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

Twitter Inc. developed Its large San Francisco office footprint is under review for downsizing on Wednesday, and it canceled the opening of an office in Oakland, California, a person familiar with the matter said.

The move obscures the future of the social media site’s elegant San Francisco headquarters, a 1.1 million square foot memorial office complex at 1355 Market Street, where Twitter TWTR,
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It occupies about 75% of the space, according to Trepp data.

Cutbacks by tech giants could have painful repercussions for San Francisco, a city with a skyline and culture that has been dramatically reshaped in recent decades by the technology boom on its land, but also by staggering inequality and a homelessness crisis exacerbated by the pandemic.

Twitter said in a statement on Wednesday that it was “evaluating our global office portfolio and sizing certain locations based on usage,” but also that its decision “doesn’t affect the number of existing employees or employee roles.”

offices in Seoul. Wellington, New Zealand; Osaka. Madrid. Hamburg. Sydney; And Utrecht, the Netherlands, is being placed under review for closure when leases expire, a person familiar with the matter said. The plan would be to resize offices in Tokyo, Mumbai, New Delhi, Dublin, New York and San Francisco, but scrap plans entirely for an outpost in downtown Auckland.

Twitter fights Elon Musk in court after Tesla Inc. TSLA,
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The CEO informed the company that he had terminated his $44 billion agreement to acquire it, after raising the issue of bots and spam on the platform.

A $9 billion cloud

Outside of Twitter’s headquarters, lenders have financed $9 billion worth of office real estate in San Francisco in recent years by selling commercial mortgage securities to investors, according to a Trepp count.

Once viewed as a relatively safe real estate bet, especially trophy buildings, office real estate has recently been a major concern for landlords and financiers due to the rise of the hybrid business.

“There are a lot of tech companies that are driving San Francisco and not coming back in the same way,” said Dan McNamara, founder of hedge fund Polpo Capital, a real estate debt investor focused on the plight.

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

While more workers are flocking to offices relative to the lowest levels of the pandemic, San Francisco still lags behind other major US cities with an occupancy rate of 38.1% as of July 25, versus 44.7% of the national average, according to a measure of return to work in 10 cities in the Castle System .

“This is just unimaginable two to three years ago,” McNamara said of low occupancy levels. Before founding PolPo, he made headlines at MP Securitized Credit Partners for driving lucrative bets against failing malls.

Need to rethink?

The pandemic and its far-reaching repercussions were not on the radar 10 years ago, when the oldest loans were underwritten in existing commercial mortgage bond deals.

The carnage in high-tech stocks,
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   In the first half of 2022, it only got worse, drying up M&A activity and the IPO market, but also bringing in cuts and cost cuts for many of the tech companies that call the San Francisco Bay Area home. </p> <p>Twitter shares rose 1.3% on Wednesday, but are down 41.7% from a year ago, according to FactSet. </p> <p><strong>We see</strong>: It's the end of "Fantasy Land" for big tech companies and their workers</p> <p>Daniel Herzstein, director of public policy at the San Francisco Chamber of Commerce, said more tourists, passengers and employees have returned in the past two months.  But he also said San Francisco needs to prepare for a new way forward.</p> <p>“The pandemic has fundamentally changed how we use offices, and we need to reimagine how we view our economy, especially in downtown San Francisco,” he said by phone.</p><h6>Offices a no-go area for lenders?</h6> <p>San Francisco has its own set of challenges, but finding lenders willing to bet the big cash back after 10 years on an office property is becoming more difficult just about everywhere.</p> <p>The lack of a clearer picture of the office's future made it "extremely difficult to obtain financing for an office building," said Robert Ferron, founder of Iron Hound Management, a New York real estate exercise firm.  "Most lenders don't want to do anything."</p> <p>Prior to rehearsals, Verrone worked on Wall Street creating large loans on commercial real estate for nearly two decades.  He had not yet been asked to help clear office real estate debts in San Francisco during the pandemic, but he has been working on retail in the city.</p> <p>San Francisco, already reeling from remote and commuting office workers, received $400 million in tax revenue last year, according to the city's office of the Comptroller.</p> <p>While many investors anticipate more pain in the future for the office sector if tech companies downsize, the pain for older, under-reported office buildings before COVID could be even worse.  </p> <p>Tenants have been fleeing old buildings for newer buildings built since 2015 (see chart), the only category resisting the trend of negative net absorption, or free space, according to Deutsche Bank. 
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      <h4 class="wsj-article-caption-content">Tenants are escaping from old buildings.</h4>
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        Deutsche Bank, Jones Lang LaSalle
  <h6>Looming maturity</h6> Borrower Shorenstein Properties, a real estate developer, owes $400 million on a large mortgage on its Twitter headquarters in San Francisco, according to Trepp, a platform that specializes in monitoring commercial mortgage bond deals. </p> <p>An update for June indicated that the borrower remained standing, but was seeking refinancing before the mortgage came due in September.  Shornstein did not immediately respond to a request for comment.


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