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Apple New Campus Cost Seen Jumping to $5 Billion: Tech

(Corrects unit of measurement in 30th paragraph and removes NBBJ project attribution in 40th paragraph.)

At what turned out to be his last public appearance, Steve Jobs stood before the Cupertino City Council on June 7, 2011, to present plans for a new corporate campus for Apple Inc. (AAPL)

Scarecrow thin yet forceful as ever, Jobs displayed several renderings of a headquarters intended to accommodate more than 12,000 employees in a single, circular building.

“It’s a little like a spaceship,” he said of the massive, four-story ring, which, at 2.8 million square feet, would be two-thirds the size of the Pentagon and set among 176 acres of trees where today there are mostly asphalt parking lots. “We have a shot,” he said, “at building the best office building in the world. I really do think that architecture students will come here to see it.”

Jobs died four months later, before the final plans could be submitted to Cupertino city planners, though he had made it clear that this corporate Shangri-La would be expensive. Apple would add 6,000 trees and hide almost all the roads and parking spaces underground. There would be plenty of cafeterias, including one that could handle lunch for 3,000 employees. Jobs highlighted the main building’s curved exterior walls. The plans call for unprecedented 40-foot, floor-to-ceiling panes of concave glass from Germany.

Before the Cupertino council, Jobs said, “there isn’t a straight piece of glass on the whole building,” adding that “as you know, if you build things, this isn’t the cheapest way to build them.”

Ballooning Budget

He had that right. Since 2011, the budget for Apple’s Campus 2 has ballooned to almost $5 billion from less than $3 billion, according to five people close to the project who weren’t authorized to speak on the record.

If their consensus estimate is accurate, Apple’s expansion would eclipse the $3.9 billion being spent on the new World Trade Center complex in New York, and the new office space would run more than $1,500 per square foot -- three times the cost of many top-of-the-line downtown corporate towers.

Before his death, Jobs had hoped to break ground in 2012 and to move in by the end of 2015. Apple will start tearing down the 26 buildings on the site in June, according to another person familiar with the plan. At the company’s annual meeting on Feb. 27, Chief Executive Officer Tim Cook said the move-in date has been pushed back to 2016. Apple declined to comment for this article.

Cost Cutting

One reason for the new timetable, say three people who have spoken to Apple personnel about the project, is that the company has been working with lead architect Foster & Partners to cut $1 billion from the budget before proceeding. Jobs and Apple first hired Norman Foster’s firm, renowned for the rebuilt Reichstag in Berlin and Hearst Tower in New York, in 2010.

Apple has named a general contractor -- a joint venture of DPR Construction, in Redwood City, California, and prefabrication specialists Skanska USA Building in New York -- though it hasn’t completed agreements with the scores of subcontractors needed to finish the job. Some contractors will be submitting bids by May. There’s so much dirt to be removed, excavating the site will take six months and require a continuous, 24-hour convoy of trucks, says a former Apple manager who heard a presentation from Foster’s firm.

Cost overruns are to be expected on large construction projects, and the scale of this one has evolved -- from an initial plan to accommodate 6,000 employees to offices for 12,000 or even 13,000 in one place. Meanwhile, $1 billion is still less than 1 percent of Apple’s $137 billion in cash reserves.

Falling Shares

Yet the multibillion-dollar budget for Campus 2 could add fuel to the debate about what Apple’s doing with all of its money. Investors didn’t squawk much when Apple was dominating the smartphone and tablet market, though its shares have fallen 38 percent since September amid rising competition from Samsung Electronics Co. and concerns about Apple’s product pipeline.

Now shareholders are calling for a big dividend, stock buyback or, in the case of Greenlight Capital’s David Einhorn, the issuance of a new class of preferred shares. Apple has hinted it might oblige in some way, though critics are sure to question whether curved glass is the best use of funds.

“It would take some convincing for me to understand why $5 billion is the right number for a project like this,” said Keith Goddard, the chief executive of Tulsa, Oklahoma-based Capital Advisors Inc., which owns 30,537 shares of Apple. “This is rubbing salt in the wound, to spend at a level that most anyone would say is extravagant, at a time when they’re being so stingy on dividends.”

If the stock continues to underperform, Goddard predicted, “this headquarters would perpetuate the negative story.”

‘Campus Curse’

Moreover, in Silicon Valley, nothing says you’ve peaked quite like a lavish new headquarters. Highfliers such as Silicon Graphics Inc., Borland Software Corp. and Sun Microsystems Inc. all suffered the “campus curse”: Their fortunes went south soon after opening swank corporate villages.

Few architects will publicly question the judgment of Jobs and Foster, though many privately snicker at the doughnut-shaped design. At a time when Google Inc., Facebook Inc. and others favor floor plans that promote as many chance meetings as possible -- a Jobsian virtue -- the circle could isolate people and teams. A circle does not allow for much flexibility. Many companies today opt for “living buildings” that can be easily reconfigured. Facebook’s West Campus in Mountain View, California, will be one huge quarter-mile-long structure -- essentially a large warehouse that can be adjusted on the fly as projects are started and finished.

