By Konrad Putzier
The biggest U.S. tech companies are providing a jolt to the
slumbering commercial real-estate business, emerging as major
tenants and acquirers of office and other space while many nontech
firms are trying to tear up their leases.
Five of the biggest property owners in the tech industry --
Amazon.com Inc., Facebook Inc., Apple Inc., Google parent Alphabet
Inc. and Microsoft Corp. -- together occupy around 589 million
square feet of U.S. real estate, according to CoStar Group. That is
more than all of the office space in New York City, or the
equivalent to about 220 Empire State Buildings. It marks a fivefold
increase from a decade ago.
Tech's soaring real-estate demand has been mostly a boon for
cities and towns, though it has also fueled some concerns over
rising rents and gentrification. Big Tech's arrival usually brings
an influx of well-paid employees and fills city coffers with
property-tax revenue. Their presence has had a positive knock-on
effect, helping boost retail, restaurant and other businesses.
While Facebook, Microsoft and Google have said they would
support working from home beyond the pandemic, that hasn't appeared
to have dulled their appetite for warehouses, data centers, retail
stores and even more office space. This year alone, the five tech
giants have expanded their real-estate footprint by more than a
quarter, their fastest rate over the past decade.
Other industries expanded aggressively in the past, such as
financial services in the early 1980s or manufacturing companies in
the 1960s, but brokers say there is no precedent for Big Tech's
impact on property markets.
"This is maybe the best opportunity that ever existed in the
real-estate industry," said Roy March, chief executive of
real-estate investment bank Eastdil Secured LLC. "I don't think
we've ever had this kind of demand that's being driven out of a
sector since the invention of the internal combustion engine."
Big Tech's demand reflects how fast these companies continue to
grow, the treasure trove of cash at their disposal, and recently
discounted prices throughout the commercial-property market because
of Covid-19.
Their hold on the real-estate market mirrors their dominance of
social media, web searches, online advertising and e-commerce.
These five companies also help propel the stock market, where they
account for a significant share of the S&P 500 index and played
a key role in its surge from a March low.
The pandemic has only made these firms more dominant in real
estate. While most other companies are holding off on property
transactions amid uncertainty over the economy and the rising
popularity of remote work, Amazon, Facebook and its peers continue
to lease and buy space.
"We believe that post-pandemic we will ultimately return to
doing a majority of our work in the office," said John Schoettler,
Amazon's vice president of global real estate and facilities. "We
believe that much of the best work that we do is done in the office
where employees can come together, work together to solve problems
and be collaborative."
That dominance is also causing anxiety. The industry's impact on
apartment rents has made cities less affordable for many longtime
residents. That has turned Big Tech into a boogeyman for
anti-gentrification activists.
In 2018, Google backed out of plans to open a campus for tech
startups in Berlin's Kreuzberg neighborhood following protests that
the tech company would drive up apartment rents. A few months
later, Amazon canceled a deal to open a huge office campus in Long
Island City, N.Y., after a similar backlash from local residents
and some politicians.
The five tech companies have pledged to invest billions into the
creation of affordable housing, but the sums are far too small to
offset their impact on apartment rents.
What makes tech different from other industries that have rented
lots of office space is how much real estate it has bought or
built.
Alphabet owned $39.9 billion in land and buildings as of
September, not including properties under development, according to
a filing with the Securities and Exchange Commission. That is up
from $4 billion a decade ago. Amazon owned $39.2 billion in real
estate at the end of 2019, up from slightly more than $1 billion in
2010.
In buying rather than leasing, tech companies can put their huge
cash reserves to use and avoid having to deal with landlords. They
also get to profit from the growth in property values that their
presence creates.
Google's first big real-estate bet came in 2010, when the
company bought an office building in Manhattan's Chelsea
neighborhood for $1.8 billion. The purchase marked the end of New
York's real-estate market crisis and sparked a yearslong boom in
prices, said Douglas Harmon, chairman of capital markets at Cushman
& Wakefield, who brokered the deal. The company has leased more
office space in the area and bought another nearby building for
$2.4 billion.
Thanks in part to Google's expansion, the area's office rents
and apartment prices grew faster than the Manhattan average over
the past decade. Employees started looking for apartments within
walking distance from work and helped attract shops and high-end
restaurants.
"Technology tenants tend to create ecosystems, just like
financial services tenants did when they dominated skylines around
the city," said Michael Turner, president of Oxford Properties
Group, which last year leased to Google an office building in
nearby Hudson Square.
Tech's impact on real-estate markets isn't confined to big
cities. Pryor, Okla., population around 9,000, is home to one of
Google's biggest data centers and the company is spending $600
million to expand it.
Local real-estate agent Karla Meislahn estimates she has sold
about 35 homes to Google employees over the years, while
construction workers building the data center are filling rental
units. Typical home prices in the county have grown almost 40%
since early 2011, according to Zillow Group, with Google's
expansion playing a notable role.
In Washington, D.C.'s Virginia suburbs, the government and its
many contractors were once the biggest source of new demand for
real estate. Then, in 2018, Amazon announced plans to build an
office campus for up to 25,000 employees in Arlington. Facebook and
Microsoft have also announced plans for the area.
Tech companies are now the area's biggest source of new
real-estate demand and are driving up home prices, said Victor
Hoskins, head of the Fairfax County Economic Development
Authority.
"The closer you get to the Amazon campus," he said, "the higher
the spike."
Write to Konrad Putzier at konrad.putzier@wsj.com
(END) Dow Jones Newswires
November 24, 2020 05:44 ET (10:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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