Revenge of the hoodies: Big Tech may be breaking up with Big Office for good
Building owners bent over backward to embrace the tech aristocracy. It could be their undoing
On Thursday, Mark Zuckerberg took direct aim at real estate’s holiest of holies: The L word.
“Over time, location will hopefully be less of a factor in how many people work,” he said in a note on Facebook, the $659 billion social media giant he built and leads. “And we’ll have the technology to feel truly present no matter where we are.”
Zuckerberg was announcing the beginning of Facebook’s permanent shift to a distributed workforce, a decision that could see up to half of the company’s 45,000 employees go remote in the next few years. It’s likely to set off a ripple effect among tech companies and rock office markets across the country.
Consider New York, where Facebook occupies more than 1 million square feet of office space at Vornado’s 770 Broadway and Orda Management Corp.’s 225 Park Avenue South. It has also signed for 1.5 million square feet at Related’s Hudson Yards campus, and is reportedly near the finish line for another 740,000 square feet at Vornado’s Farley Building redevelopment.
Last year was the third straight that tech leasing in Manhattan surpassed 3 million square feet, according to CBRE, and was the biggest year for tech leasing on record. In San Francisco and Seattle, tech firms accounted for half or more of new office leases signed in 2019, and about a fifth in New York and Los Angeles.
Now, leases are hard contracts — companies can’t just walk away from them, though many will try. What’s more likely to happen is that building owners will be forced to invest even more in health and safety facilities because tenants will demand that for their employees — and landlords have little leverage.
“Those rules where a landlord for the last 100 years would say, ‘You have a lease, and these are the terms of the lease, and you’re going to live by those terms,’ — those are out the window,” Cushman & Wakefield CEO Brett White said in a recent interview with Fifth Wall Ventures. “They are being forced to do things to support their tenants that they never envisioned, whether it’s rent reductions, rent abatements — landlords in this pandemic have learned very quickly that their existing tenant base is critically important.”
But even if these gleaming towers with their stripped-down aesthetics and open plans have a 10-year grace period thanks to current leases, what happens next? Owners have long counted on tech companies to spread like weeds — or memes — in their office buildings: Facebook started off with just 100,000 square feet at 770 Broadway in 2013, and has grown seven-fold since.
Landlords have also counted on a sort of virtuous cycle in tech leasing: Snag one big name and reap the rewards of the whole ecosystem moving to your ’hood. And that impact isn’t felt just on the office floors. A young, wealthy tech workforce with heaps of disposable income is a godsend for retail. Recall the pre-pandemic scenes at José Andrés wildly expensive Mercado Little Spain or Estiatorio Milos on a weekday afternoon.
“Any real estate decision is location-driven, but with tech tenants, what we’ve found is that that tends to be one of the primary drivers,” Colliers International’s Stephen Shapiro said in December. “In banking or in legal or accounting, you don’t necessarily get that same sense that all the talent wants to be in a two-block radius.”
But if one of the most well-capitalized, profitable companies on Earth doesn’t feel the need to make it to the office every day, how will other firms justify the costs?
The list of companies that have announced a permanent shift toward remote work is filled with heavyweights: Twitter, Shopify, Square. But that’s not the half of it. Consider firms such as Mastercard, Google and Zillow, which have announced that work-from-home is the reality for at least this year, and possibly beyond.
Whereas lost productivity was cited as one of the key reasons that remote work would never work, some tech leaders are now turning that rhetoric on its head. Zillow CEO Rich Barton tweeted that “my personal opinions about WFH have been turned upside down over the past 2 months.” Mastercard’s chief people officer, Michael Fraccaro, told Reuters that companies may find their offices at a third of capacity even once this pandemic is past. Joan Burke, chief people officer of DocuSign, went even further, telling the New York Times that “working from home is a great thing for the company and for the employees, who don’t want to get back in cars and commute for two hours. That’s lost productivity.”
The other upside of going remote for these tech firms could be financial: They paid top dollar for workers in New York and San Francisco because they believed that was necessary to land top talent. In the shift to a remote workforce, they will become more open to hiring anywhere, and anywhere that is not New York or San Francisco is cheaper. Zuckerberg told Bloomberg the company would “localize everybody’s comp on January 1,” which could mean tens of millions of dollars in savings.
Office landlords have bet the farm on tech companies, buying out lesser tenants and stockpiling space in the hopes of their expansion, designing buildings from scratch with them in mind, and offering generous concessions to name-brand firms. The great irony is that these are the companies that are finding it easiest to make the forced transition to remote work during the pandemic: Much of their core work is already distributed across engineering teams globally. The cloud is already part of their DNA.
I’ve been working on a fully distributed/remote basis since leaving a big company in ‘07. I’ve never actually met our back office/CFO equivalent, nor have I ever been in the same room as our corporate lawyers or investment bankers.
— Chris Sacca (@sacca) May 21, 2020
Venture capitalist Chris Sacca, an early investor in Facebook and Kickstarter
The lumbering giants of banking and law are having a harder time with remote work, and their employees and leaders are raring to go back to the office. But these industries are not signing large leases at nearly the rate that Big Tech is: According to CBRE, tech accounted for nearly one-third of the largest 100 leases in the U.S., compared to financial services and insurance at 13.5 percent, or legal, at about 2 percent.
Shortly after Facebook signed at Hudson Yards in November, Stephen Winter, who oversees leasing for Related at the megacomplex, said the deal meant the execution of their business plan was now “beyond perfect.”
“Because now,” Winter said, “it seems that every single major tech company wants to be in and around 34th Street.”
There’s a lot of dust yet to settle, and reports of the death of alpha office markets have always turned out to be greatly exaggerated, but it is worth pondering: If Big Tech can truly be everywhere, does it need to be anywhere in particular?
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