Dropbox CEO Drew Houston speaks on stage during the Dropbox Work In Progress conference at Pier 48 on September 25, 2019 in San Francisco

Matt Winkelmeier | Dropbox | Getty Images

Dropbox made headlines in 2017 when the software company signed San Francisco’s largest-ever office lease, securing 736,000 square feet over 15 years in the city’s Mission Bay neighborhood.

The combination of a global pandemic in 2020 that led to a boom in telecommuting, followed by a downturn in the tech market last year, turned this huge space into a financial albatross with an initial minimum commitment of $836 million. As of September, that figure was $569 million.

Dropbox said in its fourth-quarter earnings report Thursday that it recorded a $162.5 million impairment charge “resulting from unfavorable changes in the commercial real estate market in the San Francisco Bay Area.” Total real estate impairments for the year were $175.2 million, still well below the $400 million the company reported at the end of 2020.

Of all the major US markets, San Francisco has been one of the slowest to recover from the Covid pandemic due to its heavy reliance on the tech industry, which typically supports a hybrid workforce, and in some cases completely remote.

In 2020, Dropbox decided to go “virtual first,” announcing in a blog post that “remote work (out of the office) will be a core experience for all employees and a daily standard for individual work.” This reduced the company’s need for office space and prompted it to seek tenants to sublease significant portions of its headquarters.

Although Dropbox has been able to sublease some of its real estate to some biotech companies, there is not enough demand to accommodate all of the company’s vacant space. Tim Regan, Dropbox’s chief financial officer, said Thursday that the sublease environment has become more challenging than management expected, and the company no longer anticipates subleasing additional space in San Francisco in the next few years.

“We entered the market relatively quickly with our sublease plans, but the market has deteriorated and many companies have reduced their real estate footprint,” Regan said. “And there has definitely been an increase in the supply of sublease properties, which has pushed our expected time to lease.”

San Francisco’s third-quarter office vacancy rate was 24%, the highest since 2007, according to city data. Sales department, Airbnb, Uber and Zendesk are among other companies that have picked up on the city’s property depreciation. Yelp has leased its headquarters in San Francisco in 2021.

Dropbox executives expected to sublease the company’s San Francisco property in mid-2023. They pushed that goal back two years and lowered the rates the company expects to receive.

“We’ve certainly been proactive and continue to be proactive with our landlord in finding a sublease,” Regan said. “But at this point, that’s our revised guess given what we’ve encountered at this point.”

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