San Francisco tech giant Dropbox plans to surrender more than a quarter of its headquarters space after years of trying to land a subtenant and facing hundreds of millions of dollars in mounting real estate expenses.
The online file-sharing company confirmed it will pay $79 million in termination fees to dump roughly 165,250 square feet of unused and unwanted office space at its corporate campus at 1800 Owens St. The decision to officially cut ties with the space — much of which Dropbox has tried to market for sublease since the early days of the pandemic — underscores the challenges top-tier office markets across the country face as companies make long-term decisions to adjust to a more flexible workforce.
A Dropbox spokesperson said in a statement that the company has "taken steps to de-cost our real estate portfolio as a result of our transition" to a virtual-first model, which prioritizes remote work but still requires some face-to-face gatherings.
Dropbox, which adopted its "virtual first" model about three years ago, started dumping large chunks of space at its headquarters in the city's Mission Bay area in July 2020. By August 2021, the company had listed for sublease all but 90,000 square feet in the property, known as the Exchange on 16th, which it planned to retain as a satellite office for employees who needed to occasionally meet in person.
The tech company will gradually dump the space across three phases through the first quarter of 2025, the first of which will include about 52,000 square feet and more than $28 million in lease termination fees paid to landlord KKR.
Once it hands back the space, Dropbox will be left with about 439,000 square feet in the Owens Street building. It is the second time the tech company has paid to cut ties with space at the Mission Bay campus. In late 2021 it paid nearly $32 million to hand back a chunk of its corporate hub.
The company signed the original 738,064-square-foot lease with the Exchange's former owner and developer, Kilroy Realty, in 2017. Kilroy sold the property in 2021 to global investment firm KKR for about $1 billion.
Its smaller footprint is estimated to save the company more than $225 million in rental and building maintenance expenses over the remaining 10-year lease term, according to a Securities and Exchange Commission filing.
Adjusting to 'Hard Truths'
The decision to terminate its lease punctuates Dropbox's long-term effort to get rid of the financial obligation of being tied to such a large, mostly unused real estate footprint.
The company had been working with landlord KKR to sublease some of the space, and over the past couple of years has brought in a handful of smaller deals among subtenants such as BridgeBio, Vir Biotechnology, and earlier this month, finalized a 30,000-square-foot one with Siren Biotechnology.
Dropbox is among a growing group of tech companies such as LinkedIn, Block, Salesforce, Meta, Amazon and Google that have implemented widespread cuts to their previously vast real estate portfolios around the world. The impact of those decisions has been most acute in the San Francisco and Silicon Valley areas, however, since it is where many are headquartered and operate in a more concentrated amount of space.
After roughly a decade of fueling record-high spikes in rent growth and demand — often leasing up space before it was even built — tech giants are now responding to slowing growth by making deep cuts to their property holdings by shutting office locations, subleasing unwanted space, terminating prelease agreements and walking away from future investments.
Those decisions — which have also been fueled by significant layoffs and permanently adopted remote-work policies — have loaded up the Bay Area's real estate market with millions of square feet of available sublease space or have downsized offices as leases come due.
In downtown San Francisco, the average vacancy rate among leased office buildings has jumped past 25% from less than 7% reported in 2019, according to CoStar data. Large tech companies have contributed hefty chunks to the nearly 13 million square feet of available sublease space across the market, adding even more pressure to declining rents and landlords competing with empty listings.
Dropbox earlier this year released plans to lay off more than 15% of its workforce as part of widespread cost-cutting efforts.
“We need to acknowledge some other hard truths,” Dropbox CEO and co-founder Drew Houston wrote in a company memo announcing the cuts. “In some areas, investments that showed promise before the downturn have more limited potential today. In others, we haven’t been executing consistently or managing performance as tightly as we need to. So we’ve made more significant cuts in these areas in order to free up investment in our future growth.”