Google Inc., owner of the world’s most popular search engine, is also a dominant real estate deal maker that’s expanding its office space while nationwide demand from more traditional tenants wanes.
The company signed the year’s biggest leases in California’s Silicon Valley and San Francisco and agreed to a fourfold jump of its space in Chicago, according to brokerage Cushman & Wakefield Inc. A pending deal in Manhattan for about 360,000 square feet (33,000 square meters) would be the biggest in midtown south, the area where Google bought a converted freight terminal for $1.84 billion almost three years ago.
“Google is a monster engine everywhere, and we’re pretty thankful they’re in our world,” said Bob Chodos, a principal at brokerage Colliers International in Chicago, where recent leases brought the technology giant’s total space in the city to 807,000 square feet. “Companies like that draw other companies and create places where people want to do business.”
With its share price soaring beyond $1,000, Mountain View, California-based Google is leading the way among growing technology companies that are making some of the biggest leasing deals while financial firms and other office-using industries cut back. U.S. office rent increases have slowed for three straight quarters, data from Reis Inc. show.
Areas that attract and retain innovative companies -- including Silicon Valley, Boston, San Francisco and Seattle -- are defying the torpor, with rents 12 percent higher than the U.S. average, according to Jones Lang LaSalle Inc. Half of 23 million square feet of office projects under way will be occupied by technology firms, an outsized demand for an industry with just 3.3 percent of private-sector jobs, the brokerage said in an August report.
Google, whose Android operating system runs more than 1 billion mobile devices, is “being very smart, making careful and strategic decisions based on their predicted growth, at a time when we don’t have a lot of new supply,” Maria Sicola, head of Americas research at Cushman & Wakefield, said in an interview from San Francisco. “Our expectation is that the office market in general will get tighter in 12 to 24 months.”
This year, Google took 350,000 square feet in San Francisco to expand its Hills Plaza lease, 901,000 square feet in Silicon Valley near its headquarters in Mountain View, and 232,000 square feet in Chicago, according to Cushman. An expanded hub for engineers working on Google’s Chrome browser will almost double the company’s space near Seattle, data from Cushman show.
Katelin Jabbari, a Google spokeswoman, declined to comment on the company’s leasing and real estate plans. Robert McGrath, spokesman in New York for CBRE Group Inc., Google’s national real estate adviser, also declined to comment.
The company’s expansion in San Francisco, Silicon Valley and the Seattle area are a “key driver of strength” in commercial real estate, said Jed Reagan, an analyst at Green Street Advisors Inc. The locations are the top three markets for technology job growth, venture-capital funding and college-educated workers, according to Jones Lang LaSalle.
“Google is in so many fields, with a myriad of product lines,” said Phil Mahoney, executive vice president at brokerage Cornish & Carey Commercial Newmark Knight Frank in Santa Clara, California, who represented the landlord on one of the company’s Silicon Valley deals last quarter. “They’re showing no signs of middle age.”
Founded in 1998 by Stanford University graduate students Sergey Brin and Larry Page, Google makes money by selling ads that appear next to search results on desktop and laptop computer screens, smartphones and tablets. Led by its iconic search engine, it captures a third of total online advertising revenue and half of the mobile market, EMarketer Inc. data show.
Google owns the YouTube video service and is developing Chromebook laptops, Nexus tablets and mobile phones and Google Glass wearable devices. Google Maps is the most-used smartphone application, ahead of second-place Facebook Inc., according to GlobalWebIndex.
Third-quarter profit rose 36 percent from a year earlier to $2.97 billion, after higher ad volume across platforms, Google said on Oct. 17. The shares surged past $1,000 the next day, and are up 44 percent this year. With a market value of about $341 billion, the company is the world’s biggest after Apple Inc. and Exxon Mobil Corp.
Google aims to “increase the velocity and the execution” of product development while keeping “the passion and soul of a startup as we grow,” Page, chief executive officer since 2011, said during an earnings conference call. “When you look across the company, it’s amazing how all the teams are executing.”
