San Francisco Office Market Takes a Hit From Dropbox

San Francisco’s old school tech tenants continue to scale back their space needs just as several prominent artificial intelligence software firms, including Hive and Hayden AI, as well as video game developer Roblox, are signing major new commitments in the market. Namely, Dropbox is returning more than 25% of the headquarters space it has leased from KKR, or 165,244 square feet, according to a report in CNBC. 

At one time before the pandemic, the firm had more than 736,000 square feet of space in Mission Bay, but has since subleased close to 134,000 square feet and now is paying $79 million in termination fees to return space at 1800 Owens Street. 

The move comes as San Francisco is struggling to its feet with a 32% vacancy rate. Marcus & Miillichap reports that new businesses are showing interest in the metro area, fueled by the demand generated by artificial intelligence applications. “As this next wave of technology ventures mature and grow, so will their office needs; yet, this process will take time,” it says. 

Meanwhile, not all of San Francisco, by any means, is at a 32% vacancy rate. Marcus & Millichap points out that the vacancy rate was 16.7% in Downtown West, which encompasses Van Ness, Chinatown, Union Square and the Civic Center. 

It also notes that vacancy outside the CBD, but still inside the city of San Francisco, was under 10 percent in June. “Offices in these lower availability areas tend to be much smaller, with a mean height of three stories, and closer to residential nodes, cutting down on commutes,” it says. “Such spaces appeal to smaller businesses, who lack the budget or desire for trophy floor plans, and may also be more disposed to in-person work given close-knit office cultures.”