In 2017, Dropbox garnered attention for securing the largest office lease in San Francisco, a whopping 736,000 square feet over 15 years in the Mission Bay area. However, due to the confluence of events, such as the global pandemic that led to the rise of remote work and the subsequent downturn in the tech market, the space has turned into a financial burden. The original minimum commitment of $836 million has now dwindled down to $569 million as of September.
To make matters worse, Dropbox reported a $162.5 million impairment in the fourth quarter of 2022 due to adverse changes in the corporate real estate market in the San Francisco Bay area, with a total real estate impairment of $175.2 million for the year. While this amount is relatively high, it’s still lower than the $400 million hit the company took in late 2020.
San Francisco, being heavily reliant on the tech industry, is one of the slowest U.S. markets to recover from the COVID-19 pandemic. Dropbox’s response was to shift to a “virtual first” approach, which reduced the company’s need for office space and led to subleasing its headquarters to biotechnology companies. However, even with subleasing, the company is unable to account for all of its empty space. The subleasing environment has become more challenging than expected, and the company is no longer assuming that it will sublease additional space in San Francisco in the next few years.
San Francisco’s office vacancy rate in the third quarter was at 24%, the highest it’s been since at least 2007. Other companies such as Salesforce, Airbnb, Uber, and Zendesk have taken real estate impairments in the city, and Yelp has also put its San Francisco headquarters up for lease in 2021.
Dropbox executives had previously planned to sublease the company’s property in the city by mid-2023. However, the company has pushed back that target by two years and lowered the rates it expects to receive. Despite remaining active in partnering with the landlord to search for subleases, management has revised their assumptions due to the current market conditions.