San Francisco tech firms sitting on file quantities of empty house
Cloudera left some Bay Area office space early last year to sublet and relocate employees south to the software company’s Silicon Valley headquarters.
But the pandemic left the company with no one to take over a full office, forcing it to take a significant write-off on real estate.
At the former DoorDash headquarters in San Francisco, a tenant missed rent a month after the lockdown, causing a loss of income for the grocery company, which doubled as a landlord.
Airbnb said in its earnings report on Thursday that it recorded a $ 113 million impairment loss in the first quarter “related to office space in San Francisco that we no longer needed.”
Taken together, these three companies saw nearly $ 200 million in real estate depreciation last year after Covid-19 turned the Bay Area office market into a dead zone. That dollar number swells to nearly $ 1 billion when you add in the lease-related write-offs from major tech companies Salesforce, Dropbox, Uber, PayPal, and Zendesk.
As software and internet companies continued their stratospheric rise in 2020, the sleek offices they call home dormant, leaving an unfamiliar glut of supply in San Francisco’s commercial real estate market. Much of the financial impact was borne by the tech companies, who led a decade-long bull market and expansion frenzy, looting huge spaces at record prices, and often sublet floors to startups and companies out of town looking for an outpost in the Bay Area.
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By the end of the first quarter of 2021, the number of available sublet space in San Francisco had risen to 9.7 million square feet, from about 3 million at the end of 2019, and represented 40% of all available commercial space in the city. according to commercial real estate firm Avison Young.
Mark Cote, co-founder of T3 Advisors, a technology-driven real estate company that helps tenants with their growth plans, said companies looking for an office in San Francisco will have a rare opportunity at a discount for the next two to three quarters. Unlike traditional landlords, who are reluctant to lower rental rates, tech companies with excess space are sometimes willing to offer lower rents and bear the loss because they “anticipate depreciation,” said Cote.
“San Francisco has a pre-boomerang window of value for tenants that people and businesses will return to,” said Cote, whose firm operates in Boston, New York and the Bay Area. “If you’re a sub-tenant, jump on an active tenant.”
Cote said companies that pay $ 90 per square foot are offering subleases for $ 20-25 less and eating up the difference. Robert Sammons, senior director of Northern California Research at real estate firm Cushman & Wakefield, said companies “layer incentives such as free rent and additional allowances for tenant improvement” in addition to these discounts.
exploding vacancies
Despite the discounts, it is still not easy to find buyers.
The Bay Area has been slow to reopen, and downtown San Francisco remains pretty hollow, even though vaccination rates in the city are among the highest in the country and Covid cases have fallen. Tech companies have stayed productive with their employees working from home, reducing the pressure to get them back to the office and prompting many to start planning a hybrid future with fewer real estate needs.
The office vacancy rate in San Francisco rose from 6% a year ago to 18.7% in the first quarter, Cushman & Wakefield reported in its market survey for the period. That’s the highest since 2005, when the city was still recovering from the dot-com collapse. The numbers are similarly inflated in major markets like New York and Chicago, but those cities are less reliant on technology, the industry most aggressively drawn to remote work.
Before the pandemic, analytics firm Cloudera had planned to move several hundred employees from its offices in San Francisco and Palo Alto, California, to its headquarters south of Santa Clara. When the closings began, the move was in progress, but the company had not found any new tenants, so much of the space remained vacant.
With no one paying the rent, Cloudera suffered a $ 35.8 million write-down last year. Mick Hollison, President of Cloudera, said in an interview that the Palo Alto office “would have envied everyone just a few years ago, and now it’s very difficult to sublet”.
Hollison said he expects about half of Cloudera’s employees to return to the office in some capacity this year, but it’s likely that about 25% will be permanently removed and many others will only come for part of the week.
“Our footprint is getting smaller over time,” he said.
