Dropbox finance chief warns San Francisco office space market has ‘deteriorated’

Dropbox mentioned in its fourth-quarter earnings assertion on Thursday that it recorded an impairment within the interval of $162.5 million “as a result of adverse changes in the corporate real estate market in the San Francisco Bay area.” Its complete actual property impairment for the yr was $175.2 million. Although excessive, it’s nonetheless effectively beneath the $400 million hit the corporate took in late 2020.

Of all the most important U.S. markets, San Francisco has been among the many slowest to rebound from the Covid pandemic due to its heavy reliance on the tech trade, which has usually maintained a hybrid workforce and, in some instances, has gone absolutely distant.

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Tim Regan, Dropbox’s finance chief, mentioned on Thursday that the subleasing setting has grow to be harder than administration had anticipated, and the corporate is not assuming it’s going to sublease further area in San Francisco within the subsequent few years.

“We were relatively quick to market with our subleasing plans, but the market has deteriorated, with many companies reducing their real estate footprint,” Regan mentioned. “And there’s certainly been an increase in supply for real estate for sublease, which has pushed out our anticipated time to lease.”

Dropbox made splashy headlines in 2017 when the software program firm signed the largest workplace lease ever in San Francisco, securing 736,000 sq. ft over 15 years within the metropolis’s Mission Bay neighborhood.

The mixture of a world pandemic in 2020, which led to a growth in distant work, adopted by a downturn within the tech market final yr has turned that large area right into a monetary albatross with an unique minimal dedication of $836 million. As of September, that quantity sat at $569 million.

Dropbox opted to go “virtual first” in 2020, saying in a weblog put up that “remote work (outside an office) will be the primary experience for all employees and the day-to-day default for individual work.” That decreased the corporate’s want for workplace area and pushed it to seek out tenants to sublease important chunks of its headquarters.

While Dropbox was capable of sublease items of its actual property to some biotechnology firms, there is not sufficient demand to account for all the firm’s empty area.

The workplace emptiness charge within the third quarter was 24% in San Francisco, larger than it has been since a minimum of 2007, in line with metropolis figures. Salesforce, Airbnb, Uber and Zendesk are amongst different firms which have taken actual property impairments within the metropolis. Yelp put its San Francisco headquarters up for lease in 2021.

Dropbox executives had anticipated to sublease the corporate’s property within the metropolis in mid-2023. They’ve pushed that focus on again two years, and lowered the charges the corporate expects to obtain.

“We’ve certainly been active, and we continue to be active in partnering with our landlord in searching for subleases,” Regan mentioned. “But at this point in time, this is our revised assumption, just given what we’re facing at this moment.”

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