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“We’ve come up with a design that puts 12,000 people in one building” June 9, 2011

Posted by Bob Cook in Company Case Studies, Corporate HQ, Green Initiatives, Profession of Corporate Real Estate, Silicon Valley.

It’s not often that a CEO of a major company makes a presentation to City Council on company plans for a new headquarters building.  But Apple is no ordinary company, and Steve Jobs certainly is no ordinary CEO.  He’s not afraid of being accused of having an “ediface complex” — a concern that afflicts most other CEO’s and which is responsible for the declining quality of architecture as it relates to corporate headquarters buildings, IMHO.  No, no one is going to challenge Mr Black Turtleneck, Mr Cool, himself, on this one.

It’ll be interesting to see if Jobs’ new Apple HQ announcement spurs imatators … just as has been the case with the iPod, iPhone, and iPad.  Will it become ok, again, to build iconic HQ’s? 

See Jobs’ presentation to Cupertino’s City Council here:  http://www.youtube.com/user/cupertinocitychannel#p/u/0/gtuz5OmOh_M

2011: Year of the Rabbit …. and Decade of the Corporate Real Estate Exec February 13, 2011

Posted by Bob Cook in Alternative Workplace Strategies, Corporate HQ, Financial Planning & Analysis, Green Initiatives, Lease Accounting, M & A Integration, Profession of Corporate Real Estate.

This Thursday ends the 15-day Chinese New Year Celebration.  According to the Chinese Zodiac, we’re entering the “Year of the Rabbit”.   We may also, though, be entering the “Decade of the Corporate Real Estate Exec”, the decade in which corporate real estate execs rise to truly strategic roles in their organizations.

The year 2011 will usher in an era of increased responsibility for corporate real estate professionals.  Events playing out this year will put corporate real estate executives, their staffs, and their advisors front and center.  The spotlight will be hot, but rewarding … for those ready to perform.

Leaving the oughts behind

With a name like that … “the oughts” … we should have known the decade from 2001 through 2010 was going to be tough.  Slashing budgets, laying-off people, constantly explaining why the company still has too much space:  it was not the best of times for corporate real estate folks. 

To be fair, the oughts did have their fun moments:  implementing alternative workplaces, expanding into China and India, building solar-power arrays, planning next-generation data centers.  But while these activities were sometimes high-profile (in the sense of “gee-whiz”, isn’t this cool), for the most part they tended to be tactical activities in service to specific divisions or functions … away from the central concerns of headquarters.  They did, however, help raise the self-image of corporate real estate professionals who no longer are satisfied with a backstage, custodial role.  Most are ready to perform on stage.

The good and the bad

So, if you’re in corporate real estate, how will 2011 differ from the past?

Good News:  You won’t be tasked to slash your budgets; corporate profits are doing just fine and executive management is now focused on growth rather than contraction.   You won’t be consolidating (unless your company buys another company to integrate); you’ve already done your consolidations.  And you won’t have to lay off any more of your staff; thank God, that’s over … or at least it is if you avoid being on the “losing end” of a Merger.

Bad News:  Some of you may lament, though, that some of the things that were fun in the past won’t be on the agenda in 2011:  You won’t be constructing many new buildings; we have enough of those for a while.  You also won’t be building out much space inside your buildings because you probably have built space you’re still not using.  You won’t be flying across oceans looking for new space; globalization is taking a breather while companies wait for worldwide demand to catch up with worldwide capacity.  And you probably won’t be doing a big outsourcing; where outsourcing makes sense, you probably already have.

