forcing it to take a substantial real estate write down.
At DoorDash’s nearby former headquarters, a tenant defaulted on rent a month into lockdown, resulting in lost income for the food delivery company, which was doubling as a landlord.
Airbnb said in its earnings report on Thursday that it took a $113 million impairment in the first quarter “related to office space in San Francisco that we deemed no longer necessary.”
Combined, those three companies have recorded nearly $200 million in real estate impairments in the past year after Covid-19 turned the Bay Area office market into a dead zone. That dollar figure swells to almost $1 billion when adding in lease-related write downs from large tech employers Salesforce, Dropbox, Uber, PayPal, and Zendesk.
While software and internet companies continued their stratospheric ascent in 2020, the plush offices they call home sat dormant, leaving San Francisco’s commercial real estate market with an unfamiliar supply glut. Much of the financial fallout was borne by the very tech companies that led a decade-plus bull market and expansion spree, snapping up massive amounts of space at record prices and often subleasing out full floors to start-ups and out-of-town businesses that were seeking a Bay Area outpost.
By the end of the first quarter of 2021, the amount of vacant sublease space in San Francisco had soared to 9.7 million square feet, up from about 3 million in late 2019, and accounted for 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 tech-focused real estate firm that helps tenants with their growth plans, said that companies looking for an office in San Francisco have a rare opportunity over the next two to three quarters to get in at a discount. Unlike traditional landlords, which have been reluctant to drop lease prices, tech companies with excess space are sometimes willing to offer cut-rate rents and take the loss because they’ve already “faced the reckoning on the impairment,” Cote said.
“There’s a value window for tenants in San Francisco before the boomerang effect, where people and companies are going to come back,” said Cote, whose firm operates in Boston, New York and the Bay Area. “If you’re a sublandlord, you jump on an active tenant.”
Cote said companies paying $90 a square foot may offer subleases for $20 to $25 less and eat the difference. Robert Sammons, senior director of Northern California research at real estate firm Cushman & Wakefield, said that in addition to those discounts, companies are “layering on incentives such as free rent and additional tenant improvement allowances.”
Skyrocketing vacancies
Even with the discounts, it’s still not easy to find takers.
The Bay Area has been slow to reopen, and downtown San Francisco remains fairly hollow, even as 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 like New York and Chicago, but those cities are less reliant on tech, the industry that’s gravitating most aggressively to remote work.
