jump to navigation

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.
Tags: ,
add a comment

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.

Advertisements

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.
Tags: ,
3 comments
 
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”.

Mercury News’ columnist got it wrong. Headline should be: HP Grows Up ( … with corporate real estate playing role) June 2, 2010

Posted by Bob Cook in Company Case Studies, Financial Planning & Analysis, Profession of Corporate Real Estate, Silicon Valley.
Tags: , , , ,
add a comment

Today, Columnist Chris O’Brien lambasts HP for finding success – not from innovating like Apple or Google – but from implementing a “ruthless, brutally effective strategy” that he playfully characterizes as “Buy a company. Cut costs. Trim employees. Repeat.” His column was prompted by HP’s latest layoff announcement.

HP should, however, in fact, be lauded for maturing into a well-run enterprise that can successfully compete in a complex world where success – especially for a large company – requires more than just coming up with the latest and greatest. It requires business acumen, discipline, and management – something that has been missing from the many great product-focused, geekdom companies that are now R.I.P. in the Silicon Valley graveyard. Think (and weep, ’cause it was great in many ways): Sun Microsystems.

HP is showing an alternative way for a tech company to succeed – and to do it long term. It’s a way to build an enduring enterprise – a way away from the self-limiting strategy pursued by most tech companies and which I’ll playfully characterize as: “Design breakthrough product. Develop cult following. Sell before competitor catches up. Repeat first three steps as many times a possible, then (inevitably)…. Blink. Hiccup. Crash.”

HP has become a corporate juggenaut by realizing, under the five-year leadership of CEO Mark Hurd, that success requires the careful management of resources: capital, people, assets, infrastructure. The last of these is partially the domain the HP real estate group which is clearly busy with initiatives like the consolidation of HP’s data centers and which is proving its worth to the enterprise.

According to HP’s latest 10-K, of 77 million square feet of space, fully 10 million square feet had been vacated – probably significantly helping on-going P&L, albeit with some large one-time negative hits for write-offs and reserves. While only three million square feet had been sublet such that this vacated space continues to drain cash, once those unneeded leases burn off, the cash flow savings will become as permanent as are the P&L savings already in place. Having said that, subletting three million square feet is no small feat. (Pun intended.) Moreover, let me tell you, vacating 10 million square feet is an even bigger feat. (Yep, pun intended, again.) You might think, “what’s so hard about moving out of real estate”, but it must have involved thousands of decisions, hundreds of presentations, and dozens of approvals to decide which sites to vacate, when to do it, how to do it, who should should pay for it and who should profit from it.

As companies like HP become mature enterprises – managed by professional managers who leave product design and marketing to others and see their job as managing the enterprise – corporate real estate departments become more important. To manage an enterprise is to manage the company’s infrastructure – both hard (e.g. real estate, IT systems) and soft (e.g. culture) – and corporate real estate plays a central role in this area. Products come and go. People come and go. Infrastructure endures.