Elsewhere in San Francisco, DoorDash recorded a $ 11 million impairment loss in the first three quarters of 2020 and would not make a future monthly rental payment. “
Airbnb’s $ 113 million charge in the first quarter of 2021 brings lease impairment losses to $ 35.8 million last year. The room-sharing company laid off around 25% of its employees a year ago when the travel market collapsed.
After Uber cut about 20% of its workforce at the start of the pandemic, the rapidly expanding San Francisco transportation company found itself with far too much real estate. Uber said in its 2020 annual report that it has “moved out of certain rented offices and made them available for sublet, largely due to expanded contracts from the city of San Francisco and our restructuring activities.” The company recorded lease-related impairment losses of $ 94 million for the year.
Sign on the facade at the construction site for the construction of Uber Inc’s new headquarters announcing work stoppages and delays during an outbreak of the COVID-19 coronavirus in San Francisco, California on March 19, 2020.
Smith Collection | Getty Images
According to Cushman & Wakefield, Uber had 824,000 square feet of available sublease space in four San Francisco locations at the end of the first quarter, by far the most companies. Dropbox ranked second at 418,000 square feet after the collaboration software company announced it would go remote first. Dropbox’s impairment last year was just under $ 400 million, followed by an additional charge of $ 17.3 million in the first quarter.
Salesforce, San Francisco’s largest private employer, has 287,000 square feet available. According to the company’s annual report, the company recorded an impairment loss of $ 216 million last year.
‘Beginning to see them re-enter’
However, Sammons said activity is increasing. Tenant demand is at its highest level since the pandemic began, suggesting more businesses are looking for space. Sammons said a direct lease of 200,000 square feet is being announced, which will be the largest since the days before Covid.
“Some had pulled out and paused any kind of expansion, and we’re seeing them come back on the market,” said Sammons.
There has also been movement lately in terms of subleases. Design software company Figma has just acquired more than 100,000 square feet of space in downtown Credit Karma, which has moved its headquarters to Oakland.
And Dropbox has found buyers for large parts of its free storage space.
BridgeBio, a drug developer, recently acquired nearly 53,000 square feet from Dropbox, and Vir Biotechnology, another life science company, agreed to sublet approximately 134,000 square feet of the complex late last year.
Vir’s price per square foot starts at $ 47.77 this year and increases 3% annually to $ 68.11 in 2032 according to the lease. When Dropbox signed its original 15-year lease in 2017, the company agreed to paid $ 62 per square foot in the first year, up to $ 93.78 last year. Dropbox reportedly signed the largest office contract ever in San Francisco by renting 736,000 square feet for that price.
While Dropbox may need discounts and other perks to attract potential renters, the company is in a unique position to attract biotech companies. The complex is in an area called Mission Bay, which is full of medical centers and designated for life science companies.
The demand for space in the booming biotech industry is so great that private equity firm KKR bought the property for about $ 1.1 billion earlier this year, with Dropbox still in charge of the remainder of the lease.
“Life science companies are looking at the city now because they see this opportunity,” said Sammons. The Dropbox building “has the floor slabs and the floor plans, and everything is built and ready for life science companies.”
The sudden move to what Dropbox calls its “virtual first” model has turned a cloud software company that spearheaded San Francisco’s rise as a tech hub into one of the city’s largest subtenants. At its stripped down headquarters and other locations around the world, Dropbox keeps some space for personal collaboration and team meetings.
Dropbox said in its most recent quarterly report that while it is expected to generate additional sublease revenue and save some money by remote control, “there is no guarantee that we will realize the expected benefits to our business.”
Other San Francisco-based tech companies like Twitter, Square, and Okta have told employees that they can work from anywhere now and in the future.
Still, Cote expects T3 to see San Francisco recover even if about 20% of the jobs are permanently removed. Tech employers need to be more flexible and rational with their physical space, but they still want to be at the center of the action, he said.
“The main thing that everyone needs to remember is the talent of the workforce,” said Cote. “You can’t repeat that overnight.”
– CNBC’s Jordan Novet contributed to this report.
CLOCK: Cushman & Wakefield CEO explains why he’s confident office demand will return