Aesthetics, Productivity

Aesthetics seem to trump productivity, says Scott Wyatt, a managing partner at NBBJ, a Seattle-based architecture firm that’s designing offices in the region for Google and Samsung.

“I would be concerned that it would be alienating, as opposed to convening,” Wyatt said. Rather than making it a great place to work, “it seems more like an object, just like the iPhone is an object.”

There’s no indication that Apple is getting cold feet. For one thing, it needs the space. Even after the campus opens, it will continue using its current Infinite Loop headquarters, which houses 2,800 employees. Given its cash, Apple can make it happen, even at $5 billion. Yet Cook dropped hints at Apple’s annual meeting in February that the campus would not be precisely what Jobs envisioned.

“Steve put a lot of love and attention into this before he passed away,” Cook said. “Hopefully we’ve made it better during the design phase. We want to do this right.”

Sustainable Design

Apple’s spectacular second campus, at least as Jobs conceived of it, was never going to be purely practical. Set on land Apple purchased in two blocks -- 50 acres in 2006, and roughly twice that from Hewlett-Packard Co. (HPQ) in 2010 -- Jobs wanted it to be a model of sustainability. The goal, he said, was for the facility to generate all of its own electricity, relying on the grid only as a backup. He wanted the whole place to look less like an office park and more like a nature refuge.

Shortly after entering the new campus at one of just two entry roads, the plans reveal, most cars will be directed underground into a network of roads and garages. The company plans to plant 15 acres of native California grassland and 309 different species of trees (that includes the 6,000 new ones and 1,000 existing trees that will be dug up, stored during construction and transplanted back from the nursery later). The vast courtyard in the center of the main building’s doughnut will be especially verdant, with apricot, olive and apple orchards and an herb garden near the patio of a sprawling cafe.

Underground Auditorium

The plan is for only six structures to be visible when it’s all done: the headquarters, the lobby to an underground auditorium (no more schlepping to San Francisco for product demos), a four-story parking garage separating the campus from Interstate 280, a fitness center, and two research and development labs housing testing facilities such as an anechoic chamber for analyzing antenna signals.

“The overall feeling of the place is going to be a zillion times better than it is now,” Jobs told the Cupertino City Council.

To achieve its goals of a “net-zero energy” campus, the roof of the spaceship will hold 700,000 square feet of solar panels, enough to generate 8 megawatts of power. (That’s enough to power roughly 4,000 homes.) Apple says it’s negotiating contracts for additional solar and wind power.

Open Windows

To keep consumption down, the company plans to install “climate responsive” technology. Judging from the drawings, this will include window treatments that automatically open or close to let in just the right amount of light, wind and fresh air to maintain a comfortable temperature. Apple will probably make liberal use of Solatubes -- skylights that are used to shunt outdoor light into internal offices -- and huge, airplane propeller-size fans made by companies such as Big Ass Fans Co. in Lexington, Kentucky, that move lots of air without using much energy.

The true expense of the campus lies not in green tech, though, as much as the materials -- as well as what product designers call “fit and finish.” As with Apple’s products, Jobs wanted no seam, gap or paintbrush stroke showing; every wall, floor and even ceiling is to be polished to a supernatural smoothness. All of the interior wood was to be harvested from a specific species of maple, and only the finer-quality “heartwood” at the center of the trees would be used, says one person briefed on the plan last year.

Curved Glass

The main building will also be groundbreaking in how it’s assembled. While the structural shell will be erected on site, the glass that forms the exterior walls will be bent and framed by Seele GmbH in its factory in Gersthofen, Germany.

“It’s something like 6 kilometers of glass,” said Peter Arbour, an architect with Seele, who said no company has attempted to use panes as large -- certainly not curved panes -- in anything approaching this scale. “Normally we talk in terms of square feet.”

Seele, which built the glass staircases in many Apple stores as well as the large glass cube at the entrance to its store on Fifth Avenue in New York, has doubled the capacity of its plant to supply the Apple project, Arbour said. Most curved glass is created through a heating process that can lead to cloudiness or house-of-mirror-style distortions. Apple’s will use a cold-bent process; Seele developed machines to bend the panes and hold them in place as they are laminated with a bonding material so they keep the correct shape.

“With cold-bent glass, you get a true surface and true transparency and true reflectivity,” Arbour said. Seele can complete this process only at its Gersthofen factory, requiring that the glass be shipped from Europe.

Prefab Modules

Arriving by truck will be thousands of prefabricated 26- foot-long modules in various configurations -- bathrooms, utility closets and banks of offices complete with carpets and window treatments, said three of those who spoke with Bloomberg Businessweek about the project.

