Google’s growing fiefdom in New York signals more headline real estate plays to come, sources say
MAR 1, 2018, 10:00 AM
By Mark Maurer
It started as a lease expansion.
But Google — in its quest for dominion over Chelsea and the Meatpacking District — wanted more.
The technology giant first moved into the Chelsea Market building in 2007 with 108,000 square feet of office space at the 1.2 million-square-foot property. Five years later, it sank its teeth into another 94,000 square feet.
As leases expired and tenants moved out, Google showed a level of hunger not even found in the building’s beloved ground-floor food hall.
By last year, the company’s turf had expanded to roughly one-third of the building at 75 Ninth Avenue, which is also home to Major League Baseball, the Food Network and NY1 News. Sources familiar with Google’s negotiations with the building’s owner, Jamestown Properties, said the tenant was looking for opportunities to grow its operation at the building while those other leases remained.
Jamestown received several unsolicited offers for the property over the past few years. But as Google’s appetite has grown, its recent bid for the asset won the landlord over, according to multiple sources. Instead of focusing exclusively on the lease, conversations with Jamestown veered towards an acquisition — one poised to rock a slumping real estate marketplace off its axis. As The Real Deal first reported last month, Google agreed to buy the entire property for about $2.4 billion in what would be the second-priciest deal for a single building in New York City history. Representatives for Google and Jamestown did not respond to requests for comment.
The 3.8-acre, full-block office and retail building is also one of the most recognizable in the city, with a food hall that draws roughly 6 million visitors per year.
If nothing else, the move proved that Google has been playing the long game. Between its monster $1.77 billion deal for 111 Eighth Avenue in 2010 and its lease deals at 85 10th Avenue and the upcoming Pier 57 project, Google has assembled a fiefdom that stretches along West 15th Street from Eighth Avenue out to the waterfront pier.
And with at least $4 billion in NYC real estate acquisitions alone, the company is earning a serious reputation as a local property owner and operator. Marcus & Millichap’s Eric Anton, who is not involved in the deal, said that Google’s latest deal gives it the buying power to further transform the office leasing and investment-sales markets in Chelsea and the Meatpacking District .
“Behemoths like to create their own private environments,” Anton said. “A couple of these users could buy more of their own facilities, but a deal like this — at a staggeringly high price — won’t ignite a trend because there is only one Google.”
Google, a real estate history
After Larry Page and Sergey Brin founded Google in a garage in Menlo Park, California, in 1998, the firm rapidly grew into the multibillion-dollar multinational tech conglomerate.
When it came to real estate, it only took Google a few years to make a major investment. In 2004, the company built a corporate headquarters known as the Googleplex at 1600 Amphitheatre Parkway in Mountain View, in the heart of California’s Silicon Valley. The campus initially spanned 2 million square feet of offices. (In 2015 — the same year Google restructured to exist under its new parent company, Alphabet — the campus expanded to 3.1 million square feet.)
The company’s next big move was to build a presence in New York, which to date represents its second home state and splashiest real estate dealings.
Google inked its first Manhattan deal on Dec. 31, 1999, when it signed a lease at 1440 Broadway in Times Square. That office space grew to 170,000 square feet over the next six years, according to lease documents and news reports.
The space soon became too cramped for Google’s more than 500 employees, and the company’s executives looked to Midtown South. In 2005, they signed a lease for 300,000 square feet at 111 Eighth Avenue, a 2.9 million-square-foot, block-long office building then owned by Taconic Investment Partners, Jamestown and a state pension fund. At the time, sources told the New York Times that Google liked the location because the building sat on top of a major internet fiber-optic line.
While also planting a flag across the street at the Chelsea Market building in 2007, Google was determined to keep growing at the 18-story Eighth Avenue property. In what remains one of Google’s biggest real estate purchases worldwide, the company paid $1.77 billion for 111 Eighth Avenue in 2010.
Over the next several years, Google tried to muscle existing office tenants out of the building. The company failed to persuade Nike and advertising agency Deutsch to accept buyout offers in 2012. The tenants ended up staying until 2014 and 2015, respectively. WebMD accepted an undisclosed sum to vacate in 2015. Although Google owns the property, it’s unclear how much space it occupies in the building. One source said it has about 800,000 square feet.
It appears that Google’s growth strategy at 111 Eighth — years of steady leasing expansions accelerated by a monster purchase — is being mirrored across the street at Chelsea Market, sources said. Even before news broke last month that the tech giant was planning to buy the property, several of building’s office tenants began reducing their space. MLB, for example, will have fully relocated to Rockefeller Group’s 1271 Sixth Avenue by 2022.
Google has already started to piece together something of a second headquarters in Manhattan. That stronghold not only puts the tech giant in the spotlight for its real estate plays but also has market observers questioning Google’s greater intentions in New York.
Eight years later
If the Chelsea Market deal holds, it would not only be the second-priciest building sale in the city’s history but would also boast the highest price per square foot among its cohorts in the $2 billion club — an astronomical $2,000 if the deal closes at $2.4 billion.
The price per foot is even more significant when contrasted with Google’s purchase of 111 Eighth Avenue, which penciled out to $610 per foot. That was the biggest investment-sales trade of 2010, and one of the largest ever in terms of dollar volume. While the market this year is lackluster, the price per foot for the Chelsea Market deal is more than triple that of 111 Eighth. But the striking differences in price don’t surprise some.
“Look at Google’s share price and market cap in 2010 versus now,” said Anton, pointing to its parent’s market cap of nearly $800 billion. He added that since only a handful of tech behemoths can pull off real estate deals like Google has in New York, a larger owner-user trend among other Silicon Valley firms is unlikely.
Indeed, Google is not the same company it was in 2010. Apart from the Alphabet restructuring, it now has 74,000 employees worldwide as well as more than 70 offices and 15 data centers in 50 countries, according to the company.
It has also been aggressively buying up vacant industrial plots and office buildings in the San Francisco Bay Area in recent years, including an $820 million purchase of 52 buildings in Sunnyvale in July. Although the acquisitions outside of New York are significantly larger in terms of gross acreage, the pricing doesn’t compare.
Alphabet’s global real estate assets have an estimated value of $14.5 billion, according to Real Capital Analytics — roughly 30 percent of which is concentrated in two New York City buildings.
The Chelsea Market building’s 290,000 square feet of development rights, meanwhile, shows even more untapped potential for the company’s real estate holdings. Brian Strout of City Center Real Estate — which specializes in air rights transactions — said utilizing the rights would not necessarily be motivated by profit.
“They want to control as much as possible,” he said. “It’s imperative for them to meet future expansion needs, whether they use the air rights on day one or later on.”
The Chelsea Market deal, which is expected to close in the next two months, has brought the city’s top investment-sales brokers. Cushman & Wakefield’s Doug Harmon, a longtime adviser to Jamestown, is representing the seller, and CBRE’s Darcy Stacom is representing Google in the deal, sources said. The two represented opposite sides in Google’s 111 Eighth purchase as well, when Harmon was still at Eastdil Secured. Both declined to comment for this story.
“These are very different times and points in the market,” said Zev Holzman, a tenant-representation office leasing broker at Savills Studley who was not involved in the deal. “Eight years is an eternity.”
Untapped value
The $2.4 billion figure also speaks to how much the real estate itself has appreciated over more than a century. The New York Biscuit Company developed a Romanesque-style complex of six-story bakeries on the site starting in 1890. And in 1959, the biscuit manufacturer, which had merged to become the National Biscuit Company, vacated the premises and sold the then 22 structures to investor Louis Gli…