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Is Employee Housing Far-Fetched? What is Google up to now? November 22, 2010

Posted by Bob Cook in Company Case Studies, Corporate HQ, Financial Planning & Analysis, Real Estate Markets, Silicon Valley.
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Ask virtually any corporate real estate exec whether it makes sense for his company to provide housing for its employees, and you’ll get a dismissive “we don’t do that”.  So sums up conventional wisdom on the subject.

Now, it is true that some companies have provided housing for manufacturing employees in China where workers expect to receive it, but most U.S. companies now tap Chinese labor through contract manufacturers like Foxconn (infamous for its worker housing), so few provide housing themselves. 

And while it’s true that companies have in the distant past provided worker housing domestically, for example in Pullman which was built by the Pullman Sleeping Car Company way back in 19th Century Chicago, few companies provide employee housing today.   The exceptions are lumbering and mining operations and resorts, remote from existing housing.  Most companies, though, are located in urban areas with plenty of housing available, and in most cases, it makes sense for companies to rely on the “the invisible hand of the market” to provide housing for workers.   This is the conventional wisdom.

But, what kind of unconventional situation would make this conventional wisdom not wise?

And what is secretive Google planning for the Googleplex, its headquarters complex in Mountain View CA, where it has been reported it may build housing?

And are the two questions related?

Last week, the San Jose Mercury News reported on how “Google’s growth online [is] reflected by [its] expansion in Mountain View”.  The Merc revealed that Google may be building housing as part of its 1.2-million-square-foot expansion of its present four-million-square-feet of real estate holdings in Mountain View.  Previously TechCrunch and others had reported that Google was pushing the City of Mountain View to allow more residential and retail development in the vicinity of its campus … evoking visions of a “Googletopia” … so news of Google building housing is not surprising.

What exactly is Google up to, though?  One of the Merc’s sources says that as much as 120,000 square feet of residential could be built in the new campus development Google is planning … and “that would be the rough equivalent of 60 homes of 2,000 square feet”.   My thoughts on the math:  while the arithmetic is technically correct, it just doesn’t add up.

What on earth would Google want with 60 homes?  It’s not a number that would make a dent in Google’s ability to house its local employees … which the Merc estimates to be around 17,000 … and why would Google want the headache of deciding who should be allowed into such plum housing?  (A 2,000-square-foot house might not sound like much, but in Silicon Valley, that’s actually a pretty big home.)

Here’s what might make sense, though:  Google builds dormitories.  Google could squeeze as much as 400 dorm units (think small “nerd capsules”) in that 120,000 square feet.  While not enough to house a large percentage of its workers, it’s big enough to be noticed and plenty large enough to serve as a pilot to see if building and owning more dorms might make sense.  This is why it might …

Each month, Google hires a raft of twenty-somethings … many straight from university life, many from overseas … and many don’t want to live in the houses or two bedroom apartments that the market provides.  Why should they?   They don’t need kitchens; Google feeds them for free.   They don’t need space; they spend most of their waking hours at a desk.  They don’t need family rooms; they don’t have families … they’re nerds (which, BTW, today, is a complement … at least in Silicon Valley).  And they certainly don’t need to spend a lot on rent; it’ll be a while before their stock grants and options vest. 

Furthermore, these are not, of course, conventional people Google is hiring.  These are the cream of the crop.  They’re the people other companies oogle, and competition for them is the reason Google just announced it is raising salaries 10% across the board.  Providing these people with dorms on campus would be a great recruitment and retention tool.  With dorms, maybe the next salary increase would only have to be 5%.

So, if the demand for dorms is there, why can’t “the market” provide? Where is the “invisible hand”?   Zoning is the problem.  Two reasons.  The first has to do with geography.  The zoning in Mountain View has heretofore envisioned non-residential uses on the Google side of “the 101”, the U.S. highway that separates recreational, commercial, and aviation uses from the more residential, neighborhoody part of Mountain View.  A private developer would not be able to build a dormitory near Google’s campus… let alone right on it.   The second reason is that zoning in Mountain View and all the surrounding communities tends to limit the number of dwelling units that can be built on a site, either explicitly as a “DU per acre” limit or implicitly because of the physical and economic practicalities of providing the required parking.  Developers, therefore, being dictated how many units they can build, develop large and luxurious units which allow them to more easily recoup their high-Silicon-Valley land costs.  While some cities force developers to build some affordable housing as a condition of gaining their entitlements, the zoning still applies such that dorms are not in anyone’s product line.

So, the “invisible hand” isn’t working:  Googlers want dorms (or so one would think), but developers can’t get the zoning and, even if they could, couldn’t afford to build dorms.  Google wants to make the Googlers happy, but can’t rely on the market.  Google does, though, have influence over zoning (by virtue of being Mountain View’s biggest employer), and so could  act on its own if it wants dorms for its employees.  It certainly hasn’t been shy about providing Googlers with the good life on campus … from free gormet food to massages to pool tables to swimming pools.  Will it build housing?  The situation is unconventional enough to make conventional wisdom unwise.

Now … to be clear … there has been no announcement, as far as I know, that Google is going to build a dorm, and I have no insider knowledge to that effect.  But … putting two and two together … what do you think?

And if Google is not going to build dorms, maybe some of those other companies who are oogling the Googlers should think about doing so.

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