Publicly-traded U.S. companies are holding a record $2.7 trillion in cash, cash equivalents, and short-term investments, an increase of 90 percent from 2011’s fourth quarter, according to S&P Global.
For example, Alphabet Inc., Google’s parent company, had $135.9 billion in cash at the end of this year’s second quarter, S&P said.
With interest rates at record lows near zero, “that cash is just sitting there in a not particularly productive way,” Brian Kingston, head of real estate for Brookfield Asset Management, a private equity firm, said to The Wall Street Journal.
To make a return, many of the companies are putting that spare cash into commercial real estate, the WSJ reported.
The timing is right: commercial real estate prices crashed to bargain prices during the COVID War, as we have documented extensively in articles such as “Remote Work = Commercial Bust” (2 Jun 2020) and “New York Office Vacancies Set Record” (13 Jul 2021).
The price of office space in Chicago, New York, San Francisco, and other traditional business hubs is significantly lower than it was at the end of 2019, the WSJ noted.
Cash-rich corporations are taking advantage.
Google will pay $1.2 billion for a Manhattan office building, the company announced last month. In 2020, Amazon spent $978 million to buy the former Lord & Taylor department store, also in Manhattan. Facebook put up $378 million to buy an office campus in Bellevue, Wa.
Alphabet owned $47.9 billion in property at the end of 2019, compared to $5.8 billion in 2011, the WSJ said; Amazon owned $57.3 billion worth, second only to Walmart.
Publicly-traded U.S. companies now own $1.64 trillion in property, according to S&P Global Market Intelligence, 38 percent more than in 2011.
Tech companies increasingly are joining conventional retailers such as McDonald’s and Walmart in owning the buildings they occupy.
Ownership spares them the tedious dealings with landlords, negotiating leases, renovations, and upkeep. Paying cash also saves the interest costs of a mortgage and often allows the transfer of ownership to happen faster.
However, owning the properties also puts the companies at risk if commercial real estate prices fall, which they did precipitously during the COVID War, as we noted above.
TREND FORECAST: With Facebook releasing its entire workforce to be remote and other companies adopting hybrid workplace structures, a few cash-rich companies buying buildings here and there will not rescue the commercial real estate market, which we have long predicted will permanently shrink not only in size but also in value.
As we noted in “Commercial Real Estate: Boom or Bust?” (25 May 2021) office buildings could lose as much as 40 percent of their value. This is most likely in conventional business centers such as Chicago, New York City, and San Francisco.
Values will decline less, but still decline, in newly popular business hubs such as Charlotte, Austin, and Minneapolis.We also have stated numerous times that as commercial real estate loses value, cities lose tax revenue, their residents either lose services or pay more for them, and the quality of urban life is damaged, persuading more people to live elsewhere. See, for example, our forecast in “As Forecast: NYC Commercial Real Estate Crisis Worsens” (24 Aug 2021).