As Twitter rethinks its San Francisco footprint, increased $9 billion in demand hangs over the city’s office market

Twitter Inc. on Wednesday assessed its large office footprint in San Francisco for downsizing and turned down the opening of an office in Oakland, California, said a person with direct knowledge of the matter.

The move is clouding the future of the social media site’s stylish San Francisco headquarters, a 1.1 million-square-foot trophies-filled office complex at 1355 Market Street, where Twitter TWTR,
takes up about 75% of the space, according to Trepp data.

Budget cuts by tech giants could have painful consequences for San Francisco, a city with a skyline and culture that has been dramatically reshaped in recent decades by a tech boom at its home, as well as staggering inequality and a homelessness crisis exacerbated by the pandemic.

Twitter said in a statement Wednesday that it “evaluated our global office portfolio and resized certain locations based on usage,” but also said its decision “will not affect our current number of employees or employee roles.”

Offices in Seoul; Wellington, New Zealand; Osaka; Madrid; Hamburg; Sydney; and Utrecht, the Netherlands, were being assessed for closure when leases expire, said a person with knowledge of the matter. The plan would be to resize offices in Tokyo, Mumbai, New Delhi, Dublin, New York and San Francisco, but scrap plans for an outpost in downtown Oakland entirely.

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A $9 Billion Cloud

Outside of Twitter’s headquarters, lenders have funded about $9 billion worth of San Francisco office properties in recent years by selling commercial mortgage bonds to investors, according to a Trepp count.

Once considered a relatively safe real estate bet, especially trophy buildings, office buildings have recently been an acute source of concern for landlords and financiers due to the rise of hybrid work.

“There are a lot of technology companies that power San Francisco that don’t come back, or don’t come back the same way,” said Dan McNamara, founder of hedge fund Polpo Capital, a real estate debt investor focused on emergency.

“San Francisco is almost a complete break for us,” he said by phone.

As more employees seep into offices compared to pandemic lows, San Francisco still lags behind other major U.S. cities on July 25 with an occupancy rate of 38.1%, compared to the national average of 44.7%, according to the 10 cities. -barometer of work. .

“That’s something that was just unimaginable two to three years ago,” McNamara said of the low occupancy rate. Before founding PolPo, he made headlines at MP Securitized Credit Partners for boosting lucrative betting on failing malls.

A need to reconsider?

The pandemic and its far-reaching consequences were not on the radar 10 years ago, when the oldest loans in outstanding commercial mortgage bonds would have been underwritten.

The carnage in high-flying technology stocks COMP,

In the first half of 2022, things got worse, drying up M&A activity and the IPO market, as well as driving cost cuts and cuts for many tech companies that call the San Francisco Bay Area home.

Twitter shares rose 1.3% on Wednesday, but were down 41.7% from a year ago, according to FactSet.

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Daniel Herzstein, director of public policy at the San Francisco Chamber of Commerce, said more tourists, commuters and officers have returned in recent months. But he also said that San Francisco needs to prepare for a new way forward.

“The pandemic has fundamentally changed the way we use offices, and we need to rethink our economy, especially in downtown San Francisco,” he said by phone.

Offices a no-go zone for lenders?

San Francisco has its own challenges, but it has become more difficult almost everywhere to find lenders willing to take a big gamble to get paid back on an office building 10 years later.

The lack of a clearer picture of the office’s future has made it “very difficult to impossible to get an office building funded,” said Robert Verrone, founder of Ironhound Management Company, a New York-based real estate company. “Most lenders don’t want to do anything.”

Before training, Verrone spent nearly 20 years on Wall Street, making large loans for commercial real estate. He hasn’t been asked to untangle the debts of office buildings in San Francisco during the pandemic, but he has worked on retail sales in the city.

Already reeling from remote and displaced office workers, San Francisco received $400 million in tax revenue last year, according to the city’s Office of the Controller.

While many investors expect more pain for the office sector as tech companies contract, the pain for older office buildings falling out of favor before COVID increases could be worse.

Tenants are fleeing aging buildings for newer ones built since 2015 (see chart), the only category to break the trend of negative net absorption or vacant space, according to Deutsche Bank.

Tenants fleeing older buildings.

Deutsche Bank, Jones Lang LaSalle

Term of loans is imminent

Borrower Shorenstein Properties, a real estate developer, owes $400 million to a senior mortgage on Twitter’s San Francisco headquarters, according to Trepp, a platform that specializes in monitoring commercial mortgage agreements.

A June update indicated that the borrower has remained current but is seeking refinancing before the mortgage expires in September. Shorenstein did not immediately respond to a request for comment.

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