The shape of 2011 and the decade to come

The Year of the Rabbit, CY2011, and the coming decade will bring a new world shaped by these forces: 

  • cash hoards at leading companies in a “winner-takes-all” economy
  • attractive real estate markets  from an occupier’s perspective, for at least a few more years in most locales and indefinitely in some
  • new advances in “green technologies” and lowering prices due to competition
  • the establishment of a new lease accounting standard
  • strained budgets at all levels of government

The New Agenda

This world will bring those corporate real estate professionals who are ready for the stage closer to the core of their companies’ businesses.  The new corporate real estate agenda for the “Year of the Rabbit” and beyond:

  • Acquisition Integration
  • Balance sheet Management
  • Corporate Citizenship
  • Design & Management of Processes
  • Employee Retention and Recruitment


Acquisition Integration.  Most leading companies are sitting on cash hoards and have large borrowing capacity, setting the stage to make the year 2011 record-breaking in terms of M&A activity.  Corporate real estate execs will play key roles in integrating acquired companies, as they have been, but those, savvy enough to grab the opportunity, will engage beyond managing cost-saving consolidations.  They will take a leadership role in managing the “soft art” of cultural integration. Corporate real estate execs have an opportunity to address a vexing problem: most M&A’s are unsuccessful.  Most experts think the obstacle to success is cultural incompatibilities.  By simply extending corporate real estate’s responsibilities from the physical environment to the social environment and thinking of themselves, not as “facility engineers” but, as “social engineers”, corporate real estate execs can … and should … take on the challenge of successfully merging cultures to achieve M&A success.

Balance Sheet Management.  All that cash and borrowing capacity at leading companies are going to make real estate central to discussions about financial structure.  Companies need to decide whether they should continue to retain all that cash (something that stockholders don’t like), pay down debt (something that has probably already been done if the company has a lot of cash), give cash to shareholders via stock buybacks or dividends (something that company managers don’t like because they want to keep money for a “rainy day”) or spend it (something that certainly cannot be done foolishly.)    It turns out that spending cash to buy company facilities bridges these concerns: it keeps wealth in the company in a way that can be turned into cash if needed, earns more than cash-equivalent investments, and can often support business operations better than can leasing property.  Real estate is, thus, destined to become important in discussions about a company’s financial structure, particularly over the next few years while an “occupier’s market” reigns and purchases can be made cheaply.  Also entering the discussion will be the new lease accounting standard that will transform the balance sheets of many companies and bring real estate strategy (own vs lease, lease duration, utilization) even further into discussions about company financial structure.

Corporate Citizenship.  Our governments are broke (to use an imprecise but, I think, meaningful term.)  Corporates will be called upon to pick up the slack … either forcefullly by regulation or voluntarily… and they will have to get serious about social and environmental responsibilities.   Federal and state governments can’t afford tax breaks for energy-savings and environmental-protection so companies will be expected to beef up their sustainability programs.  While technological advances may improve the ROI on energy-saving and environmental-protection investments, companies will be expected to make these investments even where there’s no payback.  As for local governments, they can’t afford redevelopment programs so companies will be expected to participate in urban revitalization projects, even when no subsidies are available.  There may even be a return to the civic-mindedness of the 1960’s when corporations built their headquarters with plazas to serve as centers of their communities.  Corporate real estate professionals will be managing much of this good corporate citizenship.

Design & Management of Processes.  As the role of corporate real estate execs migrates towards the center of the company, execs will find themselves spending less time on implementation and more time designing and managing processes to lead, coordinate and govern the implementers, who will increasingly be outsourced providers.  Acquisition integration, for example, requires processes to plan consolidations, account for them, and track implementation status.  Another example: the new lease accounting will require SOX-compliant processes to record leases in a timely fashion, abstract them accurately, and (if the present proposal holds) make quarterly assumptions about their likely lengths, contingent rents, and service components.  All these processes will have to be integrated with processes of other functions … HR, IT, Finance … intertwining corporate real estate with other key functions and making it integral to how the company works.

Employee Retention and Recruitment.  Despite the fact that unemployment is still stubbornly high, competition for top talent is severe.  As product design, marketing, supply chains, financing, and the art of management, itself, becomes more sophisticated, the winning of the competition for sophisticated talent is becoming more and more important to company success.  If you have the best talent, you can create the best products, the best marketing, the best cost structure, etc. … the things that allow you to easily win the competition for customers.  And what attracts talent?  Money helps, but ultimately, it’s about the work environment.  Here again, corporate real estate execs can play an important role by using their command over the physical work environment to help mold the social work environment that will determine how successful their company is in retaining and recruiting talent.

