Airbnb shows how San Francisco’s office shortage is suddenly a historic glut: monopolizing vacant space for a future that never came

They’ve all done it, from Salesforce, Uber, and Twitter to the drop. It was pure magic, a show produced with huge hype. Now they’re all trying to get out at the same time.

By Wolf Richter for WOLF STREET.

When Airbnb reported a net loss of $ 1.17 billion for the first quarter last week, it also revealed in its letter to shareholders that that loss included a $ 113 million expense he expects as he attempts to “get out” of an office lease in San Francisco “which we deemed unnecessary given our restructuring and restructuring efforts. cost reduction.”

The expenditure of $ 113 million represents her estimate of the difference between what she would get by subletting the space to new tenants and what she would have to pay the landlord and related expenses over the remaining term of the lease. But that’s a cheaper solution than leaving it vacant and paying the landlord until the end of the lease.

What’s fascinating about this is the amount of office space Airbnb had secured with long-term office leases during the years of the so-called office shortage that it never even got. busy, and by renting office space that it did not need, it further increased the office shortage at the time.

Airbnb’s disclosure relates to its 287,000 square feet (square feet) at 650 Townsend St. in the south end of Market. According to San Francisco Business Hours, Airbnb had rented the space in 2017 for a period of nine years. But it only occupied 170,000 square feet. The rest had been vacant for all these years.

This brings the total amount of office space in San Francisco that Airbnb is now trying to sublet to 427,000 square feet, spread over three buildings. This represents about half of Airbnb’s total office space in San Francisco.

They’ve all done it, from Salesforce, Uber, and Twitter, chasing office space they thought they needed in the future, assuming rapid, endless growth of everything. And by renting out office space that they didn’t need and often didn’t occupy, they also made the office shortage worse, while driving up office rents in the ridiculous realm.

It was pure magic, a show produced with huge hype. And now they’re all trying to get rid of that vacant office space – from Salesforce, Uber, and Twitter on the downside – by putting it on the sublet market at the same time, unraveling those office dreams and thus creating San Francisco’s worst – ever historic office glut.

In San Francisco, sublet inventories exploded to a new all-time high of 8.9 million square feet in the first quarter, according to real estate services provider Savills. The total availability rate (subletting and direct rental from owners) amounts to 23.6% of the total office space. And asking Class A rents have fallen 15% year over year.

But lowering asking rents is not an adequate measure in this environment because actual leases are signed 10% to 15% below asking rents, and because huge incentives are being negotiated, such as Improvement allowances up to $ 80 per installment. sf more than in the pre-Covid offers and three more months of free rent, according to John McNellis of McNellis Partners.

Leasing activity in Q1 collapsed 85% from Q1 2019. Of the few leases signed, more than half were lease renewals. This is the environment Airbnb faces when trying to sublet its unnecessary office space.

Airbnb share [ABNB] has had a rough time in recent weeks, and given the $ 1.17 billion loss in the first quarter, it makes sense that the company is trying to cut costs. Since the February 11 closing high, the stock price has fallen 38% to $ 136 at the moment (data via YCharts):

When it comes to bringing employees from San Francisco to the office rather than working from anywhere, Airbnb will create a hybrid model.

“We want to set an example of the living anywhere lifestyle. So by modeling the lifestyle live anywhere, we will allow more flexibility for our employees, ”CEO Brian Chesky said during the call for results Seeking Alpha).

“I told our employees that they don’t have to come back to the office until next September. And even when we ask people to come back, they will have a lot more flexibility than before, ”he said.

“You don’t expect people to come back to the office five days a week every week. We think that’s really not how most 21st century workplaces are going to operate, ”he said.

“We also think in-person collaboration is important. So we want to strike a balance between modeling the living anywhere lifestyle and creative collaboration in person. And that’s what we design, ”he said.

They all do. Dropbox, in February, revealed a charge of $ 400 million related to the exit of its headquarters in San Francisco. Salesforce, after announcing in February that it had switched to a working hybrid model from anywhere, revealed in March that it had canceled the lease for 325,000 square feet of space in an unbuilt tower in the area. from Transbay. And he’s put his 225,000 square feet at 350 Mission St. on the sublet market. Uber and Twitter and a slew of others have all put large chunks of office space on the sublet market. And as they all do, it’s hard to see a recovery in the San Francisco office market.

Airbnb may eventually find a tenant, if the rent is low enough, given the sumptuous layout of these office buildings. If the rent is low enough, businesses will leave their old digs at the end of the lease and move in for a big upgrade, perhaps at a lower cost. The flight to quality. This will lead to a gradual decline in vacancy rates, but it takes years, given the length of typical commercial leases.

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