Since the beginning of 2020 Big Tech has purchased 1.6 million square feet of office space in NYC alone. It’s a move to control their operations, park hoards of cash into hard assets, and continue to expand their operations with hundreds of thousands of new hires. In fact Amazon hired over 400,000 employees in just 10 months following the start of the pandemic. With a massive increase in headcount comes a need for infrastructure and space to work in.
As if the timing couldn’t have been better, demand dropped while supply shot up in commercial real estate, causing building prices to fall. This opportunity allowed the Big Tech companies to pick up hoards of buildings at a great deal further expanding their portfolio and balance sheet assets. 600 million square feet is the space that Big Tech companies own and operate in the US. To put that into perspective the US has about 4 Billion square feet of office space total in the US.
In this episode of Things Have Changed we cover the Commercial Real Estate market, how Big Tech is positioning themselves with recent acquisitions, and why vacancy levels have inverted from suburban regions to downtown areas.
Adrian Grobelny [00:00:02] Big tech has purchased one point six million square feet of office space in New York City alone since the beginning of 2020. It's a move to control their operations, park hoards of cash into hard assets and continue to expand their operations with hundreds of thousands of new hires. In fact, Amazon hired over 400000 employees in just 10 months following the start of the pandemic. With a massive increase in headcount comes a need for infrastructure and space to work it as if the timing couldn't have been better. Demand dropped while supplies shut up and the commercial real estate market causing buildings prices to fall. This opportunity allowed the big tech companies to pick up parts of buildings at a great deal further, expanding their portfolio and balance sheet, 600 million square feet is the space that big tech companies own and operate in the US currently to put that into perspective. The U.S. has about four billion square feet of office space total to date. And this episode of Things have changed, we covered the commercial real estate market, how big tech is positioning themselves with the recent acquisitions and why vacancy levels have inverted from suburban regions to downtown areas.
Jed Tabernero [00:01:27] Welcome to THC, where we unpack the ever changing technology economy
Adrian Grobelny [00:01:33] hangout with Jed Shikher and Adrian as we tackle the industries of tomorrow.
Shikher Bhandary [00:01:39] This is things have changed, so we know the pandemic had a huge effect on homes. There was a wild stat that like right now in the United States, there's only two and a half months for all houses to be unavailable in the whole country. Right. So this kind of demand, we've never really seen a whole lot of this prior to the pandemic. Everyone wants to work from home. So if that's happening in your residential market, what's happening in the commercial market, there is a lot of real estate that is comprised of things other than homes. And, you know, you have corporations. So industrial and general lodging, you have retail. So there's a lot happening. So what effect has that seen through this pandemic? And does that have any relation to residential rates?
Jed Tabernero [00:02:40] Yeah, I mean, you know, commercial real estate, to your point, is not just like, you know, corporations buying buying buildings and, you know, offices, corporate offices. Also leasing comes into play. Right. That's a huge part of commercial real estate where where deals are signed that are multimillion dollar deals over periods of time, long periods of time. But you have the face of commercial real estate right now is big tech. Initially when this coronavirus happened, right when we were talking on, things have changed. We kind of thought about what what's the future going to look like of offices. Right. We had that on our one episode, which which will plug in here. And in that one episode, we mentioned how, OK, the future may be looking a little bit different. You know, companies are now realizing they can move their entire operations online. So a lot of them are contemplating, are we supposed to go back to the office? So would that decision point? You know, we were thinking, oh, shit, commercial real estate is going to be down. Nobody's going to be buying new shit. The guys that are actually more well positioned to go all the way online, you know, these massive tech companies are actually buying up more real estate. I mean, I'm sure you guys have heard of the case in Manhattan, right?
Shikher Bhandary [00:03:59] Yeah. Yeah. Commercial real estate in general is not doing as good as it was doing two years ago. So that's 100 percent the baseline. But there is a segment of the economy that has never been doing this well, and that is big tech. So what is big tech, too? I'm going to go and buy all the sexy spots in Manhattan, which is exactly
Jed Tabernero [00:04:29] what they were sexy do. How do you know the robots are sexy?
Shikher Bhandary [00:04:32] Amazon comes in and buys. Have you seen the Hudson Yards? That needs to be like an experience. That's why they built it.