It is a new year:  “Year of the Rabbit”. 

Will it be a new decade:  “Decade of the Corporate Real Estate Exec”?

Facebook taking Sun headquarters? Schumpeter’s creative destruction at work. January 5, 2011

Posted by Bob Cook in Company Case Studies, Corporate HQ, Financial Planning & Analysis, Silicon Valley.
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Economist, 1883 - 1950

Joseph Schumpeter, Economist, 1883 - 1950

The Mercury News reported yesterday that Facebook is close to buying the former Sun Microsystems headquarters in Menlo Park CA for its own.

It’s all part of economist Schumpeter’s “creative destruction”.  With innovation, there are those who rise and those who slide.  Over the last decade, Facebook has risen, Sun has slid.

Sun built its million-square-foot Menlo Park campus during the dot-com boom of the late 1990’s (remember that?), back when its Unix-based servers sizzled and allowed Sun’s boastful advertising slogan: “We’re the dot in dot.com”.   Sun even built a couple more million-square-foot campuses in Silicon Valley and made one its official headquarters address.  The Menlo Park campus, though, was never displaced as home of executive management, and it continued to be the “real” headquarters until “the end”. 

“The end” began when the internet boom busted and, as the IT market moved away from Unix, Sun’s revenues busted even more.  Last year, the remnant of the once-proud company was bought by Oracle for $7.4 billion, a paltry sum given Sun’s much-loftier market capitalization ten years earlier.   Sun’s management is largely gone.   When Oracle closed the purchase, Sun’s last CEO Jonathan Schwartz famously haiku’d: “Financial crisis/Stalled too many customers/CEO no more“.  Oracle whose headquarters campus is down “the 101” about 10 miles, apparently, figures it can do without the old Sun headquarters.

As Sun has slid into the tech horizon, Facebook has risen towards the tech heavens.  Founded only a few years ago, in 2004, with a handful of employees, the company now has about 2,000 workers … still small compared to the nearly 40,000 that Sun had at one time, but other stats are superlative:  Its market cap is estimated to be about $50 billion … a staggering amount for a company that is still privately-held … and it claims to have 500 million users!  It even has a movie made about it.  Facebook’s trajectory is strongly upward, and undoubtedly it feels it will fill the former Sun headquarters, which can probably house at least 3,000 workers, in no time.  It’s earned the right to have everyone under one roof … to have its own campus.

A loser, a winner:  It’s the Schumpeter Way.

May the Christmas spirit be with you … and your company December 19, 2010

Posted by Bob Cook in Corporate HQ.
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My first experience with corporate real estate was when I was a child growing up in Pittsburgh.  Of course, I didn’t at the time think of it as having to do with corporate real estate, but in retrospect, I realize it was.

Every Christmas season my parents would take me downtown to see the Christmas decorations. My favorite displays were the animated scenes of Santa’s workshop in the windows at Horne’s Department Store.   I also, though, loved seeing decorations at all the big company headquarters.  I remember vividly a large Christmas tree in the big glass lobby of the Alcoa Building and a giant Christmas wreath over the gothic entrance of the Gulf Building.

I don’t get back to Pittsburgh at Christmas anymore so I don’t know if the Alcoa tree and the Gulf wreath are still traditions kept there, but I certainly hope so (… even though, I know, Gulf’s HQ isn’t in Pittsburgh anymore).  Those holiday displays were a way for the companies to give a present to the community each Christmas season.  It couldn’t have cost much, and it brought much wonderment.

I fear, though, that many, maybe most, companies have lost the Christmas spirit.  Few, today, contribute to holiday festiveness the way companies did in the past.   There are many reasons for this: multiculturalism, shareholder activism, bottom-line focus, suburbanization, globalization.   In this environment, it takes courage for a corporate real estate executive or any type of executive to authorize Christmas displays.   Those who do should be applauded.

I take heart in knowing that, in Pittsburgh, the Christmas spirit still seems to be alive.  This year, the community celebrated the 50th installment of Light-Up Night which kicks off the holiday season in “the ‘burgh”.  It’s now a two-day festival.  Downtown buildings keep all their lights on all night long, and yes, corporations participate: a 60-foot tree rises lit on PPG Plaza and the Pittsbugh Creche (a religious display, no less) sits prominently on U.S. Steel Plaza.

