Dropbox Faces A $175 Million Real Estate Loss

There was a lot of buzz in 2017 when Dropbox signed the biggest office lease in San Francisco's Mission Bay neighborhood, securing 736,000 square feet over 15 years in one of the city's most sought-after neighborhoods.

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Global pandemics in 2020 and a downturn in the tech market last year led to a boom in remote work, turning that huge space into a financial albatross with an original minimum commitment of $836 million. The number sat at $569 million as of September.

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This year, Dropbox reported in its fourth-quarter earnings statement on Thursday that it recorded a $162.5 million impairment due to adverse changes in the corporate real estate market in the San Francisco Bay area during the period. This was part of its total real estate impairment for the year, which was $175.2 million. Despite the fact that the amount is high, it is still significantly less than the $400 million hit that the company took in late 2020.

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San Francisco has been among the slowest to recover from the Covid pandemic due to its heavy reliance on the tech industry, which has generally maintained a hybrid workforce and, in some cases, gone fully remote.

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As part of its “virtual first” strategy, Dropbox announced in a blog post in 2020 that “remote work (outside an office) will become the default experience for individual work and the primary experience for all employees.” As a result, the company had to find tenants to sublease substantial portions of its headquarters, reducing its need for office space.

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Dropbox has been able to sublease some of its real estates to biotechnology companies, but there isn't enough demand to fill all of its empty spaces. In a statement on Thursday, Dropbox's finance chief Tim Regan said that the subleasing market has become more challenging than management had anticipated, and the company is no longer assuming it will sublease additional space in San Francisco.

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“Our subleasing plans were relatively quick to market, but the market has deteriorated, and many companies are reducing their real estate footprints," said Regan. “The supply of real estate for sublease has certainly increased, which has pushed out our anticipated lease dates.”

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San Francisco recorded a 24% vacancy rate in its office sector in the third quarter, the highest since at least 2007, according to figures provided by the city. Among the other companies that have taken real estate impairments in the city are Salesforce, Airbnb, Uber, and Zendesk, among others. In 2021, Yelp will put its San Francisco headquarters on the market for lease.

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Dropbox executives expected to sublet its property in the city by mid-2023. Those goals have been pushed back two years, and rates are expected to be lower.

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"We have certainly been active in finding sublease opportunities with our landlord," Regan said. “Given what we're facing right now, this is our revised assumption at this time.”