Google made property purchases in Mountain View and nearby Palo Alto in the third quarter “ahead of our needs,” Chief Financial Officer Patrick Pichette said on the conference call. The five acquisitions with 665,000 square feet cost about $319 million, according to research firm Real Capital Analytics Inc.
Recent leases include an agreement in September to rent the Mayfield Mall in Mountain View, a former shopping center that’s being renovated into a 500,000-square-foot office complex.
The 180,000-square-foot expansion of the Chrome campus in Kirkland, Washington, is a boon to the area, even with homegrown Microsoft Corp. and Amazon.com Inc. based nearby, said David Postman, press secretary to Washington Governor Jay Inslee, who attended a March event announcing the project.
The Seattle region’s 112,000 technology jobs account for 11 percent of total employment in the area, the largest share for any market outside Silicon Valley or San Francisco, according to the Jones Lang LaSalle report.
“When Google says, ‘We want to be here,’ it validates this area,” Postman said in a phone interview. “The high-tech industry is changing every day, and it’s all about staying on the cutting edge.”
Google’s expansion in Chicago includes four floors atop the historic Merchandise Mart, with two 15-year leases for a total of 607,000 square feet. Workers from the Motorola Mobility mobile-phone unit will relocate from Libertyville, Illinois.
In Chicago’s West Loop district, Google has a 15-year agreement for 200,000 square feet at a converted cold-storage warehouse in the former meatpacking district, said Chodos of Colliers. The property will house workers moving from Google’s current base on West Kinzie Street, with occupancy starting in 2016 after renovations by owner Sterling Bay Cos.
“What they’re doing at the Merchandise Mart is monumental, and what they’re going to do on the West Side will have even more impact,” said Chodos, who wasn’t involved in the Google leases. “This is huge for our marketplace.”
Google doesn’t always leave landlords satisfied. It came close to signing a letter of intent with Tishman Speyer Properties LP to occupy Foundry Square III, a new building in San Francisco’s South of Market, before backing out of the deal, three people with knowledge of the situation said in July.
Google instead renewed its lease at Morgan Stanley’s Hills Plaza, boosting space to 350,000 square feet in the city’s biggest deal for 2013. Terms included average rent of $65 a square foot, little changed from its current agreement, starting in 2015, a person with knowledge of the deal said. Google may have sought leverage with Morgan Stanley by negotiating with other San Francisco landlords amid a leasing slowdown and a spurt of speculative development, the person said.
Rick Matthews, a spokesman for New York-based Tishman Speyer, declined to comment on Foundry Square.
In New York, Google has a tentative deal at Related Cos.’s 85 10th Ave. in Chelsea, according to a person with knowledge of the terms. Joanna Rose, a spokeswoman for New York-based Related, declined to comment.
The building is in the same neighborhood where Google purchased 111 Eighth Ave. in December 2010. That deal unleashed a wave of sales and leasing by technology companies in midtown south, now the city’s best submarket for rent growth. The vacancy rate of 7.6 percent in the third quarter was the lowest of any U.S. business district, Cushman & Wakefield data show.
“There’s no question that it’s the healthiest portion of Manhattan, with lots of appeal to tech and creative companies,” Reagan, of Newport Beach, California-based Green Street, said in an interview.
In 2005, a group led by Shorenstein Properties LLC paid $438 million for the Starrett-Lehigh Building, also in midtown south, as commercial real estate prices surged toward their peak. The San Francisco-based developer expected to keep the 2.2 million-square-foot property for the long term to meet its yield targets, according to Chairman Doug Shorenstein. Then after a single deal, the market took off.
“I saw what Google paid” on Eighth Avenue, he said.
Shorenstein changed his plans. In April 2011, the group sold the Starrett-Lehigh Building to Scott Rechler’s RXR Realty LLC for $920 million, more than doubling its investment.