They all made it, from Salesforce to Uber to Twitter. It was pure magic, a show that was produced with tremendous 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, the company announced in its letter to shareholders that that loss included an expense of $ 113 million, which it expects if it tries to make one We terminate the San Francisco office lease we consider no longer necessary given our restructuring and cost-cutting efforts. “

The $ 113 million cost is an estimate of the difference between what would be incurred by subletting the space to new tenants and what the landlord and associated costs would have to pay over the remainder of the lease term. But that’s a cheaper way out than leaving it empty and paying the landlord until the lease ends.

The fascinating thing about it is how much office space Airbnb had secured with long-term office rents during the years of so-called office shortages, which it had never occupied, and which it had by renting office space that it didn’t need.

Airbnb’s disclosure pertains to the 287,000 square feet (sf) at 650 Townsend St. south of the market. According to the San Francisco Business Times, Airbnb rented the space in 2017 for a term of nine years. But it only took 170,000 sf of it at a time. The rest had remained empty all these years.

This brings the total area of ​​office space in San Francisco that Airbnb is currently trying to rent to SF427,000, spread over three buildings. That’s roughly half the total Airbnb office space in San Francisco.

They all made it, from Salesforce to Uber to Twitter. They were looking for the office space they envisioned for the future, assuming everything would grow at an endless rate. And by renting office space that they didn’t need and often didn’t occupy, they also exacerbated the office shortage and drove office rents into the ridiculous realm.

It was pure magic, a show that was produced with tremendous hype. And now they’re all trying to rip that vacant office space – from Salesforce, Uber, and Twitter down – by sublet it at the same time, breaking up those office dreams and creating San Francisco’s worst. ever historical office flooding.

In San Francisco, the number of subleases exploded to a new all-time high of 8.9 million square feet in the first quarter, according to real estate services company Savills. The total availability rate (subletting and direct leasing from landlords) rose to 23.6% of the total office space. And the asking rents for class A fell by 15% year-on-year.

In this environment, however, the decline in asking rents is not an appropriate measure, as the actual rental contracts are 10 to 15% below the asking rents and, in addition, enormous incentives are being negotiated, e.g. B. Improvement grants of up to $ 80 per person, according to John McNellis of McNellis Partners, more than pre-covid deals and an additional three months of free rental.

Leasing activities in the first quarter decreased by 85% compared to the first quarter of 2019. Of the few signed leasing contracts, more than half were for the extension of leasing contracts. In this environment, Airbnb tries to sublet office space that is not needed.

Airbnb share [ABNB] has had a tough time over the past few weeks, and given the $ 1.17 billion loss in the first quarter, it makes sense for the company to try to cut costs. Since the closing high on Feb.11, the stock is currently down 38% to $ 136 (data via YCharts):

Airbnb will develop a hybrid model to bring employees back to the office in San Francisco instead of working from anywhere.

“We want to live the lifestyle everywhere. By modeling lifestyle everywhere, we can give our employees more flexibility, ”said CEO Brian Chesky during the call for results (transcript via Seeking Alpha).

“I told our employees that they wouldn’t have to return to the office until next September. And even if we ask people to come back, they will be much more flexible than before, ”he said.

“People are not expected to return to the office five days a week every week. We believe that this is not how most workplaces will work in the 21st century, ”he said.

“We also think personal collaboration is important. So we want to strike a balance between modeling lifestyle everywhere and enabling personal creative collaboration. And that’s exactly what we’re designing, ”he said.

They all do it. Dropbox announced a $ 400 million fee in February for leaving its San Francisco headquarters. After Salesforce announced in February that it would switch to a hybrid work-from-anywhere model, the company announced in March that it had canceled the lease for 325,000 sf of space in an undeveloped tower in the Transbay region. And it brought its 225,000 SF to the sublet market at 350 Mission St. Uber and Twitter, as well as a number of others, have brought large chunks of office space to the sublet market. And since they all do, it’s hard to see a recovery in the San Francisco office market.

Airbnb will eventually be able to find a tenant if the rent is low enough, considering how lavishly these office buildings have been furnished. If the rent is low enough, companies will leave their old dig sites when the lease ends and move in for a major upgrade, possibly for less. The flight to quality. This will cause the vacancy rates to gradually move downwards. However, given the length of typical commercial leases, this takes years.

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