As Twitter rethinks its San Francisco footprint, a bigger $ 9 billion demand looms over the city’s office market

Twitter Inc. revised its large San Francisco office footprint for downsizing Wednesday and canceled the opening of an office in Oakland, Calif., One person with first-hand knowledge of the matter said.

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

Cuts by tech giants could have painful ramifications for San Francisco, a city with a skyline and culture dramatically reshaped in recent decades by a tech boom on its territory, but also by jaw-dropping inequality and a pandemic-aggravated homelessness crisis. .

Twitter said in a statement Wednesday that it was “evaluating our global office portfolio and scaling some locations based on usage,” but also that its decision “has no impact on our current employee numbers or employee roles. “.

Offices in Seoul; Wellington, New Zealand; Osaka; Madrid; Hamburg; Sydney; and Utrecht, the Netherlands, have been audited for closure when leases expire, a person familiar with the matter said. The plan would be to downsize offices in Tokyo, Mumbai, New Delhi, Dublin, New York and San Francisco, but completely demolish plans for an outpost in downtown Oakland.

Twitter battled Elon Musk in court after Tesla Inc.’s TSLA.
+ 6.17%
the chief executive informed the company that it was terminating its $ 44 billion contract to acquire it, after raising the issue of bots and spam on the platform.

A 9 billion dollar cloud

In addition to the Twitter headquarters, lenders have financed approximately $ 9 billion worth of office properties in San Francisco in recent years by selling commercial mortgage bonds to investors, according to a tally by Trepp.

Once considered a relatively safe real estate bet, particularly trophy buildings, office properties have lately been a major concern for owners and financiers due to the rise in hybrid work.

“There are a lot of tech companies driving San Francisco that aren’t coming back, or aren’t coming back the same way,” said Dan McNamara, founder of hedge fund Polpo Capital, a real estate debt investor focused on hardship.

“San Francisco is almost a complete hiatus for us,” he said, over the phone.

While more workers have entered offices than pandemic lows, San Francisco is still lagging behind other major American cities with 38.1 percent employment as of July 25, versus the national average of 44.7 percent, according to the barometer. of the return to work of 10 cities of Kastle System.

“This is just something unimaginable two or three years ago,” McNamara said of the low levels of employment. Before founding PolPo, he made headlines at MP Securitized Credit Partners for making profitable bets against failing malls.

A need to rethink?

The pandemic and its far-reaching repercussions were not on the radar 10 years ago, when the oldest loans in pending commercial mortgage bond operations would have been signed.

The carnage in high-flying tech stocks COMP,
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   in the first half of 2022 it made matters worse, drying up M&A businesses and the IPO market, but also bringing cost cuts and reductions to many tech companies calling the San Francisco Bay Area home. </p> <p>Twitter's stock was up 1.3% on Wednesday, but was down 41.7% from a year ago, according to FactSet. </p> <p><strong>See</strong>: It's the end of "fantasyland" for Big Tech and its workers</p> <p>Daniel Herzstein, director of public policy at the San Francisco Chamber of Commerce, said more tourists, commuters and officials have returned in the past two months.  But he also said that San Francisco must prepare for a new way forward.</p> <p>"The pandemic has fundamentally changed the way we use offices and we need to reimagine the way we look at our economy, especially in downtown San Francisco," he said over the phone.</p><h6>Offices a prohibited area for lenders?</h6> <p>San Francisco has its own set of challenges, but finding lenders willing to make a big bet to get paid off 10 years later on an office property has become more difficult almost everywhere.</p> <p>The lack of a clearer picture of the future of the office has made it "very difficult or impossible to obtain financing for an office building," said Robert Verrone, founder of Ironhound Management Company, a real estate firm in New York.  "Most lenders don't want to do anything."</p> <p>Prior to training, Verrone worked on Wall Street obtaining large commercial real estate loans for nearly two decades.  He has not yet been asked to help untangle office debt in San Francisco during the pandemic, but he has worked in retail in the city.</p> <p>According to the city's Office of the Controller, San Francisco, already shaken by remote and relocated employees, suffered $ 400 million in tax revenues last year.</p> <p>While many investors expect more pain for the office sector if tech companies downsize, the pain for old office buildings falling out of favor before COVID may be worse.  </p> <p>Tenants have fled from dated buildings to newer ones built since 2015 (see chart), the only category bucking the trend of negative net take-up, or free space, according to Deutsche Bank. 
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      <h4 class="wsj-article-caption-content">Tenants fleeing old buildings.</h4>
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        Deutsche Bank, Jones Lang La Salle
  <h6>The maturity of the loan is looming</h6> Borrower Shorenstein Properties, a real estate developer, owes $ 400 million for a senior mortgage on Twitter's San Francisco headquarters, according to Trepp, a platform that specializes in tracking commercial mortgage bond deals. </p> <p>A June update indicated that the borrower remained current, but sought a refinance before the loan expired in September.  Shorenstein did not immediately respond to a request for comment.

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