I hope the Christmas spirit is alive in your community …. and, if you have some authority, you do what you can to keep it alive in your company.   May the spirit be with you and yours.

We’ve Got Pop-Up Stores; How about Pop-Up HQ’s? December 15, 2010

Posted by Bob Cook in Corporate HQ, Financial Planning & Analysis.

T’is the season for pop-up’s. 

They’re everywhere.  Retailers have figured it out.  If you do most of your business at only certain times of the year … Christmas, Back-to-School, Summer Vacation … then why rent space all the other times?  There’s a lesson here for corporate headquarters.

The Pop Up Phenomenon

In early fall, Halloween stores appeared.   The chain of “Spirit Halloween” stores, for example, opened nearly 900 pop-up’s around Labor Day and kept them open through Halloween.   Then in November, Christmas gift stores began popping up.  Many examples here, but perhaps the most notable: Toys-R-Us opened over 600 “Express” stores this season and resurrected the “FAO Schwartz” name in the form of 10 pop-up’s in tony locations to serve the top (or you might say “over-the-top”) of the toy-buying  market.

Trendwatching.com takes credit for coining the term “pop up store” back in 2004.  As the examples on its website shows, the phenomenon isn’t just for Halloween and Christmas.  Pop-up’s pop up year-round.   They sell the gamut of merchandise … from designer clothes to gourmet food to cat snacks … and they’re run by all types of retailers … from small-time, one-timers like the Meow Mix Company … to big-time, part-timers like MTV … to big-time, full-timers like Target and JC Penny.  Pop up’s aren’t just for mom-and-pop’s anymore.

And they might not just be for retailers, anymore, either.

Entropy and the Corporate Headquarters

It used to be that all the folks “at headquarters” were, in fact, physically, at headquarters.   Not anymore.  In this day of specialization, getting the right person for a high-level position often requires ignoring geography.  If the best CFO-candidate is in Houston and he won’t move to headquarters in Atlanta, then give him a cell phone and VPN-access, and he’s good to go.  The same goes for middle-level managers and individual contributors where the competition for talent is strong.  As for the lower-end of the corporate hierarchy, those headquarters functions are more-and-more outsourced, off-shored, or near-shored.   When an employee calls “headquarters” to find out why his travel expense hasn’t been approved or what his HR benefits are or how he should connect his computer to the company’s main servers, those calls rarely go to anyplace one might think of as headquarters.   In fact, in the modern corporation, it’s often difficult to identify where headquarters is.  There’s no “there” there anymore.  “Headquarters” no longer has a physical connotation.

Where’s the center?

Yet, many think there is a need for some sort of center. … a place that symbolizes and embodies the company’s values, it’s soul.   If we’ve learned anything about corporate management over the last few decades, it’s that culture is important.  Read Good to Great.

For many companies, the center is now the company’s intranet.   That can work pretty well.  If you’re an employee, the homepage lets you know what’s happening around the company.  Video-on-demand lets you actually see the CEO talk about things he thinks are important.  And the use of social media … including that old-fashioned thing called “email” … allows employees at all levels engage in “water cooler” conversation, virtually.   This leads some to observe that the importance of physical place is dead.  But is it?

Different companies with different cultures answer this differently.   For some, a traditional corporate headquarters with “all hands on deck” might make sense.  For others, a totally virtual headquarters might be better.  For most, though, something in-between works.  But there’s a lot of terrain between the two extremes, a lot of room for different headquarters models and hybrids.

Why not a  Pop-UP HQ?

Consider a company that has headquarters personnel widely distributed  … perhaps globally.   It might have an address where some of the executive management and headquarters staff have offices, but it does not have anything like the traditional headquarters with most headquarters folks under one roof.  Company management feels a need for more face-to-face interaction across the headquarters staff.  Solution:  No need to lease a big corporate headquarters building; instead, have a pop-up headquarters a few times per year.

