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Google Buying New York Building? October 27, 2010

Posted by Bob Cook in Company Case Studies, Corporate HQ, Financial Planning & Analysis, Lease Accounting, Silicon Valley.
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Follow-up regarding story below:  On December 3, 2010 it was reported by the WSJ and others  that Google has, in fact, contracted to buy the building at 111 8th Avenue Building.  An interesting post on how this tech-laden building is emblematic of New York’s important role in the geography of the internet age was published by Globe St and you can see it here. 
 
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In a previous post I laid out the reasons why it makes sense for companies to buy their headquarters:  low prices in today’s market, low corporate borrowing costs, large amounts of cash on hand, and the forthcoming new lease accounting which will take away some of the financial-statement advantages presently enjoyed by leasing versus owning.  I had referred to recent HQ-acquisitions by Northrop Grumman and others and concluded the post with “more are yet to come”.  That logic applies not just to headquarters buildings, but to any large, strategically important building in a company’s real estate portfolio. 
 

111 Eighth Avenue

$2 Billion Purchase

Today, the New York Post announced that “Google appears close to buying the trophy 111 Eighth Ave. building, one of the largest buildings in Manhattan.”  The 2.9 million-square-foot building is rumored to have a price tag of close to $ 2 billion.  A big number, but well within the capability of Google, which is a cash-generating money machine.   Lately, it’s been generating more than $2 billion quarterly in free cash flow … so it could pay for this building with the cash generated in just three months.

Google needs New York

While this isn’t Google’s headquarters, it is one of its largest engineering centers outside of the Googleplex in Silicon Valley.   In 2006, the New York Times reported that it was the largest and … if that is still not the case … it undoubtedly is the most important Google site outside of Silicon Valley.   New York is the center of the world’s advertising industry, and that’s the industry that makes Google rich.  Google needs to be in New York to access that industry and, equally importantly, to feed off the energetic frenzy of the Big Apple.  It’s likely to need a large New York presence for a long time… an imperative in deciding to buy versus lease.

So… the purchase of 111 Eighth Avenue, if it is to be, appears to be the result of the perfect storm:  Manhattan office prices are at historic lows, Google’s got oodles of cash, and the property is strategically important.  The purchase is of interest, though, for other reasons, also.  It exemplifies bold strategic planning moves on both the part of a tenant, i.e. Google, and a landlord.

Perfect building for Google

The 111 Eighth Avenue Building is so big it actually has multiple addresses … one on each side of the building, which covers an entire city block.  Those big floor plates … greater than 200,000 square feet … make the building perfect for Google.  The bigger the floor, the more room there is for scootering around, literally.  The big floors allow Google to recreate the office environment and culture it has in California.  Also making the building a good match for Google is the fact that, according to DataCenterKnowldege.com, it “is also one of the most wired carrier hotel properties in New York, and a key intersection for the Internet’s largest networks”.  One wonders if some game-changing utilization of this capability is in Google’s plans. 

A Prescient Building Owner

One also wonders if Taconic Investment Partners, owner (and presumably seller) of the building was  particularly prescient or just lucky.  Back in 1998 when it bought the building, conventional thinking had it that big, deep floors with space far from the window line are undesirable to office tenants.  Lawyers, investment bankers, advertising account execs… they all want window offices.  Did Taconic know when it “implemented a complete repositioning plan including vacating the printing and warehouse tenants to assemble large blocks of space” that companies like Google would come along for whom the large floors were ideal?  Remember, Google was just founded in 1998.

Google’s Ambitions

Google’s ambitions for the building are unknown.  Presumably, though, it envisions expanding in the building bit-by-bit as it expands its New York office.  Google’s website today lists about 140 positions available in New York.  They’d need 30 K to 40 K square feet to accommodate those folks.  Back in January, it leased an additional 57,000 square feet to add to the 270,000 square feet it initially leased in 2005; one report puts Google’s present occupancy at 500,000 square feet  … still just a fraction of this huge building.  No one knows how much space Google might eventually occupy.  The company’s ambitions, though, seem limitless.  Making such a large investment might portend more than a desire to secure office space in Manhattan.  DataCenterKnowledge.com reports that the building “houses major data center operations for Digital Realty Trust, Equinix, Telx and many other providers and networks”.  Could the building become the center of the “parallel internet” some think Google wants to build?  The potential building purchase is sure to provide fuel for the conspiracy theorists and makes for great “Google watching”.