Big Tech preps for going back to offices by scooping up commercial real estate.
Just over two years ago, Google finalized a lease for St. John’s Terminal in New York City. The tech giant waited while the owner, Oxford Properties, expanded and renovated the former railroad freight terminal into a modern office complex.
By 2021, Google didn’t want to be a tenant anymore. The company plunked down $2.1 billion to acquire all 1.3 million square feet. This new “Googleplex” includes two nearby structures besides the former terminal on Washington Street—the other sites being 315 and 345 Hudson Street—spanning a total of 1.7 million square feet.
This wouldn’t be the first time Google went from lease to purchase. Back in 2000, the Mountain View, California-based company, known primarily for its ubiquitous search engine, was a newcomer in New York. The company rented space at a snazzy art deco building, a former headquarters of the New York Port Authority, in Manhattan’s Chelsea neighborhood. A decade later, Google decided to buy the whole building (3 million square feet) for $1.9 billion. The logic behind the decision was sound. Buying real estate allows companies to circumvent the burden of lease agreements. Low bond yields and the desire to hedge against inflation also make these types of transactions attractive. Plus, it saves money in the long run—especially in pricey metro areas like New York.
However, the St. John’s Terminal deal occurred during a strange time. Google just spent billions on a massive office property during the so-called work-from-home revolution. There are also hybrid schedules, where companies have employees come to the office just a few days a week. The accommodation grew out of the Covid-19 pandemic, during which workers grew accustomed to wielding video tech in lieu of in-person meetings.
“We’re trying to reduce our own footprint for those reasons,” says James Caruso, chief financial officer at pharmaceutical and health care marketing firm J. Knipper and Company. That’s currently the norm among middle-market companies like J. Knipper, he explains. “They focus on the core business and don’t want the risk of owning real estate.”
Lately, Google and its ilk are propping up the commercial real estate sector in their own way: opting to own rather than lease. “If they need the space,” Caruso notes, “it makes more sense to buy now than lease later when there’s higher demand.”
A similar trend has taken hold in China’s commercial real estate market, where Big Tech firms are managing stratospheric growth. Alibaba, Tencent, ByteDance, JD.com and Kuaishou last year employed 500,000 workers needing around 6 million square meters of office space. This year the companies have been hiring; they’ll add an estimated 320,000 employees, based on current trends.
Chinese tech firms have also been buying rather than leasing. At the end of 2020, ByteDance announced it would spend about $1.6 billion for new Beijing offices, having just purchased one building for about $780 million. Alibaba Cloud is planning to spend about $31 billion to build super data centers over the next three years.
This flurry in activity isn’t exclusive to tech firms, though. In Europe, the Middle East and Africa (EMEA), publicly traded companies as of 2021 own land and building assets valued at $1.8 trillion—up 35% from 10 years ago. The ranks of top landowners among publicly traded companies are dominated by automotive and energy-related businesses. They include Saudi Aramco, BP, Royal Dutch Shell, Norway’s Equinor, and France’s TotalEnergies and Electricite de France, in energy, and in autos, Volkswagen, Daimler, Renault and Dutch parts-maker Stellantis.
Still, it’s the tech giants, already cash-rich before Covid-19—and even richer after—that seem most acquisitive. In early 2020, Seattle-based Amazon agreed to take the former Lord & Taylor headquarters off WeWork’s hands for $978 million. WeWork had acquired the midtown Manhattan landmark in 2017 for $850 million.
Facebook, which occupies over 3.2 million square feet of space in New York City, has similar square footage in the Seattle area, including its 400,000-square-foot campus in Bellevue, Washington, which it recently purchased for $368 million. The Menlo Park, California-based social media company is currently looking to add another 300,000 square feet to its New York holdings. Apple just spent $450 million to purchase five office buildings that it had been leasing in Cupertino, California.
“Much of the sector is gearing up for a hybrid return to office early next year, so employers are now planning what that will look like, including how workspaces will be used and who’s expected back in them,” says Julie Samuels, founder and executive director of technology-industry network Tech:NYC. “To purchase over lease shows a long-term commitment to the city and its talent.”
Amazon and Alphabet are, respectively, second and third to Walmart among the top 10 US corporate landowners as ranked by S&P (S&P does not include real estate or financial firms in its ranking). Rounding out the rest of the list are Microsoft, AT&T, McDonald’s, Intel, Target, Verizon and Home Depot.
Expect this trend to continue in 2022—as long as coffers are full and debt remains cheap. According to S&P Global Market Intelligence, publicly traded US companies currently own land and buildings valued at over $1.6 trillion. “Buying diversifies their portfolio and guarantees them that they will always have a prime location to attract prime workers,” says Martin Eiden, a real estate broker with Compass in New York.
The current trend is a turnaround from 20 years ago, when many businesses sold their properties and leased them from the new owners. Leasing was seen as more efficient, while selling off property represented an income opportunity—albeit a short-term one. “This was done to boost quarterly earnings,” Eiden says. “Huge mistake.”
So long as urban property values remain high, acquiring an office allows a company to deploy substantial cash reserves into a traditional asset class. Plus, tech companies rely on the “creative brainstorming and mentoring” that was significantly diminished during the work-from-home era, Eiden explains. “Also, company culture is not able to be carried out via Zoom.”
In the US, leasing deals will likely continue to plummet, according to research by commercial real estate services and investment firm CBRE. The firm discovered that, in the US, total office-leasing activity decreased by 36% year-over-year in 2020. Within the tech sector, leasing was down by 48% to 26 million square feet. The “office sector,” meanwhile, had the largest share of total investments (26%) in the first half of 2021 (followed by industrial at 22% and multifamily at 20%).
“There is a surplus of capital trying to deploy in real estate right now, partly due to low bond yields but also due to the need to hedge against inflation,” says Richard Barkham, CBRE global chief economist.
China’s giants aside, leasing is popular among Asian tech firms. Colliers estimates that the tech sector accounts for 20% to 25% of such demand in APAC. In Singapore, tech companies have been active in leasing to take advantage of a Covid-19 induced decline in commercial rents and to use the city-state as a base from which to expand into Southeast Asia. Tencent has taken on 10,000 square feet of office space there, while ByteDance has acquired 160,000 square feet as of August. Still, there has been demand for development sites over completed assets in APAC, Colliers notes, suggesting long-term planning. Tech companies acquired nearly $10 billion in APAC real estate assets during 2020, a fivefold increase over 2016 levels, according to Colliers.
Meanwhile, the return to the office is more advanced in APAC and EMEA than in the US, Barkham adds. “We expect this to pick up in the States over 2022, when the return to the office gains pace.”