce Kilroy and the team, provide any opening remarks, tell the audience the top reasons investors should buy your stock today, and then we'll get into Q&A.
Great. Well, thank you. I'm Angela Aman. As Michael said, I'm the CEO. We've got Jeffrey Kuehling here, who's a Chief Financial Officer. Rob Paratte, our Head of Leasing, and Eliott Trencher, our Chief Investment Officer. Kilroy really owns about 17 million sq ft, primarily in West Coast markets: San Francisco, Los Angeles, Seattle, San Diego, and a small but growing presence in Austin, Texas as well. Primarily Class A office, but with a growing life science portfolio as well in San Francisco and San Diego. In terms of the reasons to buy the stock today, I think there are a number of different reasons that make this a really compelling entry point for Kilroy Realty.
I would say first and foremost is the quality of this portfolio, which across all of our markets continues to really perform extraordinarily well and will continue to benefit from the flight to quality dynamics that continue to play out for office assets across the entire nation, but certainly in West Coast markets in particular. The second reason I would say is just continued and growing West Coast leasing momentum, which you specifically saw in our fourth quarter results, which was a meaningful acceleration from where leasing had been really since the end of 2019 or since the beginning of the pandemic, which was incredibly exciting.
I think that was being driven and continues to be driven by a number of different factors, including enhanced return to office momentum across all of our markets and from major West Coast employers, including the technology sector, emerging technologies in many of our markets, including artificial intelligence, which has really unleashed a significant amount of activity, particularly in the city of San Francisco, and then quality of life issues across all of our markets, which continue to improve and make the cities feel more vibrant and create really a virtuous circle of bringing people back to the office and interested in locating in some of these primary office markets as well.
In addition, the company has an extraordinarily strong balance sheet, robust liquidity, a tremendous amount of financial and operational flexibility that positions us very well in an environment like this and allows us and will continue to allow us to capitalize on interesting investment opportunities as they come up over the next several years, and then fourth, I would say, is just relative valuation.
Thank you for that overview, Angela. Maybe just starting with, I think, your first point you made there, just in terms of the improving sentiment within office, particularly on the West Coast, the drivers, whether it's return to office mandates, companies finally looking to grow again, how can Kilroy capitalize and benefit from this improving sentiment in the office market?
Yeah, I think it's really twofold, so it's both of those first two points I made. One is just the flight to quality dynamic. One thing we've really been emphasizing for investors over the last few months, really, is the amount of vacancy we have in some of the highest quality assets we have in the portfolio, so if you look at just assets we have that were recently developed or repositioned, three assets in particular are West 8th in Seattle, 2100 Kettner in San Diego, and Indeed Tower in Austin. There's 410 basis points of portfolio occupancy upside embedded in just those assets that are really the highest quality assets in the market, are well amenitized, have all of the things that current office users are looking for.
I think really making sure that our leasing team, both internally and externally, is swarming all the resources they have available to them to make sure that we're capturing demand in some of those highest quality vacancies is an incredibly important piece of how we leverage and capture the growing momentum in the market. I think the second piece is just really understanding the market by market and submarket by submarket dynamics across all of the regions we operate in and trying to understand where demand is coming from and how we can best leverage that demand or best make sure the vacancy we have in the portfolio is really targeted to where the demand is coming from.
And so a great example of that is the city of San Francisco, where we continue to see significant and growing demand from smaller, earlier stage tech companies, but in particular, AI companies. And so one way we can leverage that demand is really understanding those users are looking for space they can get in and take occupancy in very quickly, space that's already built out, in many cases, space that's already furnished. And so that's a market where a really robust spec suites program can be highly effective. And so, again, just understanding the dynamics in each of the markets and making sure that we're deploying the right resources internally and externally to leverage those pockets of demand.
So to that end, is it fair to assume the leasing pipeline is predominantly those smaller, kind of more startup-y tenants, have bigger tenants come back to the market? I know there have been a number of large AI leases in San Francisco recently. So maybe just talk about the leasing pipeline, the opportunities out there.
Yeah. I mean, I'd say I'll kick it over to Rob in just a moment to put some more color to this. But I would say if you look at our fourth quarter leasing activity in particular, it really did run the gamut, so two of the largest leases we talked about on the call included a direct deal we did with a subtenant for one of our largest 2026 lease expirations. That was over 250,000 sq ft that we signed in Silicon Valley. Again, a large global technology user willing and able to make a long-term commitment for a very significant footprint. The second largest lease we talked about that was signed during the quarter was nearly 100,000 sq ft in Bellevue, Washington.
