Pinterest forfeits $89.5M to terminate a year-old lease for yet-to-be-built SF office building
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[{"id": "g3lra5c", "text": "Article (paywalled): \n\nPinterest Inc.\u2019s decision to fork over $89.5 million to terminate a year-old lease for a yet-to-be-built San Francisco office development signals a major \u2014 and most likely permanent\u2014 turning point for the city\u2019s hot real estate and big tech industries, according to local business and real estate experts. The company, which went public last year and had planned for further growth in San Francisco, said Friday it has killed its 490,000-square-foot lease at 88 Bluxome St. as it analyzes its workplace needs in light of Covid-19. \n\nThe sudden reversal appeared to catch the commercial real estate community largely by surprise. But experts say Pinterest will likely not be the last company to change course on expansion plans in San Francisco, where pandemic-induced remote work and pending taxation efforts have created a \u201cperfect storm\u201d bound to impact site selection and accelerate a long-projected exodus of tech companies from the city. \u201cSan Francisco has been the golden child of our national economy for almost a decade. I think this lease break is a wake-up call that our heyday \u2014 that era \u2014  is coming to a close and the city is not just going to be gifted the best and brightest companies going forward,\u201d said Jay Cheng, public policy director of the San Francisco Chamber of Commerce. \u201cRemote work has fundamentally changed our economic landscape and how competitive San Francisco is nationally and globally \u2014 and it is here to stay, at least for a couple of years,\u201d he said. \n\nCompanies such as Core-Mark, Bechtel, McKesson, Schwab, PG&amp;E, Stripe, Juul and Xero have or will soon relocate their headquarters, while Uber and Square have announced large campus acquisitions outside of San Francisco, according to Cheng.  Twitter, Facebook, Slack and Coinbase have \u201cannounced the move to near 100% remote workforce,\u201d and smaller tech companies like Gitlab, Buffer, Automattic, Zapier have made \u201csimilar announcements pre-Covid-19,\u201d he added. While remote work is by no means a new trend, companies finding themselves in cost-cutting mode post-pandemic are more likely to opt in to this model on a more permanent basis while opting out of the city\u2019s pricy real estate market as the exorbitant cost of living is forcing employees to settle down elsewhere.\n\nFor a remote worker, \u201cthe Bay Area is a difficult sell because of its high cost of living and the taxes, versus a lower cost alternative,\u201d said John Boyd, a principal at The Boyd Co., a site-selection consulting firm. The desire to negotiate the freedom to work remotely \u2014 at least part time \u2014 is a growing particularly among millennials, according to Boyd. He also cited an IBM survey that revealed that nearly 70% of new hires want the freedom to work remotely to be at least an option. \u201cCompanies now have a dollar-and-cents motivation to embrace the work-from-home model and they see that as an HR recruiting tool,\u201d Boyd said. Going \u201cbackwards\u201d on remote work is likely to present a \u201cmajor behavioral battle,\u201d said Martin Reeves, a San Francisco-based office expert with the Boston Consulting Group \u2014 particularly as the pandemic stretches on in the absence of a vaccine. Reeves is not predicting the death of the office market, but he is predicting long-lasting changes. \u201cWe will have some form of rebound but it won't be to previous levels. What we will be rebounding to might be different \u2014 a core workforce versus a peripheral workforce, showroom types of offices, different uses of space,\u201d said Reeves. \u201cNone of this is good for the real estate market, except perhaps the rebuilding and different usage of space. Every crisis is a fortune or blessing for somebody, and certain segments of the market will benefit.\u201d\n\nIncreased taxes proposed at the state and local levels \u2014 including a proposed repeal of Proposition 13\u2019s protection on property-tax increases for commercial and industrial property and a San Francisco ballot measure that would impose a new levy on highly compensated CEOs \u2014 are making companies\u2019 decisions to relocate easier, according to real estate experts.\u201c These additional taxes encourage companies to look elsewhere as they are currently under direction to save money,\u201d said Alexander Quinn, JLL\u2019s research director for Northern California. \u201cOne of the ways companies can save money in the short-term is to reduce their real estate and labor costs. Thus, finding more affordable locations is a simple short-term approach.\u201d\n\nSupervisor Matt Haney, whose district includes the 88 Bluxome St. site and who is spearheading the CEO tax, said he does not believe the local tax efforts to be a factor in Pinterest\u2019s decision to give up San Francisco office space.\n\u201cThe potential tax increases on the ballot are modest and would cost Pinterest a whole lot less than $89.5 million. This is clearly driven by other factors,\u201d said Haney, adding that he expects the \u201cgrowth of Central SoMa\u201d to continue.\n\u201cCompanies will return to in-person working at some point,\u201d said Haney. \u201cPinterest continues to have a massive presence in San Francisco. There is uncertainty around how companies are restructuring their workforce, but it's not just in San Francisco, it's everywhere.