Marc Benioff, Chairman and CEO of Salesforce.com Inc., stands in front of a poster during a topping-out ceremony for the Salesforce Tower in San Francisco, California on Thursday, April 6, 2017.
Michael Short | Bloomberg | Getty Images
Cloudera left its downtown San Francisco office early last year with a plan to sublet the space and relocate its employees south to the software company’s Silicon Valley headquarters.
But the pandemic left the company with no one to take over the office and forced it to undertake a substantial property write-down.
At the nearby former DoorDash headquarters, a tenant missed the monthly rent, resulting in a loss of income for the food company that also acted as landlord.
Airbnb said in its earnings report on Thursday that a $ 113 million impairment charge was made in the first quarter “related to office space in San Francisco that we no longer needed.”
Together, these three companies saw nearly $ 200 million in real estate disruption last year after Covid-19 turned the Bay Area office market into a dead zone. That dollar number climbs to nearly $ 1 billion when adding depreciation related to leases from big tech employers like Salesforce, Dropbox, Uber, PayPal, and Zendesk.
As software and internet companies continued their stratospheric rise in 2020, the posh 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 carried by the tech companies, who for over a decade ran a bull market and expansion frenzy, building huge amounts of space at record prices, and often renting full floors of startups and companies outside of town that have an outpost in the Bay Area were looking for.
By the end of the first quarter of 2021, the amount of vacant sublet space in San Francisco had grown from about 3 million at the end of 2019 to 9.7 million square feet, accounting for 40% of all available commercial space in the city. according to the commercial real estate company Avison Young.
Mark Cote, co-founder of T3 Advisors, a technology-focused real estate company that helps tenants with their growth plans, said companies looking for an office in San Francisco will have a rare opportunity to sign up for a discount over the next two to three quarters . Unlike traditional landlords who were reluctant to lower rental rates, tech companies with excess space are sometimes willing to offer lower rents and bear the loss because they have already “faced depreciation settlement,” Cote said.
“Before the boomerang, there is a tenant window of value in San Francisco where people and businesses will return,” said Cote, whose firm operates in Boston, New York and the Bay Area. “If you are a subtenant, jump on an active tenant.”
According to Cote, companies that pay $ 90 per square foot may offer subleases for $ 20-25 less and eat the difference. Robert Sammons, senior director of research in Northern California at real estate firm Cushman & Wakefield, said that in addition to these discounts, companies are “providing incentives such as free rent and additional allowances for tenant improvement.”
Jumping job offers
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, despite the fact that vaccination rates in the city are among the highest in the country and cases of Covid have fallen. Tech companies have stayed productive with employees working from home, which eased the pressure to get them back to the office and led many to plan a hybrid future with fewer real estate needs.
The overall vacancy rate in San Francisco increased from 6% a year ago to 18.7% in the first quarter, reported Cushman & Wakefield in its market overview for the period. That’s the highest level since 2005, when the city was still recovering from the dot-com collapse. The numbers are similar in large markets like New York and Chicago, but those cities are less reliant on technology, the industry that is most aggressively remote working.
Prior to 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 shutdowns began, the move was underway, but the company had not yet found replacement tenants and had left the space empty.
With no one able to pay the rent, Cloudera had to take an impairment loss of $ 35.8 million last year. Mick Hollison, Cloudera’s president, said in an interview that the Palo Alto office “would have been the envy of everyone just a few years ago, and now it’s very difficult to sublet it.”
Hollison said he anticipates about half of Cloudera’s employees will return to the office in some form 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 took an impairment loss of $ 11 million in the first three quarters of 2020. The app-based food delivery company stated in its IPO prospectus that a tenant’s business was disrupted by the coronavirus and DoorDash was informed in April that it would not make a future monthly rent payment. “
The $ 113 million charge on Airbnb in the first quarter of 2021 increases the $ 35.8 million impairment loss on leases last year. The room sharing company laid off around 25% of its employees a year ago when the travel market became crater.
After Uber cut about 20% of its workforce at the start of the pandemic, the rapidly expanding hail-fighting company in San Francisco found itself with way too much real estate. Uber said in its 2020 annual report that it has “vacated certain rented offices and made them available for sublet, largely due to the city of San Francisco’s expanded shelter-in-place contracts and our restructuring activities.” The company recorded lease impairment losses of $ 94 million for the year.
Sign the facade on the construction site for the construction of Uber Inc’s new headquarters and announce 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, as of the end of the first quarter, Uber had 824,000 square feet of available sublease space in four San Francisco locations, by far the most corporations. Dropbox finished second, at 418,000 square feet, after the collaboration software company announced plans to go remote first. Dropbox’s impairment loss was just under $ 400 million last year, 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. The company recorded $ 216 million in impairment losses over the past year on “property leases in select locations that we have chosen to phase out,” according to the company’s annual report.
“I’m starting to see them re-enter”
However, Sammons said activity is increasing. Tenant demand has been highest since the pandemic began, indicating that more and more businesses are looking for space. Sammons said it will announce a direct lease of 200,000 square feet, which will be the largest since the days before Covid.
“Some had pulled back and stopped any kind of expansion and we’re starting to see them come back on the market,” said Sammons.
Recently there have also been movements in subleases. Design software company Figma has just acquired over 100,000 square feet of downtown space from Credit Karma, which has relocated its headquarters to Oakland.
And Dropbox has found customers for large parts of its free space.
BridgeBio, a drug developer, recently took nearly 53,000 square feet of space from Dropbox, and Vir Biotechnology, another life science company, agreed to sublet approximately 13,000 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 pay in the first Year to pay $ 62 per square foot, which rose to $ 93.78 last year. By leasing 736,000 square feet for that price, Dropbox reportedly signed the largest office contract ever signed in San Francisco.
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 filled with medical centers and reserved for life science companies.
Demand for space in the booming biotech industry is so high that private equity firm KKR bought the property earlier this year for around $ 1.1 billion, with Dropbox still in charge of the remainder of the lease.
“Life science companies are now looking to the city because they see this opportunity,” said Sammons. The Dropbox building “has the floor slabs and floor plans and everything is built and ready for life science companies.”
The sudden shift to what Dropbox calls the “virtual first” model has made a cloud software company that spearheaded San Francisco’s rise as a technology hub into one of the city’s largest subessors. Dropbox offers space for personal collaboration and team meetings at the stripped-down headquarters and other locations around the world.
Dropbox said in its most recent quarterly report that while it expects to generate additional sublease revenue and save some money by controlling it remotely, “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.
Even so, Cote expects T3 to get San Francisco back on its feet, 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 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 that office demand will return