It was signed with Walmart, so their technology group, but really looking to capture demand from what had become a more remote workforce and really bring people back to the office, so underneath that, you saw a much more granular leasing pool that included many smaller users, smaller technology users, things like that, but it really did, and I think this is an important point, run the full gamut between smaller users that are earlier in their life stage and much more established players that are willing and able at this point in the cycle to make bigger commitments in terms of square footage, but also longer duration, and so I think that's a really exciting dynamic.
Yeah. And Michael, just the last thing I'd say is that our pipeline today, compared to, say, six months ago, is more solid in terms of further staged negotiations going on with tenants. Even a year ago, a lot of tenants were in the market sort of reluctantly and tire-kicking, and now decision makers are showing up, and it's shown in the numbers that Angela just went over. And another point I'd make is that AI is having a significant impact in San Francisco, but it's not limited to San Francisco. We've also seen and done some AI transactions in Seattle, for example. So it's definitely something to watch. Tech continues to be a big driver on the West Coast, and they've got everybody back to work, and that's changed the whole experience of being back to work in cities like Seattle and San Francisco.
It's a really important point. Part of why we're seeing that demand spread out beyond just the city of San Francisco is these companies really looking for talent and where there's concentrated talent in those kind of categories, and Seattle's a really good example of where there's a highly educated, high-tech work base that they're looking to leverage as well.
Can you give us a sense of what office utilization is in the portfolio and how that might have improved over the last 12 months-18 months?
So today we're a little over, I'll call it 50%, and that's trended up throughout the last 12 months. And so we saw, I'd say, much bigger jumps kind of coming out of the pandemic, and now it's more of a grind higher. Some of the markets like the Bay Area or Seattle that have been a little bit slower to pick up physical occupancy is where we've been picking up more of the gains recently. And so it continues to trend in the right direction.
Yeah. We have some markets like San Diego that have been and have been for quite a while quite high from a physical occupancy perspective. That's also where we've seen the highest occupancy levels in the portfolio. Our suburban San Diego portfolio, Del Mar, as an example, has been very high physical occupancy, very high leased occupancy as well. Bellevue has been pretty strong and continuing to be pretty strong. Our Seattle portfolio, I just point back to what we said earlier in terms of our vacancy at West 8th. Right now, it's hard for us to get a real read on the Seattle market because of the real vacancy we have in that portfolio, but we're seeing good leasing momentum that, again, is following this return to office phenomenon.
With Amazon's announcement that they're going back five days a week, that really started at the beginning of January, we've seen a material change in traffic in that market overall. I think car traffic to the city of Seattle was up over 20% in January, just as a result of, we think, primarily as a result of that announcement.
We had a question come in just about the renewals within the leasing pipeline. Are you still seeing companies reduce space on renewals or have some started to actually expand?
It's a combination, right? There's definitely still some downsizing happening with some uses in the portfolio, though I think even the size of those downsizes is stabilizing at a healthier level than we might have expected it to a year ago. I would say in other places in the portfolio, including a couple of deals I think will get signed in the first quarter, you're seeing real expansions of tenants that had signed leases over the last couple of years and just continue to grow as they understand their needs and their business needs change and evolve as well. So I think it's more balanced than it was a year ago at this time. It's certainly more balanced than it was. And we are seeing sort of more data points on the expansion side as well.
Just on the concessionary environment, have you noticed any changes in whether it's TIs, free rents? Have they stabilized? Have they come down at all? Are you able to push on pricing, whether it's face rents or seeing any improvement in net effective rents?
So on net effective rents, I'll just tick off for our regions, Bellevue, part of Seattle, South Lake Union, San Diego, Austin. We see what we think is positive net effective rent growth, just given the quality of space, as Angela talked about earlier. If I didn't mention San Diego, I meant to. And then in terms of concessions, it really is sort of a [crappy] . It's hard to say with certainty it's any one concession that's important. So it just depends on, for example, the type of space that we may have compared to a competitor. Most of our space is in really good shape and ready to lease, whether it's a speculative suite or just already completed space. And so there's less negotiation on that than if you're going from shell.
Where most of the demand today is more toward completed or near complete space as opposed to shell. We try to be smart about every deal we do, so we're not inflating contract rents with lots of free rent. We try to, again, maximize the lease term within reason. I mean, and we're seeing tenants wanting to do that depending on their use. Some tenants want to do five. Some are moving toward 10, depending on the market.
