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Tech Firms Buy Up Property for Future Growth

03/03/2015 | 01:44pm US/Eastern
By Eliot Brown 

Some of Silicon Valley's biggest companies are on a real estate buying binge, paying premium prices to make sure they have enough space for future expansion.

Facebook Inc. is the latest to dive in, agreeing last month to spend $395 million for Menlo Science and Technology Park, a jumble of 21 low-slung warehouses and office buildings 30 miles southeast of San Francisco. It's now home to an orthopedic surgical tools company, a supermarket distribution center and a storage facility for an office-furniture company.

"We're going to grow over time," said John Tenanes, head of real estate for the social-networking giant, whose headquarters are across the road. "We just want to be prepared when that happens."

In 2014, Google Inc. paid more than $1 billion to buy at least 19 properties in Silicon Valley, ranging from warehouses near its headquarters in Mountain View, Calif., to a 935,000-square-foot office portfolio in nearby Redwood City, according to property-data firm Real Capital Analytics LLC. In all, it has spent more than $2.5 billion on property in the area since 2005.

Last week, the company revealed its plans for some of that property: a flashy new 2.5 million square foot headquarters to be built in a series of futuristic glass bubblelike buildings. A Google spokeswoman said the acquisitions are part of a broad strategy to meet the needs of the company's growth over time.

The companies' newfound hunger for real estate offers a glimpse into their remarkable ambitions for expansion. Google reported it grew by about 5,800 employees world-wide in 2014, bringing the total to 53,600. Facebook boosted its head count by 45% last year to 9,199, growth it expects to continue.

The real estate buying, known as land banking, is being done in part to give the companies breathing room as they add employees. But it is also a way to grab property before the market gets more expensive as well as to fend of rivals from planting flags in their backyards.

"It's a race for space," said Jed Reagan, an office market analyst at Green Street Advisors. "A lot of these companies are growing like crazy and the Silicon Valley and San Francisco markets are getting very tight." It is driven, he said, by "a very bullish view of the world."

The flurry of acquisitions is reshaping the landscape of the competitive world of Silicon Valley property, with tech companies often out-competing the developers and investment firms that traditionally dominate the sector. The average price paid in 2014 for an office building there was a record-high $329 a square foot, up from $299 in 2013 and $190 in 2009, according to real estate services firm DTZ.

The tech giants have a leg up on developers and investors because they can tap their enormous piles of cash. They are happy to buy property now and then collect rent, perhaps for years, while they plot their expansions. Google, for instance, reported holding $64 billion in cash at the end of 2014.

"You don't want to find out that Google is competing on a building you're trying to buy--it's that simple," said Michael Covarrubias, chairman of the Silicon Valley and San Francisco developer TMG Partners.

But there is a risk for the tech companies: Land banking could leave them with portfolios of unnecessary and less valuable real estate in the event of a downturn. A cautionary tale can be found in the dot-com era, when Silicon Valley and San Francisco companies raced to lease space for their planned exponential growth. When the bubble burst, they were left with expanses of unnecessary office space, and a sublease market in which rents had plummeted.

At Facebook, the current focus is building a Frank Gehry-designed office building just to the west of Menlo Science and Technology Park, which will serve as its new headquarters when completed later this year. Also in its land bank is a 59-acre property it bought last year adjacent to that project.

Over in Mountain View, LinkedIn Corp. in December paid $79 million for a small industrial park it plans to later develop. LinkedIn didn't respond to requests for comment.

In San Francisco, business-services firm Salesforce.com Inc. in November agreed to pay $640 million for a 41-story tower next to two under-construction skyscrapers where it has leased offices. A Salesforce.com spokeswoman said the deal ensures it can continue to expand in the area.

One notable exception to the buying spree: Apple Inc. It was most active half a decade ago when it spent more than $430 million on land in Cupertino, Calif. Now, the company is constructing is its giant circular headquarters dubbed the Apple "spaceship." It didn't make any Silicon Valley purchases in 2014 tracked by Real Capital. Apple didn't respond to requests for comment.

Another driver of the buying is tech companies' weariness of leasing from traditional owners, who can make it harder to add modern amenities many firms want.

"The list of things you want in there is long, such as being able to have food trucks, bike storage, dogs, child care, rock-climbing walls," said Stephen Berkman, a real estate lawyer at Paul Hastings LLP whose tech clients include Facebook and Salesforce.com. "We can negotiate a lot of that stuff, but...all things being equal, from a control perspective, it's just better to own."

In Salesforce.com's new headquarters it is leasing from Boston Properties Inc., the company is allowed to have a day care, a wellness center and bike storage, according to a copy of a lease filed with the Securities and Exchange Commission. But it is restricted to a maximum of 10 "nonaggressive, fully domesticated, fully vaccinated dogs," according to the lease.

Also at play is an effort to keep employees clustered near each other.

Mr. Tenanes, of Facebook, said the company believes employees gain ideas "working adjacent, next to each other, collaborating, communicating," so it needs to have its offices close by, with workers bumping into each other on sidewalks.

Now the question for Facebook is when it will need to expand.

"It could be a five- to 10-year play," he said.

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