Adrian Grobelny [00:04:39] They have that whole that architecture, the beehives, the beehive. What purpose does you just walk in circles on the stairs and get low art? What the fuck are you doing? I know, but that was like the most expensive
Shikher Bhandary [00:04:56] piece of artwork you could install
Jed Tabernero [00:04:58] in there anyway, like, you know, looking at specific cases. Right. So Facebook, Apple, Google, and as we've already talked about, Amazon, all these companies are coming in especially to, as Chika is mentioning, the sexy spots in Manhattan.
Shikher Bhandary [00:05:14] Absolutely. Do like Apple going after what that Lodin Taylor building. Those are iconic
Jed Tabernero [00:05:19] spots. That's Amazon. Sorry that I worked on it. Wink, wink.
Shikher Bhandary [00:05:24] So Amazon's got the Hudson Yards A and Taylor, so.
Jed Tabernero [00:05:28] Yeah, yeah. It's it's kind of like, I don't know, all these tech companies taking some old shit, you know,
Adrian Grobelny [00:05:34] when they made all these acquisitions, did they get. You know, less than premium rates, not rates, but acquisition prices, since I'm sure you know, a lot of the developers and the Hudson Yards, they're struggling right now because they built this big, you know, multibillion dollar complex. And like many city, basically,
Shikher Bhandary [00:05:58] and it was dead.
Adrian Grobelny [00:05:59] It's empty. Yes, it was renting. And they have all this, you know, they have expectations that, you know, they develop it, they meet their timeline and they have to fill up all the spaces and, you know, get that cash flow that they're anticipating to receive in these coming years to make up for all those costs up front.
Jed Tabernero [00:06:17] Tech companies right now, they have a bunch of cash. I mean, Apple, dude, Apple can go ahead and do whatever the fuck it wants. If it wants to build an electric car, it's going to build an electric fucking car.
Shikher Bhandary [00:06:25] Apple, Facebook, the cash flow that they generate, they don't really this is, again, investments. You know, I was having a conversation with a friend who lives in Seattle and he was saying how Amazon is the biggest property owner in Seattle. So when you go and rent, you're actually paying Amazon. So they pay you one hundred thousand dollar salary, you're paying two thousand dollars in rent. That two thousand dollars is going back to Amazon more or less because of, you know, the price of the land, stuff like that. So and they can leverage that to get more assets to buy those grounded Boeing 737. Sounds like it's literally their world and we live in it.
Adrian Grobelny [00:07:04] It's like these tech companies, I'm sure a long time ago they've already known this, but we're starting to see how they're like realizing that they're not in the business for tech and software. They're in the business of real estate. It's like the founder, you know, the story of McDonald's and how, you know, he had no idea his margins were tight. He was constrained by the original founders that were limiting what he could do with the restaurants, you know, how he could operate, what kinds of milkshakes he was using to sell and make better margins. And then, you know, it clicked and finally realized if he owned the real estate, he would own the whole business. He'd have all that control. And so these tech companies you're seeing are starting to acquire more of this real estate.
Jed Tabernero [00:07:52] I mean, a crazy stat is that, you know, we're just talking about the four massive tech companies who are in Manhattan, you know, Amazon, Google, Facebook and Apple. They're collectively employing like 22000 people, dude, in New York, 2600 that were hired in twenty twenty. You know, this is the crazy, crazy stat. They bought or leased about one point six million square feet of space.
Shikher Bhandary [00:08:18] They're just jumping on cheap commercial real estate and then going ham.
Adrian Grobelny [00:08:21] It's really smart on their part to move so fast and quickly because it's like if you would have gone in the stock market in March, you would have been up 50 percent with anything that you invested in. So with a shock where, you know, pandemic hits March twenty twenty, there's uncertainty. Rents is a it's a question whether you're going to be collecting your rents due to a lack of income, cash flow leases, all these office spaces, all these apartment buildings,
Shikher Bhandary [00:08:52] this chart that I was looking at and kind of explaining who the the moguls, the real estate moguls of the 21st century are. It's like got Google at 40 billion dollars. Amazon, I'd like 40 billion dollars. You have applied to any Facebook at 15. It's like these four companies just make up the top ten. There's no escaping the fact that they have just so much power and leverage that this past year those four companies reported silly numbers they were making like stupid amounts of money. So this just go and shop.