So maybe just wrapping up kind of the fundamental side of things before we switch over to some other topics, is it fair to assume that office fundamentals have bottomed on the West Coast, or could we still see some deterioration before we see that inflection?
I think it varies market to market. In general, I think it's fair to say things feel like we've reached a point of inflection. Although what I've said really since I started a year ago is it won't be a perfectly straight line, right? So you will continue to see over the course of the next year certain data points that sort of make you wonder whether or not we've fully bottomed. I really believe we have. I think things are continuing to trend in the right direction, though there will be announcements of downsizes in the market, right, or other space give-backs or things like that. I don't think that changes where the trend line is headed from here.
Switching over to life science now, obviously that sector has had some challenges from a supply perspective, but whether you look at VC funding or other forward indicators, it seems that sentiment is improving. So maybe kind of high level, what are you currently seeing within the life science market, and then any update you might have on whether it's phase II of KOP or the recently stabilized office-to-lab conversions?
Yeah, I'll spend just a moment maybe talking about the second part of your question first and talking about KOP in particular, and then we can go more broadly into life science and how that market's evolving. But KOP, as you know, the second phase of our Kilroy Oyster Point project in South San Francisco was delivered in January of 2025. We believe this is an exceptional quality portfolio in one of the three most dominant life science clusters in the country and believe that we're going to create a tremendous amount of value through Kilroy Oyster Point over time. We have a very successful phase I of the project that's leased to Cytokinetics and Stripe and really feel like we're going to continue to build on that momentum in phase II and in future phases of the project as well.
There's land available for phases III, IV, and potentially a phase V down the road. Right now, we're very focused on getting phase II leased up, and the company made some very thoughtful and strategic moves in the last part of 2023 to make sure that against a backdrop of a more challenging life science environment, we could be positioned to capture any and all demand that was in the market when this project delivered. That means we did go multi-tenant on one of the three buildings in phase II and built out two floors of spec suites for that project. That means we're well positioned to capture some of the earlier stage life science demand and companies that are looking for ready-built space that they can occupy very quickly.
That also leaves two other buildings at the project where larger format or later stage tenants or tenants that just have really special requirements for their lab space can custom build what they need as well, so we've got a tremendous amount of flexibility to capture any and all demand that's in the market. Having delivered the project in January, we've hosted new brokerage events and things like that that really showcase the completed project with all the landscaping, all the amenities finished out, and I think the project shows extraordinarily well and has created a lot of momentum in the market now that we're in that post-delivery phase. We continue to feel good about the traction we're seeing.
We talked throughout the course of 2024 about an uplift in overall leasing activity, really tour activity over the course of the year, and that that tour activity had become much more broad-based. So we were seeing demand from both those early-stage companies as well as later-stage companies, as well as research institutions, all the sort of traditional life science users, as well as tech users and fintech users, in particular, given the proximity to Stripe. So I think we're set up to accommodate a wide range of potential uses and tap into what we think is an improving demand picture with very broad-based demand from a size and industry perspective.
I don't really have anything to add. I would just say that our team on the ground at KOP is very busy, both with increased tour activity. I guess the last two things I'd say is there's increased tour activity that's coming directly from an improving VC funding environment, and there's just also the project has attracted a lot of attention across the Bay Area, so we're seeing tenants from other markets coming into the market to talk, so more to come, but we're busy on the project.
And has any potential worries around cuts to NIH funding or changes there? Is there some implication potential for your life science exposure portfolio, or how should we think about that?
Yeah, I would say it's very early, and some of the messages and the way this is playing out have created certainly some volatility for the way people think about making longer-term commitments right now. Though I will say and stress that to date, we have seen no impact or slowdown in activity with tenants we're currently talking to around their potential interest in making a commitment now. So depending on how things continue to play out, we'll continue to watch and monitor that, but we haven't seen any impact to date.
We had a question come in on KOP and capital risks. That's probably best for Jeffrey's purview, but how much are the carry costs of KOP excluding capitalized interest, and when will this start to impact?
Excluding capitalized interest?
Yeah.
It's reasonably small, right? Taxes and insurance are going to be a reasonably small component of it, but we can get the specific number and provide that.
Maybe just shifting to L.A., which is a core market of yours, but has seen, similar to other markets, its fair share of challenges over the past couple of years. Whether it's the Hollywood strike getting resolved, whether it's the impact of wildfires, I mean, have you seen demand improve there in your portfolio? It feels like you're seeing it more in San Francisco and Seattle. Obviously, San Diego has been very strong. What's the demand profile been like in L.A.?
