Why ‘build-and-hold’ Oxford sold to Google

Dean Shapiro, Oxford's head of US development, tells PERE the firm made an exception in selling St. John's Terminal to its tenant for $2.1bn.

Oxford Google
Terminal: Oxford made the rare decision to exit one of its developments.

Oxford Properties did something it rarely does when it leased its entire 1.3-million-square-foot St John’s Terminal development in Manhattan to Google in 2019: it gave its tenant the right to buy.

Dean Shapiro, Oxford’s head of US development, told PERE he could not recall another instance in which the firm included a purchase option in a lease agreement. “It’s not generally our policy to build and sell,” he said. “Our policy is really to build and hold.”

But Oxford, the real estate investment platform for the Ontario Municipal Employees’ Retirement System, deviated from that policy for the opportunity to work alongside Google on the ambitious conversion of a former freight terminal into a class A office complex, he explained. “This was a unique opportunity, a unique asset and a chance to do business with Google, which is one of the most innovative companies in the world,” Shapiro said. “We made the decision to accommodate them and their desire to potentially own the property.”

That decision set the table for the tech giant’s $2.1 billion acquisition of the property, which was announced this week and is expected to close early next year. The price is the highest paid for a New York office asset during the pandemic.

Analysis of other recent transactions involving well-leased, institutional-quality offices by the commercial real estate analytics firm Green Street indicates that the property could have sold for roughly $100 per square feet more on the open market. But Shapiro said the agreed upon price represents fair value for both sides.

Both Oxford and its equity partner in the St. John’s Terminal project, CPP Investments, declined to disclose proceeds from the sale. Shapiro said Oxford plans to redeploy its share of profits into new acquisitions; there is no specific outlay for the capital, but he notes that the investor has largely been focused on the industrial and life sciences sectors as of late.

Owning over renting

Google’s insistence upon a purchase option fits its typical approach to real estate, which is to own rather than rent, PERE understands. Alphabet, Google’s parent company, purchased the 1.2-million-square-foot Chelsea Market complex for $2.4 billion in 2018. And, in 2010, the company went from tenant to owner at 111 Eighth Avenue, buying the 2.9-million-square-foot building for roughly $1.9 billion.

Google is not the only tech titan to buy into the New York market during the pandemic. In May 2020, Amazon purchased a former Lord & Taylor department store on Fifth Avenue for nearly $1 billion.

Companies that have prospered during the past 18 months have not been shy about capitalizing on the general malaise of the covid-era office market, Denis Hickey, chief executive of the Americas for Lendlease, told PERE. The Australian developer and manager was not involved in either the Google or Amazon transaction, but Hickey said he has seen office occupiers favor owning properties they see as mission critical.

“Most of the bigger players, if they think a building is strategic in terms of their long-term presence, I see them wanting to control that asset over the long term, control its future,” Hickey said. “The big tech firms want to be where the talent is and if the talent is in a certain city, it becomes important for them to be there, too.”

New York state of mind

Google’s commitment to buy St. John’s Terminal is being lauded as the latest sign of life in a New York office market facing existential questions about the future of work and the viability of major city centers in a post-covid world.

In a statement, Alphabet’s chief financial officer Ruth Porat re-affirmed the company’s belief that the city will return to form as a premier labor market. “New York’s energy, creativity and world-class talent are what keep us rooted here,” she said.

Shapiro anticipates Google’s purchase of St. John’s Terminal giving confidence to others considering commitments to the market, but it will not turn the tide single-handedly. “We need sustained momentum,” he said. “It’s a step in the right direction, but I don’t think any one event will change the market.”

A lifelong New Yorker, Shapiro is confident the city will return to form, but he does not see its entire office stock coming along for the ride. With the advent of remote work, office owners will have to take extra steps to make their properties attractive to end users. He points to distinguishing features such as the outdoor spaces and the connection to the nearby Hudson River Park at St. John’s Terminal as key selling points for Google.

“What I hope to see is that the people who have the courage to continue developing office space in New York will follow suit and continue to innovate,” he said.