by Wolf Richter, Wolf Street:
Drunk with Easy Money, companies were hogging office space and workers for a future that did not come.
The layoff announcements rippling through tech and social media companies are special. They’ve been coming on a daily basis for months. Lots of big tech and social media companies, lots of startups and crypto outfits, have announced layoffs. Among the biggest ones: Alphabet, Meta, Microsoft, Amazon, Salesforce, Cisco, HP, Twitter, etc., hundreds of companies, some of them five-digit layoff announcements, meaning a company firing 10,000 employees and more.
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But these are global announcements, by global companies, that employ a lot of people in other countries, and so the actual layoffs taking place in the US are much smaller.
This is the result of an insane hiring binge over the past few years. And that hiring binge came with an even more insane office-leasing binge going back a decade, and all of this to prepare for a future that never came, and won’t come.
Elon Musk fired over half of Twitter’s employees and thousands of contractors in one fell swoop, and he told other employees to take a hike if they didn’t like it, and many did. And under his leadership, Twitter is now defaulting on some of its leased office space and is getting sued for not paying rent. And it’s getting sued by suppliers that have gotten stiffed. And it’s tangled up with its laid-off workers. But despite gutting the workforce and cutting out service providers and shedding office space one way or the other, Twitter’s service is still running just fine.
Sure, Musk ruffled some feathers, and some users quit because they couldn’t handle all the stuff on Twitter anymore, and he pissed off advertisers and they quit in droves.
But wait a minute… advertisers were already looking for an excuse to cut back on advertising anyway, because now just about everyone is cutting back on advertising.
Slashing the ad budget is the easiest and fastest way to cut costs, especially for companies that spend a lot on ads. You can cut half of your ad spend and not see any immediate impact on your revenues. There is a long-term impact to cutting your ad spend, but immediately, you might not feel it in your revenues.
And advertisers are doing it. The advertising industry generally just skips a recession and goes straight into a depression, in my experience.
Which is in part why the social media companies, which get nearly all their revenues from advertising, are laying off employees because their revenues depend on advertising, and advertising budgets are getting cut right now.
So Musk gave advertisers that were on Twitter an easy excuse to cut their ad spend by pulling their ads from the Twitter platform.
But I think Musk is on to something. And I think other CEOs in tech and social media are seeing the same thing: The way he gutted Twitter, and Twitter is still up and running, confirms to them that he has cut out huge layers of fat that Twitter had put on after years of overhiring, overleasing, and overpaying. He’s teaching everyone a massive lesson.
He’s also teaching everyone a massive lesson in how not to do it, pushing a company to the brink like that. But so far so good. Twitter is now a privately owned company and no longer has to deal with the hissy-fits on Wall Street.
What he demonstrated is that Twitter, and other companies in tech and social media, were hogging workers they didn’t need and couldn’t productively use, and they were hogging office space they didn’t need and couldn’t use, and they were doing this to overcome perceived shortages of workers and office space, because when there is a perceived shortage, it triggers a very human reaction: panic buying, panic hiring, panic leasing. And all this actually created those shortages then.
Back in 2018, San Francisco was the tightest hottest office market in the country, with an availability rate of around 8%. And every time some decent office space came on the market, tech companies, social media companies, startups with so much funding they didn’t know what to do with it, they jumped all over this office space to get their share of the office pie and squirrel it away before someone else would get it. They didn’t need it, they didn’t have the people to fill it, and it remained empty and sat there. No one ever needed this office space.
As I’ve said many times before, easy money from central banks is like a virus that turns human brains to mush. But the easy money has ended, and these brains are recovering.
In San Francisco, about one-third of the total office space is now on the market for lease, according to real-estate consultancy Savills, much of it as sublease from companies that had signed long-term office leases but didn’t need it and couldn’t get rid of it because they’d signed a long-term lease, so now they’re trying to sublease it at whatever rent they can get, but there are few takers, as leasing activity has collapsed by something like 40% from before the pandemic, and much of what there is in leasing activity is relocations and upgrades when an old lease expires, with companies downsizing often to smaller but better spaces, which just puts more office space on the market.
And so the office vacancy rate – the availability rate, as it’s called politely – keeps getting worse and worse, and keeps hitting new records every quarter, and at the end of Q4 it hit 32%, meaning that nearly one-third of the entire office space in San Francisco was available for lease.
And more office space is vacant, and waiting to be added to the availability. And new office buildings are still being built. And that’s why this will continue to get worse.
And this is happening in Silicon Valley, and it’s happening in Houston, and in Chicago, and in Dallas, and all around the country to varying degrees.