So again, our portfolio, just for people that aren't that familiar with it, we're in Hollywood, we're in West L.A., and we're in Culver City. So we're not downtown, and we're not in some of the outlying areas. We're also in Long Beach. And the entertainment out of our regions, L.A. has more work to do in terms of occupancy and demand coming back.
A lot of that, I think, is a function of the fact that there were some really large transactions done over the last couple of years by tech companies in various submarkets within LA, which is sort of natural. You get this big leasing volume, and then things do plateau. For our assets on the west side, for example, we're really well positioned between the 405 freeway, which is a major transportation artery. We have light rail right behind our project. And the type of vacancy we have is much more suited to the smaller private company professional service, if you will, either media and film production or professional service companies that want a low-rise building with really great outdoor spaces that their employees can use. That's what's really important in a market like Santa Monica. And in Hollywood, we've had leasing activity.
So really, the challenge there is just getting more consistent demand, I think, in the market, which we see it just comes sort of cyclically as opposed to sort of a regular stream.
I think this probably leads into the next question that I just got here. Just on the Hollywood portfolio, we saw that recent press release around Netflix potentially looking to exit some of its office buildings around there. Could that have a potential impact on your portfolio and any comment you might have there? I realize you can't comment on press releases sometimes, but figure that out.
Yeah, I don't know that there's much we can say outside of, obviously, we have Netflix in one of our three buildings in the Hollywood market. They've been a great tenant. We believe occupancy, physical occupancy, and that asset's quite high and continue to have a good and constructive dialogue with them going forward. So I don't think there's anything else to mention outside of that.
Maybe just switching over to external growth opportunities in the transaction market. You guys executed on a deal in San Diego last year. Really kind of made sense just given where kind of your cluster there is in One Paseo. But maybe Angela or Eliott, what are you seeing on the transaction side that could get you excited about pursuing external growth opportunities and anything you can comment about yields or IRRs that you're underwriting to relative to where you see your cost of capital?
Yeah, I'll start and just say, over the course of the last year, we have been active at underwriting deals. We've seen more market testing happen across our markets, though not everything is traded, right? There still has been a spread between buyers and sellers that, in many cases, has resulted in deals not ultimately transacting. We think that bid-ask spread has narrowed and will continue to narrow over the course of this year and expect to see more opportunities that not only sort of check all the boxes for us, but are probably more actionable than the ones we've seen over the prior year as well.
That said, we are very cognizant of what our cost of capital is and what we can really be competitive for, continue to work on executing across all of the different parts of the business, including leasing, including some of the future development pipeline land sales and things like that, to make sure we can harvest attractively priced capital to be competitive in the transaction market as it continues to solidify.
So strategically, I mean, you touched on the acquisition we made last year. That made a lot of sense for us. It's the first acquisition we made in about three years, but geographically, it made sense. Economically, it made sense. Fundamentally, it made sense. It checked a lot of the boxes that we typically look at. And then the criteria we're going to take as we look at new opportunities. What do we feel about the underlying fundamentals in a market that we'd be evaluating? What kind of level of risk do we think is appropriate given both the vacancy that may or may not exist in our portfolio at that time and what we're seeing outside of that? Can we make the math work? And how do we think it fits into the context of the overall portfolio?
So we have been and will continue to evaluate all of those things. As we look at broadly what we're seeing, we're starting to see to this point, it's generally been opportunistic capital that has been looking at office in kind of the second half of 2024 that started to change. And we started to see a little bit more of a core-ish kind of buyer come into the market. We referenced on our calls and trades in both Austin and the Bay Area. They kind of referenced that. So that's a double-edged sword for us as a seller. That's great. And then for a buyer, it will present another area of competition. But we overall think it's a good thing that more capital, institutional capital, and sophisticated capital is working on and looking into the office space.
Eliott, as you look toward potential funding sources for deals, is it issuing debt? Would you look to issue equity if the deal made sense? Free cash flow, JV Partners? How do you view kind of your capital sources as you look ahead to find opportunities?
I'll touch on part of it, let Angela and Jeffrey touch on the rest, so as Angela mentioned, we're looking at some non-income-producing land sales, and we continue to make progress on these. They don't happen quickly just because of what we're trying to undertake in monetizing land that is currently entitled for commercial, and bring it to folks that would be doing something different with it, and so we're continuing to make good progress there, but that will take time. That is very attractively priced capital as we get those proceeds in the door.
