But working from anywhere has cost cutters drooling: “All expense categories benefited from lower facilities related costs, driven by our employees working from home.”
By Wolf Richter for WOLF STREET.
When Dropbox, the San Francisco cloud services provider, released its earnings Thursday evening, it added a delicate and very costly morsel on top of the commercial real estate gloom pervading the office sector in San Francisco and other cities.
After announcing in October that it would switch to permanent work-from-anywhere, and after announcing in its Q3 earnings release in November that it would therefore not need all of its office space and would therefore book heavy charges associated with it, and after announcing in January that it would therefore cut 11% of its workforce, Dropbox announced yesterday evening in its Q4 earnings release that it would therefore try to sublease the unneeded office space to some other company, and that it had therefore booked a $400 million charge “related to real estate assets.”
This is the cascading nature of the permanent switch from working in an office to working from anywhere. During the earnings call, CFO Tim Regan said, “as part of moving to a Virtual First work model, we are taking steps to de-cost our real estate portfolio by subleasing our existing facilities.”
“De-cost our real estate portfolio” – that is the key here. Paying rent for years to come on vast amounts of very expensive corporate palaces that have mostly been vacant from get-go, especially in hyper-expensive San Francisco, and that are no longer needed at all, is a big unproductive expense.
So the cost cutters are at work. But it’s hard to cut the expense of a long-term commercial lease. You have to put the space on the sublease market and hope for the best.
Dropbox is just the tenant in this office space. Its real estate losses are that of a tenant with too much space, and are a result of office rents having plunged since it signed the lease.
The $400 million loss is the estimated difference over the remaining term of the lease between the rent it thinks it can obtain from a future sublease tenant in this unneeded office space and the rent Dropbox is paying to its landlord on the space plus other expenses associated with that space.
This estimate indicates by how much office rents are thought to have plunged from the time Dropbox leased the property.
Dropbox, like just about all tech companies and many other companies in San Francisco, went on an office leasing binge in past years, leasing far more office space than they needed at the time. The logic was that there was a permanent shortage of office space in San Francisco, that rents would always go up, and that it was better to grab all you could get now, and sit on it vacant, and hope to grow into it over the years, thereby warehousing office space for later use. This hogging of massive amounts of unneeded office space caused the office shortage.
And now, as these unused offices are being dumped on the sublease market, San Francisco suddenly has the biggest office glut in history.
So which office? Last November, Dropbox put about 472,000 square feet of its new 750,000-square-foot headquarters building in San Francisco on the sublease market. Even though Dropbox didn’t mention what cities these office properties are in, it is likely that the sublease of its San Francisco headquarters accounts for a large portion the $400 million charge.
Regan said that the company expects a smaller portion of charges, in addition to the $400 million, to hit earnings in 2021, including potential charges for its offices in Europe, “depending on the then current market and economic conditions.”
In its earnings release, Dropbox said: “As part of the Virtual First strategy, we will retain a portion of our office space to be used for team collaboration and a portion will be marketed for sublease,”
“We reassessed our real estate asset groups and estimated the fair value of the office space to be subleased using current market conditions,” it said.
“Where the carrying value of the individual asset groups exceeded their fair value, an impairment charge was recognized for the difference,” it said.
“As a result, we recorded total impairment charges of $398.2 million in the fourth quarter of 2020 for right-of-use and other lease related assets,” it said.
But the cost cutting is already bearing fruit, said Regan: “I’d like to note that all expense categories benefited from lower facilities related costs, driven by our employees working from home.”
So it appears, working from anywhere is cheaper for the company than maintaining office palaces – including Dropbox’s gorgeous and free gourmet cafeteria, the Tuck Shop, which in 2018 was enshrined in an ooh-and-ahh CNBC video, and which is now closed. That was a quarterly expense that is now off the income statement. An employee perk now gone. Now work-from-anywhere employees get to raid their own gourmet fridge and pay for their own gourmet lunch.
As Dropbox shows, working from anywhere has successfully shifted expenses from the corporate income statement to the household. At the same time, employees don’t have to spend money and time on the commute, except when they periodically go to the new meeting places for “team collaboration” that are replacing the sea of desks. Some hate it, some love it. But for corporate cost cutters, the logic is irresistible.
Meanwhile, corporate cost cutters have to figure out how to present to investors the costs of all that vacant office space, much of which had been vacant even before work from anywhere took off. Big charges to book the expense right up front is what Dropbox has chosen, rather than a quarterly bleeding for years to come.
This is just so relentless: “We’re not going back to the way things were.” Read… Salesforce, San Francisco’s Largest Employer, Switches to Hybrid “Work from Anywhere,” Won’t Need All that Space in Salesforce Tower. Uber, Old Navy, Yelp, Oracle, Dropbox… Dump Office Space
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