Now, many companies are already doing something similar.  Many have an “annual meeting” that takes place in a location like Las Vegas, where there’s an emphasis on building relationships via having fun.   It’s usually two or three days with a few convocations, maybe some training sessions, and a lot of golf and partying.

I’m talking, though, about something else.   I’m talking about creating a place, albeit temporary, that functions like a headquarters.  You don’t party at headquarters, and you wouldn’t at a Pop-Up HQ.  What happens at the Pop-Up HQ wouldn’t “stay there”.  What happens there … the sharing of stories, ambitions, insights, ideas … would build a culture that attendees would take back with them.

And the time at the Pop-Up HQ would not be structured around big presentations, training sessions, and the like.  That stuff can happen better on the intranet.  That’s not what happens at a headquarters.  Instead, attendees would meet with one another in groups of their own choosing.  Need to talk to the CIO?  This is your chance.  Need to know the real skinny on how a project is doing overseas, talk to the director in charge.   Need an impromptu meeting because of an issue that arose during a planning session earllier in the day, now’s the time to get all the folks together.

And the Pop-Up HQ would have to last a lot longer than a few days … and be more frequent than once-per-year.    You’d need at least a week; two would be better.  People need time to meet and then set up meetings based on the outcomes of those meetings.  As for frequency, quarterly feels about right.

Cost?  Certainly no more than renting and maintaining a headquarters building to house people who are rarely there.  Where?  Hotels, convention centers, and … if the phenomenon took root … empty (perhaps former traditional headquarters) office buildings that have been repurposed to serve as Pop-Up HQ’s.

Farfetched?  Maybe.   But two decades ago, the idea of loads of headquarters workers not being at headquarters would have seemed farfetched, too.

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.

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
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”.

What happens to Adobe’s HQ (and good citizenship) if Microsoft buys the company? October 12, 2010

Posted by Bob Cook in Company Case Studies, Corporate HQ, Silicon Valley.
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Rumors are still floating that Redmund-WA-based Microsoft might buy San-Jose-CA-based Adobe.  Rumors were set off by a New York Times blog last Thursday revealing a meeting between company CEO’s.   Adobe’s stock price soared more than 11% the day the rumor started.  It’s settled back a bit since then, but still lies above the pre-rumor price.

The purchase of Adobe would be huge.   First, the price … likely to be more than $15 B …  would make it one of the most expensive tech acquisitions ever … more than Oracle’s$10.3 B purchase of PeopleSoft, its $8.5 B purchase of BEA or its $7.4 B purchase of Sun Microsystems, more than Intel’s $7.7 B purchase of McAfee, and more than Cisco’s $6.9 B purchase of Scientific-Atlanta.   It would also be the most expensive acquisition ever by Microsoft, bettering its $6.3 B purchase of aQuantive. 

More importantly, though, from a Silicon-Valley perspective, a Microsoft purchase of Adobe would be the first purchase of a sizeable Silicon Valley company by an “outsider”.   How would an out-of-town Microsoft handle Adobe?  Would it treat it as a semi-autonomous subsidiary, getting the benefits of teaming up against Apple and Google but letting Adobe manage its own way operationally?  Or would it subsume Adobe into its folds, use the Adobe operation as a foothold to tap the Silicon Valley talent pool and just merge it into other business units … so that eventually the only remaining vestige of the company we-know-as-Adobe would be the .pdf  file extension?     (Not to overdramatize, but maybe this is what Scott McNealy, former Sun Microsystem CEO, was talking about when he said “it really is mankind against Microsoft … this is why I don’t quit … I don’t want to leave my children to a Microsoft-only world.”)

As for Adobe’s HQ real estate, it would be a shame if Microsoft … or any other out-of-town buyer .,. did not let the Adobe folks run independently and call the shots vis a vis the Silicon Valley real estate strategy.  For in this regard, Adobe has been a particularly good citizen … for San Jose, in particular, and, more generally, for the “green movement”.  It would be good to keep that good citizenship going.