\u201d\n\nPinterest, which has 2,400 employees worldwide, owns office buildings in San Francisco \u2014 410 Townsend St., 149 Bluxome St. and 651 Brannan St. \u2014 totaling 338,884 square feet. The company\u2019s lease for its 122,170-square-foot headquarters at 651 Brannan St. is due to expire in May 2022. Pinterest has not indicated any eventual plans to leave San Francisco and did not comment on whether the pending taxation efforts played into its decision to cancel the 88 Bluxome St. lease. For now, it expects a majority of its employees to work remotely until 2021 and plans to distribute its workforce across geographical locations after that.  \n\n\u201cWe\u2019ve explored alternatives to occupying office space at 88 Bluxome St. and have agreed with the developer to terminate the lease,\u201d a Pinterest spokesperson said on Monday. \u201cWe\u2019ll continue to occupy four buildings in San Francisco and believe we have enough space to accommodate our current needs.\u201d TMG Partners and Alexandria Real Estate Partners \u2014 the developers behind the 1 million-square-foot 88 Bluxome development \u2014 have declined to comment on Pinterest\u2019s lease and whether the project will move forward without an anchor tenant.", "replies": [], "depth": 1}, {"id": "g3m1e46", "text": "So they are paying 20% of the lease value up front to make it go away. That is a big check to write.\n\nThey must have a high degree of confidence that they still will not want this space 2-3 years from now to cut a check for $90 million. They don't even want to wait 6-12 months to see what things look like then before killing it? Wonder if there are internal cash flow issues that go beyond work from home for pinterest?\n\nSimilar to the REI HQ deal that just got killed too.", "replies": [{"id": "g3m3b77", "text": "&gt; They don't even want to wait 6-12 months to see what things look like then before killing it? Wonder if there are internal cash flow issues that go beyond work from home for pinterest?  \n  \nThere is going to be an office real estate crash next year that is comparable to what we saw in residential during 2008.   \n  \nPerhaps they thought paying their way out today with the firm is preferable to being stuck negotiating during the building owner's bankruptcy.  \n  \nIt is very likely in 3 years time they can find a new lease at a fraction of the old rent.", "replies": [{"id": "g3m3qqo", "text": "&gt; It is very likely in 3 years time they can find a new lease at a fraction of the old rent.\n\nThis is a really good point I hadn't considered...", "replies": [], "depth": 3}, {"id": "g3n3u3q", "text": "&gt;There is going to be an office real estate crash next year that is comparable to what we saw in residential during 2008.\n\nThat seems overly pessimistic (and it definitely wouldn't be widespread nationally like '08).\n\nI think it's worth noting that office can fall back on the fact that a reasonably significant amount of it's supply can repurpose/remodel itself into residential/retail/medical/etc (it's a well-located \"box\", who cares what goes in it).", "replies": [{"id": "g3n74t6", "text": "&gt; I think it's worth noting that office can fall back on the fact that a reasonably significant amount of it's supply can repurpose/remodel itself into residential/retail/medical/etc \n\nThat is an enormous expense.   New plumbing stacks for each apartment, etc.    \n  \nOffices are certainly not worthless.   But will be worth far less than their financing, and the keys will be handed back to the mortgage holders.", "replies": [], "depth": 4}, {"id": "g3qgiyl", "text": "What?! Have you actually operated office property? \n\nRarely is an office property able to efficiently convert to residential (which would be the primary conversion). The fact that you also suggested a retail conversion suggests you have no idea what you\u2019re talking about. Why would anyone convert to retail?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "g3meqwg", "text": "As a CRE broker in SF - I think part of the motivation was seeing the writing on the wall of not needing as large of a footprint in the city. More employees will continue to move to flexible hours model or go completely WFH indefinitely.. \n\nPinterest\u2019s stock also just sky rocketed to their record high in August. I believe this confirmed their notion of moving to a mobile workforce. \n\nBy removing this costly expenditure from the books, it may free up other opportunities down the line.", "replies": [{"id": "g3mm7sr", "text": "A good point. So what happens to this space? How much will rents correct there if a significant number of companies do the same thing?", "replies": [{"id": "gbeh80e", "text": "Apologies for the delay - the owner (Alexandria) is redeveloping the site as a life science building. The demands for life science and industrial has continued to stand strong. \n\nRE: rents - tbd. Owners haven\u2019t felt much pain because most of the sublease space out there is still have rent paid. Sublease space is hurting and rents are down 20%+ across the board.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g3opiza", "text": "Incoming market crash.", "replies": [], "depth": 1}, {"id": "g3pqlv6", "text": "This alleviates them carrying a half-billion dollar liability on the books for the lease.", "replies": [], "depth": 1}]