Yahoo Finance Tech’s Retrenchment Hammers Landlords With Glut of Empty Offices
(Bloomberg) -- US tech giants, grappling with a post-pandemic slowdown, have already laid off tens of thousands of workers. Now they’re dumping millions of square feet of office space, pushing vacancies in city centers to record highs and ratcheting up pressure on the commercial real estate industry.
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No sector is looking to sublease more office space than Big Tech, according to Jones Lang LaSalle Inc. Alphabet Inc., Meta Platforms Inc., Microsoft Corp. and Amazon.com Inc. have all announced plans to reduce their office footprint. Amazon has paused construction at a new campus near Washington, DC, and Microsoft is reevaluating plans for a project in Atlanta.
Some 174 million square feet of office space — double San Francisco’s entire inventory — is available for sublease across the US, according to real estate brokerage firm Savills. That’s almost twice what was available pre-pandemic, Savills said.
Companies looking to sublease space are still on the hook for rent for the entirety of the lease. But the retrenchment shows how the tech downturn, which contributed to the collapse of Silicon Valley Bank and turmoil in financial markets, is spilling into the broader economy.
San Francisco, Seattle and New York are bearing the brunt of the pullback. While New York can count on office demand from financial services and legal firms, tech-centric San Francisco has no such cushion. Seattle business groups, meanwhile, are calling for a tax holiday to keep tenants downtown.
“During the pandemic, tech companies were the only source of growth for landlords as these companies were expanding their operations, hiring aggressively and taking big blocks of space,” said Ruth Colp-Haber, chief executive officer of the brokerage Wharton Property Advisors. “This is not the only headwind facing real estate, but it is a significant one because no other industry has emerged to replace tech.”
Big Tech’s retreat couldn’t come at a worse time for the office real estate market, already stuck with partially empty buildings thanks to flexible work policies, and struggling to refinance loans amid rising interest rates. In a potentially ominous sign, landlords such as Brookfield Corp. and one tied to Pacific Investment Management Co. are opting to default on debt in an effort to secure better terms. The situation is expected to deteriorate because about $900 billion in commercial-property debt is maturing this year and next.
City Amenities
Tech companies historically operated from sleepy suburban enclaves. Then during the boom of the 2010s, they began moving into pricier urban precincts in the hopes that city amenities — dog walkers, restaurants, modern condos — would help them recruit young talent.
Twitter Inc. occupied an historic San Francisco building. Google established outposts on a Manhattan pier and near Seattle’s Lake Union. Facebook scooped up more than half a skyscraper in New York’s Hudson Yards. As recently as late 2019, tech companies accounted for almost 40% of new leases and relocations in Manhattan alone, according to Savills.
Then the reckoning arrived. Americans, having spent two-plus years gorging on services from the likes of Amazon, DoorDash and Zoom, largely reverted to their pre-pandemic behavior. And an industry accustomed to double-digit growth rushed to shed workers and real estate. Alphabet, Meta, Netflix Inc., Salesforce Inc. and a few other publicly traded tech companies have earmarked as much as $3.4 billion to cover such costs as brokerage fees, writedowns and worker relocation expenses for buildings they no longer need, according to securities filings and earnings call transcripts.
“For the first time in over 20 years, you’re seeing fiscal discipline in the tech sector,” said Scott Homa, a researcher at Jones Lang LaSalle. “Companies are throttling back their headcounts, their perks and their real estate.”
Institutional investors have defaulted on more than $1 billion worth of loans backed by offices leased to tech tenants. Many owners are struggling to pay off existing debt or get refinancing, due to uncertainty around office values and falling rental income. According to CBRE Econometric Advisors, office owners face a $53 billion financing gap through 2025, likely leading to distress for investors. Major lenders have been avoiding office loans as regulators clamp down on riskier commercial property deals.
The pain will almost certainly worsen. Salesforce, Microsoft, Meta, Amazon, Twitter and Alphabet alone have more than 12 million square feet of combined office leases set to expire across the US in the next three years, the equivalent of more than eight Salesforce towers, according to data from CoStar Group Inc.
In New York, Meta has already opted not to renew leases for Park Avenue offices and newer space in Hudson Yards. Twitter and Compass Inc. also put up much of their Manhattan office space for sublease in recent months. Lyft Inc. is looking to sublease its San Francisco offices, while Twitter is battling a Pimco-owned landlord on missed rent payment there.
Microsoft plans to vacate most of the 2.7 million square feet of office space with leases expiring in the Seattle area. Amazon has at least two large leases expiring in Seattle that it doesn’t plan to renew. Google is ending leases for a number of unoccupied spaces and still evaluating the timing of its move into a former shopping mall converted into offices in West Los Angeles. Netflix is looking to sublease two large buildings at its headquarters in Los Gatos, California.
Cities have enjoyed a nascent rebound in economic activity since tech and other companies began leaning harder on employees to return to the office. But those gains are fragile and could be reversed as tech companies cut thousands of workers and consolidate them into fewer buildings.
San Francisco has been particularly hard hit and suffers from falling property values and an ongoing homelessness and drug crisis. Mayor London Breed in February unveiled an economic recovery plan that includes an effort to transform the downtown and attract a more diverse set of employers, including life sciences, health care, artificial intelligence and climate tech companies.
In Seattle, worker foot traffic remains less than half pre-pandemic levels, according to the Downtown Seattle Association. Sidewalks and restaurants on Amazon’s once bustling campus are empty, and the company recently closed two of its Amazon Go cashierless convenience stores in the city.
In New York, workers are showing up three days a week but mostly disappear on Mondays and Fridays. In Manhattan, they’re spending at least $12.4 billion less a year, according to a Bloomberg News analysis. That’s money not being spent on meals, shopping and entertainment near their offices — purchases that long powered the city’s economy.
--With assistance from Davey Alba, John Gittelsohn, Brody Ford and Aisha Counts.
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