So what has Adobe done to be a good citizen?  First, Adobe alone, among large Silicon Valley companies, has had the nerve to locate its headquarters in downtown San Jose … and in, of all things, a group of high-rise buildings!   A million-square-feet worth!  This seems to be anathema to other Silicon Valley companies where the de rigueur is to locate in low-slung, big-footprint buildings where it’s easy to roller skate from department to department.  Sure, these buildings have lots of roof space for solar collectors, but nothing compares, from an energy perspective, to being downtown.  High-density downtowns are much easier to serve with energy-efficient public transportation than are the Googleplex’s and the Googleplex-wanna-be’s that sprawl across the Silicon Valley landscape.  (Although, to be fair, Silicon Valley is much less sprawling than are business landscapes elsewhere; some might even call Silicon Valley “urban”.)  Downtown San Jose has light rail, good bus service, might eventually get an extension of the BART subway, and probably will even get a stop on the high-speed rail line going from S.F. to L.A., if it ever gets built.  Adobe deserves kudos for being downtown.

Adobe also deserves kudos for its efforts to “green” its HQ buildings.  Back in 2006 Adobe was one of the first companies to get its headquarters a LEED (Leadership in Energy and Environmental Design) Platinum certification from the U.S. Green Building Council.  A host of environmental-friendly measures were implemented from water-use efficiency to energy-saving lighting systems to avoidance of hazardous chemicals in building maintenance.  Adobe has even installed vertical wind turbines on its buildings to generate electricity … not a lot of it … but every bit helps.

And Adobe’s good citizenship extends beyond energy-savings and the environment;  it has also had its impact on San Jose’s art scene and the scenery of downtown’s skyline.  A few years ago it installed, at the top of one of its buildings, the Semaphore, an enigmatic art piece visible from miles away that emits a secret code (which has been cracked and turns out to be the full text of Thomas Pynchon’s novel The Crying of Lot 49.)  

How would things change with a distant owner whose performance metrics for its business units would  probably not include measures of good citizenship?  Would the Semaphore remain on San Jose’s skyline?  Would the vertical windmills be maintained so they generate electricity properly?  Would the Adobe operation be eventually moved to some low-rise buildings in a misguided effort to improve expense metrics?

It’s always sad when a hometown company gets bought by an outsider.  We’ll see if the purchase happens or not.   Outsiders have tried before to buy into Silicon Valley.  There was the failed attempt by Microsoft to buy Yahoo back in 2008 and an unconsummated deal for IBM to buy Sun Microsystems in 2009.  Even if the Microsoft deal does go through, though, Adobe might be too big for even Microsoft to swallow.   Microsoft might have to leave Adobe to operate on its own.  Whatever … let’s hope the Adobe windmills keep turning.

3Par’s lease cancellation option and the HP vs Dell bidding war August 24, 2010

Posted by Bob Cook in Company Case Studies, Corporate HQ, Financial Planning & Analysis, M & A Integration, Silicon Valley.
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Update 9/3/2010:  It appears that the bidding war for 3Par did happen.  After a number of volleys, it looks like HP is the winner.  Yesterday, 3Par accepted its latest offer, and Dell said it is withdrawing from the bidding.

According to the San Jose Mercury News, here’s how the bidding went:

Aug 16:  Dell and 3Par announce they have an agreement for Dell to acquire 3Par at $18 a share.

Aug 23:  Before the stock market opens, HP announces competing offer to acquire 3Par at $24 a share.

Aug 26:  3Par announces in the morning that Dell has countered at $24.30; HP raises to $27 after the market closes in the afternoon.

Aug 27:  3Par announces before the market opens that Dell has raised its bid to $27 and HP goes to $30 two hours later.

Sept 2:  3Par announces before the market opens that Dell has raised to $32 and that HP has countered at $33. Dell announces it’s withdrawing from the bidding an hour later.

Update 8/26/2010:  Yesterday, Dell matched HP’s offer for 3Par and 3Par has accepted it.  This does not preclude HP from making another bid, but reportedly there is a $72-million termination penalty that 3Par would have to pay if it didn’t close with Dell.  

