The Long View: Google, JPMorgan Chase and the new age of spectacularly rich corporate real estate buyers

Why more companies decide to buy office space, and how the trend can change the market

270 Park Avenue and the Chelsea Market
270 Park Avenue and the Chelsea Market

They have more money than they know how to spend, safely stashed in offshore bank accounts. They are citizens of the world, moving from country to country chasing profit and lower taxes. And they like to buy trophy properties in Manhattan.

You’ll be forgiven for thinking of Middle Eastern sheiks and Russian oligarchs, but I am talking about big U.S. corporations.

Last week, The Real Deal reported that Google is paying $2.4 billion in cash for the Chelsea Market building. Last month, banking giant JPMorgan Chase announced it will tear down its existing headquarters and build a 70-story skyscraper at 270 Park Avenue in its place.

These two deals are harbingers of a new era. With corporate cash reserves at record highs, companies are starting to behave a little more like super-rich people. And like hedge funders and oil barons, they are developing a penchant for parking their wealth in Manhattan real estate. Welcome to the age of corporate stash pads.

“Looking around, not having many other investment opportunities, this is a good place to put your capital,” said Jahn Brodwin, a corporate finance advisor at FTI Consulting.

It’s not just Google and JPMorgan Chase. At Hudson Yards, private equity firm KKR, Wells Fargo and Time Warner agreed to buy office condos spanning a combined 2.3 million square feet. And on the West Coast, Facebook is building a small city for its employees that will include 1.75 million square feet of office space and 1,500 apartments.

Corporations buying office buildings isn’t new. In the early 20th century, New York’s tallest skyscrapers were built by big companies for their own use — think of the old MetLife Building and the Woolworth Building. But in the second half of the 20th century, more and more firms ditched their real estate holdings and began leasing office space instead. They were looking to simplify their balance sheets and focus investment on their core business in a bid to appeal to stock market investors. Owning real estate usually meant taking out mortgages, which increased liabilities, Brodwin said. It also carried risk.

Now the pendulum is swinging back in the other direction. One reason: the sheer accumulation of wealth in the hands of corporate behemoths. Cash and liquid investments held by U.S. non-financial firms rose by 5 percent in 2017 to $1.9 trillion, according to a November report by ratings agency Moody’s. The report projected Google’s parent company Alphabet would hold $103 billion in cash by the end of last year. Apple’s cash reserves were projected at a staggering $265 billion.

Companies need to store all that wealth somewhere, and low interest rates make bank accounts and bonds somewhat less appealing. Real estate offers an alternative. Meanwhile, the recently passed federal tax reform allows firms to repatriate their offshore wealth at a lower tax rate for a limited time, adding an incentive to move funds from overseas into the New York property market.

Another big change concerns accounting rules. In the past, companies weren’t required to list leases as liabilities on their balance sheets, even though that’s exactly what they are. But starting in 2019, that will change. Public companies that sign leases will have to include their present value as liabilities, making them look worse on paper. Companies that buy buildings may add liabilities in the form of a mortgage, but they also add a valuable property to their balance sheet.

Throw in the tax advantage of depreciation and the security of knowing you can’t get kicked out at the end of a lease, and you get a pretty compelling case in favor of buying real estate.

FTI’s Brodwin predicted that we’ll “certainly see more” companies buying their own office space. For a sense of how that could change the commercial property market, take a look at luxury condos. Over the past decade, amid a record rise in private wealth around the globe, billionaires flooded into the Manhattan residential market. They drove up prices, enriching developers like Gary Barnett and Harry Macklowe. The influx also weakened the connection between condo prices and market fundamentals like rents and demographics. As properties turned into stash pads, rental returns became a secondary concern. A similar thing could happen in the office market.

Byron Carlock, PwC’s real estate leader, said the rise of corporate real estate buyers is part of a broader trend: companies, under pressure to attract workers, are paying more attention to their office space. “There is a perception that many spaces are outdated and in extreme cases demoralizing to the workforce,” he said. Buying or building your own property can be the best way to ensure the right work environment. Spending $2 billion on a building, he said, can be “inconsequential compared to the impact it would have on the workforce.”