Because the work is done in factories designed specifically for the purpose, the approach can yield far more precise construction and fewer hours of on-site labor -- and potential savings on local union rates. It’s also faster. Apple hopes to complete construction in two years, compared with the three to five it could take using conventional methods.

Apple hasn’t announced any major changes to Jobs’s vision, so some of the sought-after $1 billion savings will probably come by rolling back his sky-high requirements for fit and finish.

Museum-Quality Floors

Rather than cement floors, Jobs wanted to use a stone- infused alternative such as terrazzo, buffed to a sheen normally reserved for museums and high-end residences. Jobs insisted that the tiny gaps where walls and other surfaces come together be no more than 1/32 of an inch across, versus the typical 1/8 inch in most U.S. construction.

Rather than a lightweight, sound-absorbing acoustical tile, Jobs even wanted the ceilings to be polished concrete. Contractors would typically erect molds with crude scaffolds to pour the cement in place, yet that leaves unsightly ruts where the scaffolding puts extra pressure on the surfaces. According to two people who’ve seen the plans, Apple will instead cast the ceilings in molds on the floor and lift them into place, a far more expensive approach that left one person involved in the project speechless.

Grand Future

On a recent visit to the site, a hint of the grand future blended in with the practical and unglamorous present. Apple has vacated some buildings in one corner of the property, though the parking lot is almost full outside the offices of Apple’s facilities staff. A large square structure looms up from behind the building, obscured by a 30-foot fence that’s covered with white tarps.

A peek through the fence reveals what appears to be a life- size mock-up of the entrance to the future headquarters, complete with floor-to-ceiling glass and a huge banner hanging from the ceiling with a photo of an iPhone, like the ones that hang in the lobby of Infinite Loop. It’s clean, minimalist and stunning -- a four-story iPad.

Wyatt, the NBBJ partner, met with Jobs to talk about various projects over the years.

“I can imagine Jobs going through some of Foster’s buildings and thinking, ‘This is what architecture should be,’” said Wyatt. “This isn’t a bad thing, but they’re an architect’s architect, not a customer’s architect.” (Foster & Partners is the lead architect for Bloomberg Place, the London offices of Bloomberg LP, the parent of Bloomberg News and Bloomberg Businessweek.) The firm declined to comment for this article.

Demanding Designs

Foster & Partners has designed several of the most demanding and technically innovative buildings in the world. Foster made his name with the Hongkong & Shanghai Banking Corp. (now HSBC) headquarters, completed in 1985. Built quickly with then-novel prefabrication and structural engineering techniques (reflected in the tubular columns and elaborate trusswork of the tower’s exterior), the skyscraper cost $1.3 billion -- in 1985 dollars, making it the world’s most expensive tall office building at the time.

Since then, Foster has emerged as the U.K.’s best-known architect. The kinds of projects he chooses these days, such as new airports in Hong Kong and Beijing, are rarely budget-driven, and the clients seem only too glad to spend on them.

The 1997 Commerzbank AG headquarters in Frankfurt pioneered many energy-conserving techniques and featured multistory “sky” gardens. A delicate, costly, high-tech glass dome crowns Berlin’s Reichstag, the ruined home of the Bundestag, which Foster rehabilitated in 1999. Its design was controversial, though it has become a much-beloved symbol of progressive, unified Germany.

Little Opposition

Jobs and Foster’s vision isn’t likely to run into any civic obstacles. Cupertino expects to have completed an environmental impact report by July, said City Manager Dave Brandt, who doesn’t anticipate much in the way of community opposition. Apple won points by agreeing to transport Glendenning Barn, a historic landmark, to a more accessible site, and by investing in a public transit program to encourage more than a third of employees to get to work by a method other than car.

Apple may struggle to find subcontractors, though. There’s a building boom in Silicon Valley, with new hospitals, a new stadium for the San Francisco 49ers (who are finally leaving Candlestick Park and moving to Santa Clara), and offices for Samsung, as well as Facebook West and Google.

Thin Profit

With so much good business out there, some companies may hesitate to commit manpower to a project that’s running behind. Moreover, according to two of the people close to the project, Apple is offering a cost-plus contract that pays only half the percentage of profit of some large deals, leading some potential partners to wonder if Apple expects them to sign up more for the glamour of working on a marquee master plan than for the money.

If that were ever true -- and no doubt, many an Apple supplier discovered it had fallen into Jobs’s reality distortion field -- it’s far less likely in the Tim Cook era. Apple may have more money than Croesus, though without Jobs’s star power and maniacal control, it’s becoming more like other big, conventional companies.

Ironically, that may be precisely why Jobs’s spaceship will one day land in Cupertino, regardless of cost. To backtrack now would be tantamount to admitting it.

To contact the reporter on this story: Peter Burrows in San Francisco at pburrows@bloomberg.net

To contact the editor responsible for this story: Bradford Wieners at bwieners@bloomberg.net

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