Additionally, we're looking at just operating portfolio dispositions, and we're working on a few of those, generally kind of thinking about areas where we either don't think we can create more value or where we think that the value that the market is placing on it is in excess of how we are underwriting the opportunity, and so that definitionally is attractively priced capital as well, so we think that those two will provide some avenue, and then as far as the others, Angela.
Yeah, I think that's really the key focus, right? Like I mentioned, we're very cognizant of where our cost of capital is more broadly today. So we need to do as much as we can to find attractively priced capital that's available to us today. So the land parcels in the future land bank are sort of, I think, the best opportunity for us to harvest some capital that we can use either for deleveraging or for more opportunistic investing. Operating portfolio dispositions will be another avenue. But it's hard for me to imagine right now that we would find an acquisition that really worked from a public equity perspective. I think that's extraordinarily unlikely.
We just got a question kind of touching back when we were talking earlier about L.A. and demand there. Does the media and entertainment industry really need to come back for L.A. to see an accelerated recovery?
It certainly would help. Look, L.A. does have. L.A.'s a very big market with a lot of interesting submarket dynamics. I think that certainly that has been a big part of the market historically, and seeing that part of the market come back in a meaningful way will be helpful, but we are seeing pockets of demand that continue to come out of professional services and other areas that have been a real driver for leasing momentum in certain submarkets within the city, and we think as submarkets like Century City become more full, that you are going to see some spillover benefits to markets like West L.A., that could happen even in the absence of a significant recovery in media and entertainment.
Angela, I know you touched on it in your prepared remarks, but just kind of around the regulatory environment in a number of markets. It seems like things are shifting more to the positive. How important is it working with key public stakeholders to entice workers to feel better about coming to the office just given what have been lingering quality of life issues in some of those markets?
Yeah, I think it's incredibly important, and the company has been active on this front for many years. But I think you look in particular at the success in the city of San Francisco, the success in Seattle, and many of our other markets over the course of the last couple of years. There have been meaningful improvements. I think what's happening in San Francisco right now continues to really speak to the benefit of just an engaged community overall. That means businesses, and that means residents together, really trying to prioritize the things like safety, homelessness issues, drug use issues, all of those things in the city that make it a vibrant place that people want to come back to. I think your question sort of touched on one dynamic, though. One is the reality of the situation. The other is perception.
I think in many of our cities today, there's been really very meaningful work done on tackling those core issues, and now we're in the stage, in many cases, of also changing the perception. I think people who live and work in those cities have seen those changes play out. I do think there's some overhang in terms of the more national perception of those markets, and we just encourage everybody to take the time to go back and tour and visit because I think things have changed, particularly over the last 12 months, in a pretty meaningful way.
We had another one come in on the leasing pipeline. You touched on the vacancy within specific buildings, including West 8th, Indeed, and Kettner. Can you talk to the demand and pipeline within these buildings, and could we see any larger leases signed this year?
Any leases signed this year? Yes.
Any look?
Yeah. No, look, I think the pipeline across all those buildings has and remains strong. I think Indeed and 2100 Kettner in particular, we've continued to make, I think, really quarter in and quarter out progress on chipping away at that vacancy. So I think that's been really positive. West 8th, the repositioning was just finished in the fall in September or October. So I think we're really just seeing that demand kind of resurge now, and particularly given the dynamics in South Lake Union and in the rest of Seattle in terms of people being brought back to the office. I think the vibrancy of that market is improving kind of just at the right time for us. So I'm really encouraged about the pipeline there and our ability to make some meaningful headway on that over the course of this year.
I know this is always a hot topic, but just on AI and how it could shift the dynamics within in-person work. You've obviously seen these AI companies take down a lot of space, but just is the application of AI technologies a benefit for the office industry? Could it be a detriment? I'd like to hear your thoughts about that.
Yeah, I mean, I'll start a little bit. I think this is going to be something that plays out over a much longer time frame, and it really is going to depend on what office we're talking about and where that office is located. I continually believe very strongly in the markets we're in that are hubs of technology and innovation, that the work that's going to be done over the next 5 years-10 years to really leverage the power resident and AI is going to create a lot of jobs in those markets around that dynamic. And I think one of the really interesting things about what AI does overall, there's no question there's going to be disruption that comes on the other side of this from an employment perspective.
