Google's surge spurs big U.S. office leases

'Monster engine' drives trend of deals by tech companies

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SAN FRANCISCO — Google, owner of the world's most popular search engine, is also a dominant real estate deal maker that's expanding its office space while nationwide demand from more traditional tenants wanes.

The company signed the year's biggest leases in California's Silicon Valley and San Francisco and agreed to a fourfold jump of its space in Chicago, according to brokerage Cushman & Wakefield Inc. A pending deal in Manhattan for about 360,000 square feet (33,000 square meters) would be the biggest in midtown south, the area where Google bought a converted freight terminal for $1.84 billion almost three years ago.

"Google is a monster engine everywhere, and we're pretty thankful they're in our world," said Bob Chodos, a principal at brokerage Colliers International in Chicago, where recent leases brought the technology giant's total space in the city to 807,000 square feet. "Companies like that draw other companies and create places where people want to do business."

With its share price soaring beyond $1,000, Mountain View, Calif.-based Google is leading the way among growing technology companies that are making some of the biggest leasing deals while financial firms and other office-using industries cut back. U.S. office rent increases have slowed for three straight quarters, data from Reis Inc. show.

Manhattan deals

In New York, Google has a tentative deal at Related Cos.'s 85 10th Ave. in Chelsea, according to a person with knowledge of the terms. Joanna Rose, a spokeswoman for New York-based Related, declined to comment.

The building is in the neighborhood where Google purchased 111 Eighth Ave. in December 2010. That deal unleashed a wave of sales and leasing by technology companies in midtown south, now the city's best submarket for rent growth. The vacancy rate of 7.6 percent in the third quarter was the lowest of any U.S. business district, Cushman & Wakefield data show.

"There's no question that it's the healthiest portion of Manhattan, with lots of appeal to tech and creative companies," said Jed Reagan of Newport Beach, California-based Green Street.

In 2005, a group led by Shorenstein Properties LLC paid $438 million for the Starrett-Lehigh Building, also in midtown south, as commercial real estate prices surged toward their peak. The San Francisco-based developer expected to keep the 2.2 million-square-foot property for the long term to meet its yield targets, according to Chairman Doug Shorenstein. Then after a single deal, the market took off.

"I saw what Google paid" on Eighth Avenue, he said.

Shorenstein changed his plans. In April 2011, the group sold the Starrett-Lehigh Building to Scott Rechler's RXR Realty LLC for $920 million, more than doubling its investment.

Areas that attract and retain innovative companies -- including Silicon Valley, Boston, San Francisco and Seattle -- are defying the torpor, with rents 12 percent higher than the U.S. average, according to Jones Lang LaSalle Inc. Half of 23 million square feet of office projects under way will be occupied by technology firms, an outsized demand for an industry with just 3.3 percent of private-sector jobs, the brokerage said in an August report.

This year, Google took 350,000 square feet in San Francisco to expand its Hills Plaza lease, 901,000 square feet in Silicon Valley near its headquarters in Mountain View, and 232,000 square feet in Chicago, according to Cushman. An expanded hub for engineers working on Google's Chrome browser will almost double the company's space near Seattle, data from Cushman show.

The company's expansion in San Francisco, Silicon Valley and the Seattle area are a "key driver of strength" in commercial real estate, said Green Street's Reagan.

The locations are the top three markets for technology job growth, venture-capital funding and college- educated workers, according to Jones Lang LaSalle.

Cutting edge

Third-quarter profit rose 36 percent from a year earlier to $2.97 billion, after higher ad volume across platforms, Google said on Oct. 17. The shares surged past $1,000 the next day, and are up 44 percent this year. With a market value of about $341 billion, the company is the world's biggest after Apple and Exxon Mobil.

Google aims to "increase the velocity and the execution" of product development while keeping "the passion and soul of a startup as we grow," Larry Page, chief executive officer since 2011, said during an earnings conference call. "When you look across the company, it's amazing how all the teams are executing."

The 180,000-square-foot expansion of the Chrome campus in Kirkland is a boon to the area, even with homegrown Microsoft and Amazon.com based nearby, said David Postman, press secretary to Washington Gov. Jay Inslee, who attended a March event announcing the project.

The Seattle region's 112,000 technology jobs account for 11 percent of total employment in the area, the largest share for any market outside Silicon Valley or San Francisco, according to the Jones Lang LaSalle report.

"When Google says, 'We want to be here,' it validates this area," Postman said in a phone interview. "The high-tech industry is changing every day, and it's all about staying on the cutting edge."