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Following the market

6 Feb 2018 By John Foley

If companies had hair, Google’s might just have developed its first flecks of gray. The search-engine operator has agreed to spend more than $2 billion on New York’s Chelsea Market, according to real-estate publication The Real Deal. That would give it ownership of the building across from its main headquarters in the city – along with various hipster boutiques and some offices it already inhabits. While not exactly breaking the mold, branching out into prime real estate is rational – and probably inevitable as tech companies age.

Most internet companies got their start by being scruffy and light on assets, but that model quickly becomes difficult to sustain. Large, youthful workforces want appealing, fashionable surroundings. And the bigger the company gets, the more important security and privacy become, which increases the appeal of being a property owner.

Google parent Alphabet, which already owns its main building in gentrified Chelsea, had $23 billion of land and buildings on its books at the end of December. That number has grown twice as fast as its revenue since 2012. It’s not just an Alphabet issue either: fixed assets like property have increased at twice the speed of revenue for Amazon, Facebook and Apple too.

For a company with $102 billion of cash on the balance sheet, the question of whether or not this is a good investment is basically irrelevant. Even so, it probably makes sense. Retail rents are rising an annual 7.9 percent in the neighboring Meatpacking District, according to Cushman Wakefield. The risk in either direction is low. Moreover, Google doesn’t have to share with landlords the general uptick in Chelsea Market rents and property values that comes from having the world’s biggest internet company as a resident.

Still, there’s something sad about the great disruptor being so establishment in its choice of real estate. Online retailer Amazon, as well as building a faux tropical forest in its new Seattle campus, is at least going through the motions of auditioning less prosperous cities like Pittsburgh and Nashville for its second headquarters. The reality is that while tech companies like to move fast and break things, there are some areas in which risk-taking starts to seem less smart – and having solid property investments is one of them. Call it the clarity that comes with middle age.

 

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