The biggest U.S. companies are sitting on huge piles of cash, and they are running out of ways to spend it. So now, they are putting their money in a lot of commercial real estate.
Last week, Google announced that it would purchase a Manhattan office building for $2.1 billion. This is only the latest in a string of real estate deals since the beginning of the pandemic. Amazon paid $978 million last year for the former Lord & Taylor department store in Manhattan, while Facebook bought an office campus in Bellevue, Washington, for $368 million.
Publicly traded U.S. companies now own land and buildings valued at $1.64 trillion, up 38 percent from ten years ago, and the highest for at least the past decade.
Retailers such as Walmart and restaurant chains such as McDonald's have long been major property holders of their own stores, but big tech companies are now joining them by scooping up offices, data centers, warehouses and retail spaces.
Tech companies avoid pricey leases by snapping up real estate
Buying real estate is a way for companies to avoid pricey leases: Instead, they often occupy these buildings to become their own landlords. These modern or renovated, sometimes custom-built, properties are the kinds of buildings that have appreciated over the years.
Corporate buying helps prop up the commercial real estate markets. At the same time, investors are shying away from office and retail buildings amidst rising vacancy rates. (Related: Coronavirus batters New York City's luxury real estate market.)
Private equity and real estate funds also raised cash that they have been reluctant to spend during the pandemic, in hopes that prices could fall further. Unlike real estate investment firms, however, big corporations tend to buy their buildings without taking out mortgages, allowing them to spend more of their money and close on deals faster.
Other factors also contributed to the buying spree. For instance, firms now have more money to purchase real estate as big, profitable companies that dominate their industries have grown bigger, thus allowing them to accumulate more cash.
The uncertainty over how the pandemic will harm the economy also prompted more companies to hoard cash.
The U.S. publicly traded companies hold $2.7 trillion in cash, cash equivalents and short-term investments. These do not include real estate and financial companies. This amount is up more than 90 percent from the fourth quarter of 2011.
Interest rates are at their all-time lows, so companies can get higher returns buying real estate than keeping their money in low-risk bonds or other public securities.
Meanwhile, office prices in Manhattan, San Francisco, Chicago and other large cities have fallen during the pandemic, making investing cheaper than it was 18 months ago.
Google, in particular, has set itself apart from other companies in terms of an increasing appetite for real estate. Alphabet Inc., Google's parent company held $135 billion in cash, cash equivalents, and short-term investments as of the second quarter of 2021. It is now one of the biggest real-estate owners in New York City and the U.S., with $49.7 billion worth of land and buildings as of 2020.
Amazon, which owns warehouses, holds $57.3 billion worth of land and buildings -- more than any other U.S. public company other than Walmart. The company's vice president of real estate and global facilities, John Schoettler, said that Amazon is not too particular whether it buys or leases, as long as the building is right.
Big Tech showed early signs of recovery in Manhattan real estate
The leasing activities from Big Tech companies sparked early signs of recovery in the Manhattan office market, which was hit hard by the pandemic. Leasing volume in August more than doubled compared to July, with 1.46 million square feet of office space leased midtown.
While tech companies have been leading new leasing activities in the city, broader markets still have long roads to recovery. For instance, only about 23 percent of Manhattan workers have returned to their offices as of late August. The survey found that 76 percent of workers plan to be back in the office in early 2022 and that 70 percent of employers are adopting a hybrid office schedule, where employees can work remotely for part of the week.
Despite all the real estate power that big tech companies hold, Manhattan still has about 86 million square feet of office space available -- a rate of over 18 percent, or a near 30-year record.
Read more about the real estate market in New York and the rest of the U.S. at MarketCrash.news.
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