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Dropbox hands over 25% of San Francisco headquarters back to landlord

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Drew Houston, Dropbox Co-Founder and CEO.

Arun Nevader | CNBC

Dropbox said Friday that it’s agreed to return over one quarter of its San Francisco headquarters to the landlord as the commercial real estate market continues to soften following the Covid pandemic.

In a filing, Dropbox said it agreed to surrender to its landlord 165,244 square feet of space and pay $79 million in termination fees. Under the amendment to its lease agreement, Dropbox will offload the space over time through the first quarter of 2025.

Since going remote during the pandemic three years ago, Dropbox has been trying to figure out what to do with much of the 736,000 square feet of space in Mission Bay it leased in 2017, in what was the largest office lease in the city’s history. The company subleased closed to 134,000 square feet of space last year to Vir Biotechnology, leaving it with just over 604,000 square feet.

In addition, Dropbox took a $175.2 million impairment on the office last year “as a result of adverse changes” in the market. That came after taking a $400 million hit in 2020.

San Francisco’s office vacancy rate stood at 30% in the third quarter, the highest level since at least 2007, according to city data.

“As we’ve noted in the past, we’ve taken steps to de-cost our real estate portfolio as a result of our transition to Virtual First, our operating model in which remote work is the primary experience for our employees, but where we still come together for planned in-person gatherings,” a company spokesperson told CNBC in an emailed statement.

While the move provides a financial benefit to the cloud software vendor, it signals that demand for office space in the city remains weak and suggests more pain may be ahead for companies that signed big leases before the pandemic, when venture funding and public investors were fueling a tech boom. In addition to the remote work trend, the tech industry has been in downsizing mode since early 2022, with industrywide layoffs.

Drew Houston, Dropbox’s co-founder and CEO, announced in April that the company was cutting its headcount by about 16%.

Dropbox’s 2017 lease for the brand new headquarters was for 15 years. Private-equity firm KKR bought the property in 2021 from its original developer, Kilroy Realty Corp., for over $1 billion.

“As a result of the amendment the company will avoid future cash payments related to rent and common area maintenance fees of $137 million and approximately $90 million, respectively, over the remaining 10 year lease term,” Dropbox said in Friday’s filing.

A short walk away from Dropbox, Uber has been trying to sublease part of its headquarters. The San Francisco Chronicle reported last week that Microsoft-backed OpenAI is close to taking space there.

Dropbox had tried working with its landlord to sublease space at the headquarters, but the real estate market deteriorated, finance chief Tim Regan, told analysts on a February earnings call.

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