It’s good entertainment watching the bidding for 3Par.  Dell offered $1.1 billion .. a full 87% premium over 3Par’s pre-offer market cap … and it looked like a “go” … until HP, yesterday, offered $1.6 billion.  Dell, reportedly, is preparing another offer.  It has quite a deficit to overcome … $400 million … but if it matches or betters HP’s offer, we might see an exciting bidding war. 

How the two companies perceive the overall value of 3Par is, of course, based on how 3Par’s product lines, technology, and talent could add value to their respective companies. When, however,  it comes down to the short strokes… when the increments between the bids are in the neighborhood of $100 million, $50 million, or even $10 million or less … that’s when those leading the acquisition teams will be looking for the not-so-obvious elements of value hidden in 3Par.  

When they look at the real estate … and they need look no further than 3Par’s 10-k … they’ll find a nugget.  3Par’s annual operating lease expense is about $2.5 milliion, but mostly from its 263,000-square-foot headquarters in Fremont CA (in Silicon Valley) for which it has the right to cancel the lease as of May 2011, albeit with a $1 million cancellation fee.  If the acquirer can move the 3Par operation to property they already have (and which is difficult to dispose given the depressed real estate markets), there’s hidden value in that right to cancel.

It looks like 3Par … when it amended the lease to include the cancellation provision … may have already been thinking about how it might look to a potential purchaser.  And it had good reason to think that a suitor might be from nearby …  with the acquisition-minded likes of  HP, Intel, Oracle, and Cisco all headquartered in Silicon Valley.

So, could the presence of this cancellation provision determine who wins the bidding war?  Maybe.  It depends on how short are the short strokes.

While it is difficult to estimate the extra value that could be garnered from eliminating some of 3Par’s real estate overhead, it is clear that the cancellation option most likely has more value to HP, which has lots of real estate in Silicon Valley where it is headquartered, than to Dell which is headquartered in Texas. 

As to how much value could be gained.. here’s my stab at quantifying it:  The annual expense that could be saved by eliminating the lease looks to  be on the order of $2 million.  There would be other savings to be had, though, from consolidating 3Par operations into the acquirer’s operations. Using a (very imperfect) rule-of-thumb for the  cost of housing an employee of around $10,000 per year … and assuming that most of 3Par’s 668 employees are at headquarters, the potential savings could be close to $6 million per year.  That savings would be eroded away by the costs of retrofitting space to accommodate 3Par and by the migration of some expenses (such as utillities) with the people, but a reasonable estimate of the annual savings possible from integrating 3Par into the acquirer’s facilities might be about $3 million, on a pre-tax basis.. That’s about $2 million, after-tax, virtually all of which would flow to the bottom line.  At a p/e ratio of, say, 10, that savings would be worth $20 million to shareholders.  Not a big number relative to the overall offer price of $1.5 billion, but maybe enough on-the-margin to help win the bid.  Depends on how short are the short strokes.

Addendum 8/26/2010:  Maybe the short stroke is the $72-million cancellation penalty.

It’s Time to Buy that HQ August 3, 2010

Posted by Bob Cook in Corporate HQ, Financial Planning & Analysis, Lease Accounting.
Tags: , ,

The ducks are all lined up: low prices … low borrowing costs … cash hoards … lease accounting.

I’ve previously posted an article on Northrop Grumman’s decision to buy its new headquarters. Reportedly, the new lease accounting influenced the decision, but other factors were undoubtedly also at play … probably the ones I just listed, above.

Perhaps never before has the time been more opportune for companies to buy real estate assets… and because purchasing makes most sense where long-term occupancy is relatively assured, HQ’s are obvious acquisition targets for companies. We may see a reversal of the trend towards leasing HQ’s that began in the 1980’s … when many companies became enamored with the cash they could raise through sale-leasebacks or leasing space offered by speculative developers.

If a company does not already own its HQ, now is the time to buy.

Low Prices

Office building prices are significantly depressed. According to the Moody’s/REAL Commercial Property Price Index (CPPI), prices have fallen to the levels of 2003/2004, which were themselves low relative to the prices around the turn-of-the-millennium. And the decline in prices might not be over. 

