Cloudera exited some Bay Space workplace house early final 12 months with plans to sublease it and transfer workers south to the software program firm’s Silicon Valley headquarters.
However the pandemic left the corporate with no person to take over a full workplace, forcing it to take a considerable actual property write-down.
At DoorDash’s former headquarters in San Francisco, a tenant defaulted on lease a month into lockdown, leading to misplaced revenue for the meals supply firm, which was doubling as a landlord.
Airbnb stated in its earnings report on Thursday that it took a $113 million impairment within the first quarter “associated to workplace house in San Francisco that we deemed not crucial.”
Mixed, these three firms have recorded almost $200 million in actual property impairments prior to now 12 months after Covid-19 turned the Bay Space workplace market right into a useless zone. That greenback determine swells to nearly $1 billion when including in lease-related write-downs from massive tech employers Salesforce, Dropbox, Uber, PayPal and Zendesk.
Whereas software program and web firms continued their stratospheric ascent in 2020, the plush workplaces they name dwelling sat dormant, leaving San Francisco’s industrial actual property market with an unfamiliar provide glut. A lot of the monetary fallout was borne by the very tech firms that led a decade-plus bull market and enlargement spree, snapping up huge quantities of house at report costs and sometimes subleasing out full flooring to start-ups and out-of-town companies that have been looking for a Bay Space outpost.
By the tip of the primary quarter of 2021, the quantity of vacant sublease house in San Francisco had soared to 9.7 million sq. toes, up from about 3 million in late 2019, and accounted for 40% of all obtainable industrial house within the metropolis, in response to industrial actual property agency Avison Younger.
Mark Cote, co-founder of T3 Advisors, a tech-focused actual property agency that helps tenants with their progress plans, stated that firms searching for an workplace in San Francisco have a uncommon alternative over the following two to a few quarters to get in at a reduction. In contrast to conventional landlords, which have been reluctant to drop lease costs, tech firms with extra house are generally prepared to supply cut-rate rents and take the loss as a result of they’ve already “confronted the looking on the impairment,” Cote stated.
“There is a worth window for tenants in San Francisco earlier than the boomerang impact, the place folks and corporations are going to come back again,” stated Cote, whose agency operates in Boston, New York and the Bay Space. “Should you’re a sublandlord, you bounce on an lively tenant.”
Cote stated firms paying $90 a sq. foot could provide subleases for $20 to $25 much less and eat the distinction. Robert Sammons, senior director of Northern California analysis at actual property agency Cushman & Wakefield, stated that along with these reductions, firms are “layering on incentives akin to free lease and extra tenant enchancment allowances.”
Even with the reductions, it is nonetheless not simple to search out takers.
The Bay Space has been sluggish to reopen, and downtown San Francisco stays pretty hole, whilst vaccination rates in the city are among the highest in the country and Covid cases have plunged. Tech companies have stayed productive with employees working from home, alleviating the pressure to bring them back to the office and leading many to start planning for a hybrid future with less need for real estate.
The overall office vacancy rate in San Francisco climbed to 18.7% in the first quarter from 6% a year earlier, Cushman & Wakefield reported in its market overview for the period. That’s the highest since 2005, when the city was still recovering from the dot-com collapse. Numbers are similarly inflated in major markets such as New York and Chicago, but those cities are less reliant on tech, the industry that’s gravitating most aggressively to remote work.
Prior to the pandemic, analytics company Cloudera had planned to move several hundred employees from its San Francisco and Palo Alto, California, offices into its headquarters just south in Santa Clara. When the shutdowns began, the move was underway but the company hadn’t yet found any replacement tenants, leaving much of the space empty.
With nobody to pay the rent, Cloudera had to take an impairment charge last year of $35.8 million. Mick Hollison, Cloudera’s president, said in an interview that the Palo Alto office “would have been anybody’s envy just a few short years ago, and now it’s very difficult to sublease.”
Hollison said he expects about half of Cloudera’s employees to go back to the office in some capacity this year, but it’s likely that about 25% will be permanently remote and many others will only come in for part of the week.
“Our footprint will shrink over time,” he said.
Elsewhere in San Francisco, DoorDash took an $11 million impairment in the first three quarters of 2020. The app-based meal delivery company said in its IPO prospectus that a tenant’s business was disrupted by the coronavirus and that it told DoorDash in April “that it would not be making any future monthly rent payment.”