But I also think there's this enormous opportunity for us to the productivity enhancements and the additional kinds of things we can't even yet envision that are going to come out of AI are difficult to quantify or difficult to talk about, but we're seeing advances in that direction day in and day out. So certainly, I can't speak to every office market in the country, but I certainly think across our office markets that have not only the ecosystem in place now, but the base of technology talent and education and all of those things will certainly continue to benefit over the medium to longer term based on the kind of activity that's happening now.
We had one come in again, kind of relates to capitalized interest, but on the land bank. Is there any implication, particularly for Flower Mart, as it relates to cap interest burn-off beyond 2025 and how that could impact earnings, maybe just capitalization stuff?
Yeah, I think we tried to provide a tremendous amount of transparency around Flower Mart and the dynamics there on our last conference call. So I'd point you to those remarks. But we effectively said that in total, Flower Mart capitalization is about $8 million a quarter. That's $7 million of interest and another $1 million in taxes and insurance and utilities and things like that. That gives you some parameters for kind of how we think about it. What we also said effectively is that the midpoint of the guidance range assumes that we stop at some point in the second half of the year. So if that were true, let's just pick a point and say you were turning capitalization off potentially at the end of the third quarter, beginning of fourth quarter, you can sort of see what the follow-through to 2026 would be.
But I think we've laid out all the pieces to make that math hopefully easy and as transparent for people as we can be.
Angela, just maybe a bigger picture question, but you've been the CEO now for over a year. Obviously, a strong understanding of the portfolio and what makes Kilroy Kilroy. As you look ahead, how has your vision for Kilroy's portfolio changed? What are you and the management team prioritizing right now in order to maximize value for shareholders?
Yeah, I think coming into the company and knowing Kilroy from the outside for as long as I did, I think the strategy here has always been about leveraging all of the strengths that this company has and has always had, strength in terms of the quality of the portfolio, the scale in certain markets and the concentration we have there, the relationships with the tenant base we have on the technology side in particular, and continuing to figure out how to utilize those benefits as well as having a really top-tier development function that's created, I think, a tremendous amount of value for shareholders historically and making sure that we're leveraging all of those strengths to continue to create value for shareholders in the future. So it's really been focused on that, and then it becomes more tactical in exactly how we do that.
I think I'm also very focused on platform enhancements and making sure that we're operating as efficiently and as effectively as we can across the entire platform, and when I say that, I'm not really talking about overhead reductions, though we've also done plenty of that. I'm really talking about how we move quicker, how we're more nimble, how we make sure that we're picking our heads up and looking around and trying to capture demand and trying to move as quickly through the pipeline as an example as we possibly can, so those have all been key focuses over the course of the last year. I spent a ton of my time working with Rob and his team on the leasing side, Eliott and his team on the investment side. Our balance sheet, as I mentioned earlier, is in really, really great shape.
We've got a tremendous amount of financial and operational flexibility, and we just need to execute and execute as quickly as we can.
One real quick one before the rapid fire came in. Are there any larger known move-outs that you can highlight for either 2025 or 2026?
Yeah, we did talk about several larger move-outs that are happening in the first quarter of this year. I'm forgetting if we called anything out by name, but one was a bankruptcy situation we did talk about at the end of 2024. They did a short-term extension, so we expect a significant downsize from that tenant in the first quarter. There's another one that was the outside of that shorter-term deal had been the largest move-out or largest expiration, excuse me, in 2025. We expect that to be a vacate, all of which was embedded in the guidance we gave for occupancy this year, and what we really talked about in this last call is that those move-outs or expected move-outs or downsizes really are concentrated in the first quarter of this year.
You should expect from an occupancy trajectory standpoint to see a dip lower in the first quarter and then much more stability as we move through the rest of the year. 2026, it's still early, but we were really pleased to make significant progress on the 2026 lease expirations in the fourth quarter of this year by signing, as I mentioned earlier, a really significant deal with one of the subtenants for our largest expiration, taking that large expiration in 2026, which is nearly 600,000 sq ft to over 70% addressed. So we're making really good progress at addressing 2026 and getting in front of it early. And I think really taking some risk off the table as it relates to us beginning to stabilize and then grow occupancy as we get into the back half of the year and into 2026.
Real quick for the rapid fire, what is net effective rent growth for the office sector overall going to be for 2026?
It's hard to say, and I can really only speak to our markets, but I would say for Class A, we think it's positive, sort of mid-single digits. For Class B, it's probably still a little bit negative.
Will there be more, fewer, or the same number of publicly traded office REITs a year from now?
Same.
Great. Thank you very much.