Many industry observers think prices are likely to fall even more as we near, over the next couple years, the maturity dates of a huge number of commercial real estate loans … many of which are underwater. National Real Estate Investor quotes Trepp LLC, a servicer of collateralized mortgage-backed securities: “The average loan-to-value ratio among 1,125 CMBS loans in a survey sample was a whopping 160%, up from 72.7% when the loans were securitized.”

Earlier this year, Standard and Poor’s issued a report titled “The Worst May Still Be Yet to Come for U.S. Commercial Real Estate Loans”, stating that “the decline in collateral values poses a difficulty for loans that need to be refinanced” and that “refinancing needs will be somewhat elevated in 2011 and 2012, although the bulk of them will not come until 2015.” 

And with the vacancy rate of U.S. office buildings at 7.4% … a 17-year high, there is little hope that these buildings with underwater loans will be generating enough NOI anytime soon to be able to cover debt service on new loans of the same amounts, even at today’s historically low interest rates. Without the ability to attract debt financing, office building prices are likely to remain depressed.

Low Borrowing Costs

And while the low borrowing costs are not going to be of much value to property owners facing the prospect of buildings being partially or wholly vacated, those low borrowing costs are very valuable to companies that become owner-occupants.

According to the Wall Street Journal, today’s rates on corporate bonds are “some of the lowest borrowing costs in history.” Corporations are already flooding the market with bonds, raising cash … sometimes probably without a clear understanding of how the funds will be used. The borrowing frenzy is not just among investment-grade companies. According to that same WSJ article, referring to last month’s bond activity, “This month has been the busiest July on record for sales by U.S. companies with junk-credit ratings.” 

Access to cheap funds available to corporates is going to make ownership very attractive … and the discrepancy between their ability to borrow cheaply and real-estate-investors’ inability to borrow much is momentous.

Cash Hoards

Even without borrowing, many companies have large cash hoards. Many have purred through the Great Recession largely unscathed, sometimes generating even more cash than usual because their capital investment opportunities have declined. And companies continue to be reluctant to give this cash back to shareholders. Issuing dividends has been out-of-favor for awhile, due to the double-taxation affecting shareholders, and buying back stock has been a risky proposition given the volatility of the markets. So the cash has accumulated.

The tech companies are an egregious example of cash hoarding … Cisco has $40 billion, Microsoft has $36 billion and Google has $30 billion. Shareholders generally don’t like it, preferring to get the money back into their pockets so they can choose how to reinvest it. This has prompted Cisco, Microsoft and others to announce major stock buyback programs. Those programs could take years to execute, though … and in the meantime, more and more cash is accumulated.

The hoarding trend is not limited to tech companies. According to Fortune, “Non-financial companies in the S&P 500 index reported $837 billion in cash at the end of March … (and) are holding cash reflecting 10% of their value today, (while) since 1999, companies on average held cash equal to (only) 6.6% of their value.”

As companies decide what to do with all this cash, given low prices and the new lease accounting (see next), buying real estate has got to be among the considerations. 

The New Lease Accounting

I’ve written extensively here about the New Lease Accounting and how it will make leasing less desirable than it was. All leases will be going onto the balance sheet, taking away one of the benefits of leasing (at least for those companies who have been sensitive to how much assets are on their balance sheet). Also, from a P&L perspective, owning will often be more attractive, particularly where there are low borrowing costs and a low building value relative to land value.

While other considerations, e.g. NPV of cash, might be the main driver for own-vs-lease decisions, the New Lease Accounting removes the objections to owning that have been based on financial statement concerns and that have stopped many companies from owning in the past.

Can we expect to see a trend to ownership?

While there were prognostications that sale-leasebacks, including those for HQ’s, would become more common as a result of the financial-crisis-induced credit crunch of 2008/2009, we seem to be past that. The future trend is likely to be the opposite … more towards more companies buying HQ’s. The Northrop Grumman deal is one. Also announced in 2010 have been Andarko Petroleum’s purchase of its HQ in Woodlands TX and Horizon Blue Cross’s purchase in Newark NJ. I imagine there have been more … and that more are yet to come.