Neat building. It used to be used as an "inland dock" - It has elevators that can hold an entire 18-wheeler, which can be unloaded inside the building.
Google is flush with cash, the real estate market is soft and it beats renting. Honestly I think more tech companies should look to own their real estate. Its a solid asset in the balance sheet. Most companies already have an in house facilities team who's job it is to maintain their property and you can always hire a property management firm to handle the rest.
My step dad owns a few faucet stores, granted totally different field, in the Bay Area, he owns the buildings of all his stores and the value of his real estate holdings are the equivalent of the value of his business.
The counterargument is that real estate is potentially an opportunity cost. Instead of purchasing real estate, that money could be used to grow your "core competency", e.g. opening more stores, expanding into other cities, etc.
The counterargument is that the ROIC of growth might be less than the real estate investment.
I had a chance to do work for a board member of a public company. For 10 years they invested in R&D which was an utter failure and used up the majority of cash flow generated from operations.
After halting most of R&D, cutting costs, the company was able to be turned around and cash flow positive.
Of course R&D may not pay off, however, in the long run, if your real estate is worth more than your business, then it probably means you are better at managing real estate than running that business. Perhaps it would have been better to have just done real estate in the first place.
I don't agree with this kind of singular thinking.
Capital should go wherever returns are best. If you have a steel company and you are at the top of the cycle, investing in steel plants or doing acquisitions in the steel space will be a destructive use of capital.
Let's say you are Google and you do indeed believe that startup valuations are getting too high to warrant acquisitions. Maybe you pull back and look for other opportunities. You have $33B in cash and 10-years are only yielding ~3%.
You're better off redeploying that capital to somewhere that will be truly accretive versus chasing bad deals or sticking in treasuries. Maybe right now the current R&D ideas just aren't appealing either. So you decide to sit tight in that area and go do a real estate deal where you can get a good IRR.
Study Henry Singleton, the founder of Teledyne and see how he chose to allocate capital wherever he could get the most value at that particular point in time.
When you're Google's size the normal rules don't always apply, but I would say that generally any "non-core" investments should at least have some strategic purpose.
McDonald's for example, owns or leases huge amounts of real-estate, which they sublease to their franchisees. One reason for this is to maintain control over the franchisees. A franchise owner can't decide to close up and open a Burger King instead, because McDonald's would cancel his lease on the property.
I'm not sure how owning real-estate relates to what Google does. They are not a retailer so the physical location of their offices is not critical. Even if a particular opportunity is a "good deal" it's still a distraction from their core business. Even if management and maintenance is subbed out, somebody in Google has to keep an eye on things to some degree.
In this case the consequence was a larger competitor came along and purchased the company at a premium.
Some businesses are just too dysfunctional to survive.
This company was plagued with leadership issues (CEO/founder had been forced out because of bad board members, new CEO had 0 industry experience and was utterly incompetent) plus because of the cash flow problem, geography, and loss of key customers, the company just could not afford to go out and beef up the R&D staff.
So the next best thing was to replace a couple of the bad board members, cut costs, clean up operations, make the company profitable, and then shop it around.
This all sounds similar to the argument that Google should stick with search instead of moving into email. Or stick with Search + Email instead of moving into mobile devices.
Also want to add to the original comment that google does have a lot of cash and my understanding is that they hire anyone who meets their high standards. So what is the downside to stepping outside of their core competencies and buying real estate? Put another way ... what else are they going to do with that money?
Actually, Google's core competency is selling targeted ads so they need to be wherever people's eyeballs are. So branching into email, mobile, etc. is actually a natural evolution.
I know of a large holding company of luxury jewelry goods that has space in the building. For them, its not just cubicles. It would be a very poor publicity stunt to kick everyone out of the building in order to install racks and servers in every room.
Other companies have enough leverage in non-internet related fields to cause a big shitstorm if it was to happen. If this is a long term approach I could see them not renew or assign new leases when current tenants vacate, but you will not see press releases. I also have no association with this story, so I can only speculate as well.
It is a massive datacenter in addition to having office space. Plus, so many VOIP and Web companies are already there, it is a perfect place for Google to interconnect fee-free (or nearly so) with them.
>"As part of the deal, we’ve retained Taconic Management Company to continue the leasing oversight services and management of the building on our behalf"
The building cost ~1.9 BILLION -- may be one of the most expensive real-estate deals yet.
Google is estimated to have about $33 billion in cash (maybe $31 billion now).
Google manages its money like a private hedge fund. Considering currency fluctuations, real estate is often considered a good hedge against inflation so it may seem like a smart move in the future.
Tishman Speyer Properties and Black Rock Realty jointly bought Stuyvesent Town and Peter Cooper Village (two very large, sprawling apartment complexes in Manhattan) for over $5bn, back in '06. Of course, they had to give it up in January because things didn't work out quite like they expected (rent controlled apartments don't give up the ghost easily; they'd wanted to turn them into high-class ibanker condos).
I don't think Tishman's Stuyvesent and PCV purchases were similar to Google's purchase at all. Tishman purchased these properties to generate cash flow from single tenants and as potential development opportunities. Very different from Google's RE strategy. Regardless of short-term fluctuations, Google's NY building will likely be a wise investment because it's a long-term play and they're not dependent on the cash flow that Tishman required to cover their monthly costs. Google will save millions on annual leases, the property will probably continue to appreciate in value over time, and they can write off massive amounts for building depreciation over the next couple decades.