Airbnb’s $113 million charge in the first quarter of 2021 adds to $35.8 million in lease impairments last year. The room-sharing company laid off about 25% of its employees a year ago as the travel market cratered.
After Uber slashed about 20% of its workforce early in the pandemic, the ride-hailing company, which had been rapidly expanding in San Francisco, found itself with way too much real estate. Uber said in its 2020 annual report that it “exited, and made available for sublease, certain leased offices, primarily due to the City of San Francisco’s extended shelter-in-place orders and our restructuring activities.” The company recorded lease-related impairments for the year of $94 million.
Sign on facade at jobsite for construction of new headquarters of Uber Inc announcing work stoppage and delays during an outbreak of the COVID-19 coronavirus in San Francisco, California, March 19, 2020.
Smith Collection | Getty Images
Uber had 824,000 square feet of available sublease space across four locations in San Francisco at the end of the first quarter, according to Cushman & Wakefield, by far the most of any company. Dropbox was second with 418,000 square feet, after the collaboration software company announced plans to go remote-first. Dropbox’s impairment last year was just shy of $400 million, followed by an additional $17.3 million charge in the first quarter.
Salesforce, San Francisco’s largest private employer, has 287,000 square feet available. The company took $216 million in impairments last year due to “real estate leases in select locations we have decided to exit,” according to the company’s annual report.
‘Starting to see them reenter’
However, Sammons said, activity is picking up. Tenant demand is at the highest since before the pandemic began, indicating that more companies are shopping for space. Sammons said that a direct lease, through a landlord, of 200,000 square feet is about to be announced, which will be the largest since the pre-Covid days.
“Some had pulled out and put on pause any sort of expansions, and we’re starting to see them reenter the market,” Sammons said.
There’s also been recent movement in subleases. Design software company Figma just took over 100,000 square feet of downtown space from Credit Karma, which moved its headquarters to Oakland.
And Dropbox has been finding takers for large chunks of its vacant space.
BridgeBio, a drug developer, recently took close to 53,000 square feet from Dropbox, and Vir Biotechnology, another life sciences company, agreed late last year to sublease about 134,000 square feet of the complex.
Vir’s price per square foot starts at $47.77 this year and rises 3% annually to $68.11 in 2032, according to the lease agreement. When Dropbox signed its original 15-year lease in 2017, the company agreed to pay $62 per square foot in year one, which climbed to $93.78 in the final year. In leasing 736,000 square feet at that price, Dropbox was then reportedly signing the largest office deal ever in San Francisco.
While Dropbox may have to rely on discounts and other perks to lure potential tenants, the company is in a unique position to attract biotech firms. Its complex is in an area called Mission Bay that’s filled with medical centers and is zoned for life sciences companies.
Demand for space is so high in the booming biotech industry that earlier this year private equity firm KKR purchased the property for about $1.1 billion, with Dropbox still responsible for the remainder of its lease.
“Life sciences companies are now looking at the city because they see this opportunity,” Sammons said. The Dropbox building “has the floor plates and the floor plans, and everything is built and ready for life sciences companies.”
The sudden shift to what Dropbox is calling its “Virtual First” model has turned a cloud software company that was at the forefront of San Francisco’s emergence as a tech hub into one of the city’s biggest sublessors. At its slimmed-down headquarters and at other locations across the globe, Dropbox is maintaining some space for in-person collaboration and team-gathering sessions.
Dropbox said in its latest quarterly report that while it expects to generate additional sublease income and save some money by going remote, “there is no guarantee that we will realize any anticipated benefits to our business.”
Other San Francisco-based tech companies such as Twitter, Square and Okta have told employees they can work from anywhere now and into the future.
Still, T3’s Cote expects San Francisco to bounce back even if 20% or so of jobs are permanently remote. Tech employers will have to be more flexible and rational with their physical space, but they still want to be in the center of the action, he said.
“The main thing everyone has to remember is the talent of the labor force,” Cote said. “You can’t replicate that overnight.”
— CNBC’s Jordan Novet contributed to this report.
WATCH: Cushman & Wakefield’s CEO on why he’s confident office demand will return