Tech Firms Go Far and Wide for Space

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March 21, 2012
The Wall Street Journal
Tech Firms Go Far and Wide for Space

When Google Inc. bought a former freight warehouse in Manhattan in December 2010, the firm occupied about half a million of the total 2.9 million square feet of space. Since then it has gobbled up over 100,000 additional square feet, even buying out existing tenants, and is prowling for more.

The Mountain View, Calif.-based Internet company has made the most of its offbeat New York office. Employees get around on scooters, and conference rooms and printers are named after city landmarks and subway stations. One floor has a cave and fake vines in its jungle-themed kitchen.

Google also is enlarging its presence in Cambridge, Mass., by another 30% less than a year after expanding to some 230,000 square feet. And in a former Nabisco cracker factory in Pittsburgh, it recently leased space to expand by more than 50% to 80,000 square feet. "As our head count expands, it is important for us to find space across the globe for our new employees," said a Google spokesman.

Google's appetite for space illustrates the one bright spot for an office-space market that has been slogging back from the downturn: technology-industry expansion. And as the Google case shows, it isn't happening just in Silicon Valley.

Landlords in multiple cities throughout the country—including some that didn't have a big tech sector in the past—are enjoying the benefits from expanding Internet-focused firms, software companies and other technology employers.

Companies in the tech sector accounted for 29% of all growth in the U.S. office market in 2011, adding an estimated 10.2 million square feet of space—nearly the size of four Empire State Buildings—according to real-estate-services firm Jones Lang LaSalle Inc.

Pushing well outside the bounds of Northern California and San Francisco—where rents have been jumping as much as 20% a year, according to Jones Lang LaSalle—tech companies have been taking more space at a time when typical mainstays for landlords, such as financial services and law firms, are looking to cut back. The change comes in part as tech employers want to geographically broaden their searches for talent outside of competitive Silicon Valley, looking for top engineers and other employees in major cities that often have top universities, say the companies and real-estate executives., for example, recently agreed to buy a site in Seattle and has plans to develop up to three million square feet of space by its headquarters; the company has signed numerous leases over the past year to expand in the area. Online coupon company LivingSocial has expanded by tens of thousands of feet in Washington, D.C., since the start of 2011, and Apple Inc. announced earlier this month it plans to build a $304 million campus in Austin, Texas.

Of course, such rapid growth in the sector has come back to haunt landlords before. When the last tech bubble popped, landlords that devoted their buildings to wooing dot-com companies were left with high vacancies and broken leases, sending some into default.

Much of the recent growth has been focused in out-of-the way districts and buildings typically considered second-rate. Google's offices in the 80-year-old former warehouse, which takes up an entire city block, are 30 blocks south of the heart of Manhattan and its glass skyscrapers.

The preference for such buildings reflects a desire to control costs, and less need than traditional office users—such as banks—to be in the heart of downtowns.

Yelp Inc. is settling in to new loft-like offices at 100-104 Fifth Ave., away from Midtown Manhattan in the tech-heavy Union Square neighborhood. "We wanted a central hub that was an easy commute from all our employees, whether they were on the Upper East Side or Williamsburg [Brooklyn]," said a spokeswoman for online review service.

The surprise beneficiaries of the boom have been landlords like Kaufman Organization, which partnered with Invesco Ltd. in 2010 to buy the Union Square building when it was half-empty. Since then, they have leased more than 100,000 square feet in less than a year to high-profile technology tenants, including Yelp and iAd, an Apple advertising service.

Even today, as leasing activity in Manhattan has slowed overall, Grant Greenspan, principal at Kaufman Leasing, says he expects to fill the entire building before the summer. "I think I dodged that whole downturn, or quiet factor, in the market," he said.

In Chicago, tech companies accounted for about 10% of all office leasing in 2010 and 2011, according to Cushman & Wakefield Inc. Chicago's tech sector has been dubbed "Silicon Prairie."

Jack McKinney, president of brokerage J.F. McKinney & Associates Ltd., said seven tech companies that currently occupy at least 50,000 square feet in Chicago are looking to expand. "Some are expanding dramatically," he said of the tech firms. At the same time, none of the nearly two dozen financial, insurance and law firms seeking space that his firm tracks are looking to expand, and many are shrinking.

The trend hasn't been lost on commercial-property investors who have bid up the values of buildings favored by tech companies. Groupon's headquarters in Chicago—at 600 West Chicago Ave., a onetime distribution center for Montgomery Ward—sold in September for $390 million. Buoyed by higher occupancy from Groupon, which is taking about 360,000 square feet of space, the price was up from the approximately $289 million it sold for at the market's peak in 2007, according to real-estate research service CoStar Group Inc.

Online games company Zynga Inc. announced earlier this month that it had reached a deal to buy its San Francisco headquarters building for $228 million, well above the $131 million TMG Partners paid in 2006 for the former wholesale fashion center, which it subsequently renovated and lured Zynga.

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