By Eliot Brown
Some of Silicon Valley's biggest companies are on a real estate
buying binge, paying premium prices to make sure they have enough
space for future expansion.
Facebook Inc. is the latest to dive in, agreeing last month to
spend $395 million for Menlo Science and Technology Park, a jumble
of 21 low-slung warehouses and office buildings 30 miles southeast
of San Francisco. It's now home to an orthopedic surgical tools
company, a supermarket distribution center and a storage facility
for an office-furniture company.
"We're going to grow over time," said John Tenanes, head of real
estate for the social-networking giant, whose headquarters are
across the road. "We just want to be prepared when that
happens."
In 2014, Google Inc. paid more than $1 billion to buy at least
19 properties in Silicon Valley, ranging from warehouses near its
headquarters in Mountain View, Calif., to a 935,000-square-foot
office portfolio in nearby Redwood City, according to property-data
firm Real Capital Analytics LLC. In all, it has spent more than
$2.5 billion on property in the area since 2005.
Last week, the company revealed its plans for some of that
property: a flashy new 2.5 million square foot headquarters to be
built in a series of futuristic glass bubblelike buildings. A
Google spokeswoman said the acquisitions are part of a broad
strategy to meet the needs of the company's growth over time.
The companies' newfound hunger for real estate offers a glimpse
into their remarkable ambitions for expansion. Google reported it
grew by about 5,800 employees world-wide in 2014, bringing the
total to 53,600. Facebook boosted its head count by 45% last year
to 9,199, growth it expects to continue.
The real estate buying, known as land banking, is being done in
part to give the companies breathing room as they add employees.
But it is also a way to grab property before the market gets more
expensive as well as to fend of rivals from planting flags in their
backyards.
"It's a race for space," said Jed Reagan, an office market
analyst at Green Street Advisors. "A lot of these companies are
growing like crazy and the Silicon Valley and San Francisco markets
are getting very tight." It is driven, he said, by "a very bullish
view of the world."
The flurry of acquisitions is reshaping the landscape of the
competitive world of Silicon Valley property, with tech companies
often out-competing the developers and investment firms that
traditionally dominate the sector. The average price paid in 2014
for an office building there was a record-high $329 a square foot,
up from $299 in 2013 and $190 in 2009, according to real estate
services firm DTZ.
The tech giants have a leg up on developers and investors
because they can tap their enormous piles of cash. They are happy
to buy property now and then collect rent, perhaps for years, while
they plot their expansions. Google, for instance, reported holding
$64 billion in cash at the end of 2014.
"You don't want to find out that Google is competing on a
building you're trying to buy--it's that simple," said Michael
Covarrubias, chairman of the Silicon Valley and San Francisco
developer TMG Partners.
But there is a risk for the tech companies: Land banking could
leave them with portfolios of unnecessary and less valuable real
estate in the event of a downturn. A cautionary tale can be found
in the dot-com era, when Silicon Valley and San Francisco companies
raced to lease space for their planned exponential growth. When the
bubble burst, they were left with expanses of unnecessary office
space, and a sublease market in which rents had plummeted.
At Facebook, the current focus is building a Frank
Gehry-designed office building just to the west of Menlo Science
and Technology Park, which will serve as its new headquarters when
completed later this year. Also in its land bank is a 59-acre
property it bought last year adjacent to that project.
Over in Mountain View, LinkedIn Corp. in December paid $79
million for a small industrial park it plans to later develop.
LinkedIn didn't respond to requests for comment.
In San Francisco, business-services firm Salesforce.com Inc. in
November agreed to pay $640 million for a 41-story tower next to
two under-construction skyscrapers where it has leased offices. A
Salesforce.com spokeswoman said the deal ensures it can continue to
expand in the area.
One notable exception to the buying spree: Apple Inc. It was
most active half a decade ago when it spent more than $430 million
on land in Cupertino, Calif. Now, the company is constructing is
its giant circular headquarters dubbed the Apple "spaceship." It
didn't make any Silicon Valley purchases in 2014 tracked by Real
Capital. Apple didn't respond to requests for comment.
Another driver of the buying is tech companies' weariness of
leasing from traditional owners, who can make it harder to add
modern amenities many firms want.
"The list of things you want in there is long, such as being
able to have food trucks, bike storage, dogs, child care,
rock-climbing walls," said Stephen Berkman, a real estate lawyer at
Paul Hastings LLP whose tech clients include Facebook and
Salesforce.com. "We can negotiate a lot of that stuff, but...all
things being equal, from a control perspective, it's just better to
own."
In Salesforce.com's new headquarters it is leasing from Boston
Properties Inc., the company is allowed to have a day care, a
wellness center and bike storage, according to a copy of a lease
filed with the Securities and Exchange Commission. But it is
restricted to a maximum of 10 "nonaggressive, fully domesticated,
fully vaccinated dogs," according to the lease.
Also at play is an effort to keep employees clustered near each
other.
Mr. Tenanes, of Facebook, said the company believes employees
gain ideas "working adjacent, next to each other, collaborating,
communicating," so it needs to have its offices close by, with
workers bumping into each other on sidewalks.
Now the question for Facebook is when it will need to
expand.
"It could be a five- to 10-year play," he said.
Access Investor Kit for Apple, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0378331005
Access Investor Kit for Facebook, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US30303M1027
Access Investor Kit for Google, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US38259P5089
Access Investor Kit for Google, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US38259P7069
Access Investor Kit for LinkedIn Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US53578A1088
Access Investor Kit for salesforce.com, inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US79466L3024