Jed Tabernero [00:09:33] Another thing to spend your cash on, right? It's huge. Yeah. I mean, those are the the biggest, you know, real estate mogul is on this fucking country. It's it's kind of nuts. I mean, if you think about collectively how much they own in terms of real estate. Right. 589 million square feet is collectively Alphabet, Amazon, Apple and Facebook and Microsoft, five tech companies. OK, so that's literally bigger than all of New York City. It's a ridiculous amount. So, I mean. This new wave of new property owners and and, you know, real estate moguls, if you will, that were tech companies, it really calls the question like is, is that a good thing or is that a bad thing? Economies of scale is reached. Well, what about Usted? What happens to rent as a use case? San Francisco. Right. And the people who were like gentrified out of that area. But right right now, like, we're looking at something we read on on Wall Street Journal that was talking about, quote unquote, the Google effect. Right. What so what typically happens when big tech moves into town? Right. So in 2010, Google bought that office building in Manhattan's Chelsea neighborhood. Fanciest neighborhood.
Shikher Bhandary [00:10:54] If it's above the restaurant, Boudicca, that Budokan don't go there if you have just hundred dollars, would like it to be on the streets.
Jed Tabernero [00:11:05] OK, damn, you'll be poor. Same day.
Adrian Grobelny [00:11:07] It's just more of a street food kind of guy though.
Jed Tabernero [00:11:10] I am. I am. So, you know, getting back to the Google effect right then buying that that office building in the Chelsea neighborhood for for one point eight billion dollars. So 2010, fast forward 10 years, right? 2020, God damn office rents blew up 65 percent. More expensive. Right. What happened to the apartment prices? Well, of course, the apartment prices went up to Parvizi, went up by 47 percent. So we can think about it in a couple of ways. Right. Big tech also brings jobs and, you know, six figure jobs and a lot of those, depending on where you're at regardless, actually, Amazon set up a minimum wage of fifteen dollars early on like, I don't know, twenty eighteen or some shit like that. Right. And that was premature from what they're talking about right now of raising the minimum wage again, right in in Congress. So, you know, there are some good things that happen. But you can't you can't really discount the externalities, the negative externalities of big tech weighing in and them owning much of the real estate. And that becomes in itself a monopoly as well.
Shikher Bhandary [00:12:20] Yeah, there are sectors that is still having a strong performance, even with the downturn. And one side, you know, one unintended consequence of this phenomenon in real estate has resulted in self-storage companies doing really well because everyone's moving, everyone's relocating, packing all their stuff and paying thirty dollars a month for a self-storage cube, smart or U-Haul or whatever. And those companies have been doing great. So that's interesting, too, to think what unintended consequences the pandemic has brought, be it in vaccine science, in epidemiology, be in real estate, as
Adrian Grobelny [00:13:02] you call a public company. I feel like you. Yeah, really. Well, right now,
Shikher Bhandary [00:13:06] Cube smart, you haul all those guys off. Kind of killed it.
Adrian Grobelny [00:13:10] Yeah. Industrials doing well right now. And self-storage, there's a term that's common in commercial real estate called absorption, which is basically how much of the inventory or units available in the market are being absorbed or filled in. And just looking at the different segments of commercial industrials has done really well throughout the pandemic. They're net positive absorption, meaning their units that are in the market are being filled up positively. So that's good. And the ones that were negative had been retail. You know, stores are just closing up. They're not filling up spaces. There's no reason for them to stay open when they were locked down. And then once they've been locked down, they just not been able to really function like most stores happen. Grocery is an exception, but retail in general has been hit hard. So there's a big surplus of inventory for retail shops right now, like we mentioned earlier, Hudson Yards. And that's becoming an issue. So another thing that's popped up and kind of shown the trends and changes in investors decisions and what they're moving into basically in 2010, suburban vacancies, we're at seventeen percent. Well, downtown vacancies for 15 and it's shifted where downtown vacancy is higher and suburban vacancies lower now showing that investors are moving to more suburban areas to invest in commercial real estate.
Shikher Bhandary [00:14:44] Dude, I love the bulbs. The bulbs of words can drive and I have a big house.
Adrian Grobelny [00:14:50] So a lot of investors are moving to those more suburban shopping centers.
Jed Tabernero [00:14:55] Larger spaces. Yeah, yeah, yeah.
Adrian Grobelny [00:14:57] To follow where people are moving, the population shifts that are happening. Investors are following that Interex.
Unidentified [00:15:05] That's the risk.
Shikher Bhandary [00:15:12] Hey, thanks so much for listening to our show this week. You could subscribe to us and if you're feeling generous, well, you could even leave us a review. Trust me, it goes a long, long way. You could also follow THC @THC_POD on Twitter and LinkedIn. This is things have changed.