What's Behind Zynga's Decision to Put Its Shiny HQ Up for Sale?

Remember Zynga?

The company was once a darling of the startup world. It created hit games like "Farmville" and "Words With Friends." Zynga moved its headquarters to a massive edifice at Eighth and Townsend streets in 2011, then bought the building the next year.

The building still impresses. It features a five-story atrium ringed with spacious catwalks and bold red walls. There is a glass elevator and lots of gleaming chrome.

A little after lunch, the place is quiet. A few employees are sitting around a table in front of emptied containers of food. Some are milling around the big TV. A 30-something guy shoots baskets on one of the arcade games in the lobby. You can hear the sound of a pingpong match somewhere down the hall.

Zynga’s business has taken a dive since 2012. Its stock value tanked and it has laid off hundreds of employees. The company has made some extra cash by leasing out empty office space to other tech companies. Now it is looking to sell the whole 670,000-square-foot building.

When Zynga moved in nearly five years ago, the building became something of a sensation. The Internet bubbled with stories like this one about the architecture, the 300-plus conference rooms, the Blue Bottle coffee. Vladimir Bosanac says Zynga set the bar for the city’s latest wave of tech companies.

Bosanac says, “It became really a showplace not only for Zynga but what would become of tech space for San Francisco in the future.”

Bosanac is co-founder of The Registry, a San Francisco real estate magazine. He says Zynga could hit the jackpot with the sale. Bosanac estimates the building is worth about double the $228 million Zynga paid for it. (Here's a breakdown of his reasoning).

“They bought at the right time, in early 2012 as we were coming out of the recession,” Bosanac says. “And they are looking to sell it at the right time."

Bosanac says it looks like we could be nearing the end of a boom cycle and that real estate prices might actually start coming down. This makes Zynga’s investment in the space look pretty savvy.

But UC Berkeley economist Kenneth Rosen sees it another way. “I would say Zynga was lucky.”

Rosen says it is a mistake for unproven young tech companies to buy real estate. Startups are notoriously risky, and if they fail, they would be on the hook for empty office space.

Startups “all think they are geniuses,” Rosen says, “They are geniuses who don't know how to make money, if you ask me. And they should not be in the real estate space.”

In recent years Uber has bought real estate in San Francisco and Oakland. But most young hot tech companies are leasing space. Take Twitter, Airbnb and Pinterest, for example. Rosen says it is smarter to rent, especially because he thinks we are headed for a tech and real estate market downturn. There are already indications of trouble in the  tech sector.

“Over the next two to three years, I expect to see a big correction in the valuations in these companies, which will lead to layoffs, a lot less job creation — maybe substantial job losses, and a real estate market correction follows thereafter,” Rosen says.

Zynga is not talking about the sale, only saying it plans to lease back space if the building sells. Then it would once again be like the other tenants in the building — small companies, renting out space, trying to make it big.