Tech Layoffs, Work From Home Weigh on Office Markets

Big Tech is shrinking as diminished profits and slumping share prices dictate layoffs, and so is the footprint of the leading tech firms in cities that have grown increasingly reliant on the industry.

Facebook owner Meta Platforms (META), which has aggressively accumulated space in tech hubs including New York City and Seattle over recent years, now plans to spend $2.9 billion through the end of its next fiscal year related to "consolidate" its offices.

Amazon.com Inc. (AMZN) spent $1.15 billion to acquire the former Lord & Taylor department store building in Manhattan in 2020, and continues to build its second headquarters in northern Virginia. Months ago, the ecommerce and cloud computing giant paused construction of five buildings at its Bellevue, Washington, campus and a sixth in Nashville, citing the need to adapt to hybrid work arrangements.

No city has been hit as hard as San Francisco, where the office vacancy rate topped 25% in the third quarter of this year. San Francisco Mayor London Breed has compared the recent downturn to that following the dot-com crash, citing the shift to remote work amid COVID-19 by local tech companies including Salesforce Inc. (CRM). "We thought people would miss working around other people, but they do not,” Bloomberg News quoted Breed as saying.

The city's office market woes are only likely to increase as San Francisco-based Lyft Inc. (LYFT) proceeds with recently announced plans to shed 45% of its office space across four cities. "Since many team members now enjoy working remotely, we are reducing our office footprint and cutting the related real estate costs by approximately half," said Lyft CEO Logan Green on the rides provider's Nov. 7 earnings conference call.

As a result of the tech office space cuts, the markets for subleased space in San Francisco and some other tech hubs have become glutted with supply. "“We have to take it in the shin right now,” one broker representing San Francisco landlords told Commercial Observer. Technology firms account for 65% of San Francisco's office space demand, by one estimate.

Technology companies continue to sign leases, of course. Just last month, two relatively obscure tech firms leased office buildings with a combined total of 175,000 square feet of space in San Jose, California, for example. Snowflake (SNOW) and another tech company recently signed big leases in the East Bay area. Since March 2020, the five largest U.S, tech companies have expanded their offices by a combined total of more than 10 million square feet, according to a market researcher.

And the technology sector is just one part of a diverse and recently strong U.S. economy. Over the last 12 months, office vacancy rates have declined in Boston, Miami, and Charlotte, North Carolina, while San Diego office rents have surpassed those in Los Angeles thanks to demand from life sciences companies.

Still, the tech layoffs already announced and those likely to materialize in the coming months suggest vacancies may spread and rents head lower. "Downsizing is much more of a threat than work from home," a Stanford University economics professor told The Wall Street Journal.