Blog: Despite discounts, Snap Inc. struggles to sublease Venice properties

When Evan Spiegel and his handful of employees outgrew his father’s Pacific Palisades house in 2012, they expanded Snap Inc.’s operation to a quaint beachfront bungalow on Ocean Front Walk. The “Blu House” would serve as the headquarters for the tech company that created Snapchat, a social media platform which allows users to send messages that disappear after they’re viewed.

It only took a year for Snap to outgrow the bungalow, taking up a series of new leases around the beachside community that would ultimately become the crux of a combative local controversy over gentrification.

Much like its disappearing messages, Snap has now largely disappeared from its quirky home base, choosing instead to relocate to a corporate business park in Santa Monica after going public in 2017. The majority of what remains from Snap in Venice Beach are the yellow ghost logos it put up on nearly every office, which serve as little, ironic reminders of Snap’s past.

It’s now been almost a year since Snap put more than half of its office space on the market for sublease. Yet only about 20 percent of the 163,000 square feet, spread across 14 locations, has been subleased, according to CoStar data.

While Snap brought a flood of new inventory to a strapped market, its effect after leaving has been marginal in comparison to what could happen in the coming years, when Snap’s leases expire, industry experts say. As of now, the company is still paying for the properties, which are not accounted for when considering the local vacancy rate.

In 2010, prior to Snap’s arrival, office rents in the small submarket were around $3.30 per square foot, according to CoStar data published by Curbed. By 2015, when Snap was in its heyday, rents had almost doubled to $6.30 per square foot. In that time span, the percentage of vacant office space also dropped from 15.1 percent to 5.9 percent.

Most recently, rents dropped slightly to $5.80 per square foot in 2018. The amount of vacant office space rose to 6.1 percent last year.

Chris Holland, managing director at Coldwell Banker Commercial WESTMAC, said landlords are “still holding out and trying to get as much as they can” in rents because very little of the Snap space has come back to the market directly — only via sublease.

“When the leases come back to market, there will probably be a reset of some sort,” he added. The bulk of Snap’s leases will expire in the next few years, with the exception of at least one of its properties on Venice Boulevard, which lasts through 2026.

Many of its biggest spaces, including the 44,800-square-foot space at 619 and 701 Ocean Front Walk, plus the 29,500-square-foot Old Bath House at 909 – 913 Ocean Front Walk, remain on the market, according to data from CoStar. The 14,209-square-foot property at 901 Abbot Kinney — one of its larger locations on the street — is also still up for grabs.

According to CoStar and marketing materials, the firm has only subleased its offices at 80 Windward Avenue, 4082 Del Rey Avenue and 1600 Main Street.

Sources familiar with the listings said Snap has also leased the 6,950-square-foot property at 723 Ocean Front Walk, as well as the 3,000-square-foot property at 41 Market Street. It’s also subleased some of the space at 619 and 701 Ocean Front Walk. That would bring Snapchat’s subleases closer to 30 percent occupied.

Snap, and its brokers Andrew Jennison of Industry Partners and Blake Searles at JLL, declined to comment.

The unique characteristics of certain Snap properties, plus its premium rates, are among some of the reasons why Snap has lagged in filling the space, brokers said.

Snap paid $12 per square foot for an 11,145-square-foot space at 910 Abbot Kinney Boulevard, according to Michael Springer, a Venice native and commercial agent at Halton Pardee and Partners. The Class C office building is still available for sublease, with a “negotiable” asking rate, according to LoopNet.

Even with a discount, smaller companies that are seeking flexible office space probably still can’t afford anywhere near the rates the company paid, said Jennifer Frisk, a managing director at Newmark Knight Frank. Out of the 14 Snap properties available, five have a pricey ocean view and three are on the luxe Abbot Kinney boulevard.

Initially, Snap tried to sublet the properties for the same rates it was paying, with the majority around $6 per square foot, Springer said. They have since been discounted to about $4.95 per square foot.

“They are undercutting everybody,” he added.

Yet highly discounted subleases are also unattractive for companies looking for long-term solutions, as landlords will typically want to renew at the rates of the original lease, said Jeremy Dee, a Kennedy West broker.

And there’s another deterrent. The company would often lease eclectic buildings such as former restaurants with a large kitchen, or live-work lofts with odd layouts, presenting challenges for firms seeking a more traditional space.

“It was an influx of crazy inventory but a lot of that space lacks the desirability of what a modern technology or venture-backed startup company might want,” said a tenant representation broker. “They have the right location but lack other features.”

Snap has since recognized its octopus-like real estate strategy might not have been in the company’s best interest.

“This diffuse structure may prevent us from fostering positive employee morale and encouraging interaction among our employees and different business units,” the company stated in a Securities and Exchange Commission filing in 2017. “Because our office buildings are dispersed throughout the area, we may be unable to adequately oversee employees and business functions”

Holland, a veteran and top-producing broker at WESTMAC, said he’d never seen any company handle real estate like Snap did.

“They cannibalized the market by taking anything and everything that was available, as long as it was in Venice,” Holland said. “That seemed to be their only prerequisite, and it just created a frenzy.”

— Alexei Barrionuevo contributed reporting.

Source: The Real Deal Los Angeles