While billion-dollar bets by trillion-dollar companies may not be the most accurate representation of broader market conditions, Google’s decision to purchase the St. John’s Terminal office building for $2.1 billion, announced Tuesday, was nonetheless hailed by local officials as proof of the city’s economic recovery.
The priciest deal since the start of the pandemic was also welcomed by the commercial real estate community as a positive sign for the city’s office market, shaken by the wide-scale adoption of remote work.
“One of my first emails [Tuesday] was a bunch of us emailing back and forth about how great this was,” said Andrew Staniforth, principal & senior vice president with L&L Holding Company, which, in partnership with Columbia Property Trust, is transforming the Terminal Warehouse in West Chelsea into a mixed-use complex centered on 1 million square feet of office space. “We’re all very excited.”
Manhattan’s office market could certainly use a good omen, with availability rates hovering around an all-time high of 17 percent in recent months. Leasing activity finally started picking up in August, but workers’ return-to-office plans have been largely disrupted by an increase in cases driven by the contagious Delta variant.
As of Sept. 15, about 28 percent of office workers in the New York area had returned to their desks, according to Kastle Systems, which aggregates card-swipe data from building access systems. Analysts have warned that the longer the work-from-home trend persists, the more likely it is to stick, potentially eroding the values of office properties.
That’s why Google’s decision to exercise its option to purchase the 1.3 million-square-foot building in Lower Manhattan’s Hudson Square from its landlord, Oxford Property Group, felt like a shot in the arm among real estate professionals. The deal sends a strong message, they say, about how tech giants — major office renters and buyers — perceive office space going forward, despite the fact that Google and others now plan to accommodate a significant amount of remote work even after the pandemic has abated.
“It says a lot that they are thinking about the value proposition of office generally as something that is going to be in their long-term strategy, and their long-term mindset of where they can have the best places for value creation,” Staniforth said.
Richard Horowitz with real estate financing firm Cooper Horowitz echoed Staniforth’s sentiment.
“This is only going to catapult lenders’ interest in financing offices in New York,” Horowitz said. “It’s great for New York. We need the boost.”
Savills’ broker Zev Holzman said Google’s move can have a trickle-down effect on the market.
“This purchase is a further signal to those smaller tech companies that the large tech companies are doubling down on office space,” he said. “And I think that is a very positive message for the market overall.”
Whether the current market condition affected the acquisition price is unknown; some leases set a fixed purchase option price when signed, and others allow negotiations to determine the purchase price when tenants exercise their options. Google representatives did not immediately provide the information as to how the firm’s lease at St. John’s Terminal was structured.
Staniforth said the price tag — which comes down to about $1,615 per square foot — is a “strong number,” regardless of how the two parties arrived at it.
“To me, it indicates, on a broader scale, the strength of New York and how things are going to trade post-pandemic,” he said.
Adelaide Polsinelli, a commercial broker with Compass, however, said she believes Google seized the opportunity to buy at the lowest point of the current cycle, noting that its decision came at a time when so-called user-buyers — tenants that purchase and then occupy a property for their own use — were much more active than investors.
Polsinelli said she recently closed two user-buyer office deals in Midtown — Japanese snack chain Minamoto Kitchoan’s $45 million acquisition of 604 Fifth Avenue; and an undisclosed Asian buyer’s $101 million acquisition of 576 Fifth Avenue. Those user-buyers jumped on the opportunities now to acquire these properties that would have been beyond their reach at the height of the market.
“Real estate follows a cycle,” Polsinelli said. “It’s all about timing.”
Google’s parent company Alphabet already owns a collection of buildings in downtown Manhattan, including 111 Eighth Avenue, the Chelsea Market building, and the Milk Building at 450 West 15th Street. In addition, the tech behemoth leases more than 300,000 square feet of office space at Pier 57, which is being developed by RXR Realty and Youngwoo & Associates.
In 2019, Google finalized its agreement to lease the St. John’s Terminal building at 500 Washington Street, while Oxford and partner Canada Pension Plan redeveloped the property into the modern office building. Google’s recent acquisition deal is set to be closed in the first quarter of next year, but the building won’t be completed until mid-2023 at the earliest.