Blue-sky thinking for Google
Google's decision to pay Nama €65m for an office block highlights the demand for commercial space in Dublin's Grand Canal Dock
THE first big property deal of the year hasn't formally closed yet, but it is as good as done. Google has agreed terms to pay Nama €65m for an office block in Grand Canal Dock in Dublin, while private equity house Blackstone will spend €100m on three blocks nearby.
All four buildings were part of the 'Platinum Portfolio' put up for sale by Nama. Blackstone's move is the latest by a big US investor here and is perhaps not surprising, but Google's deal caught the eye immediately. What is the technology giant doing spending millions on office blocks in Dublin, and could it be a pre-cursor to other tech firms buying rather than leasing space in Ireland?
Google Ireland managing director John Herlihy declined to comment on the Grand Mill Quay purchase, but the deal is not Google's first foray into the property market in Ireland. In 2011, the company spent €226m on three office blocks that make up its Barrow Street campus, including €99m on the Montevetro skyscraper -- Dublin's tallest commercial building.
Still, the three buildings it has bought up to now have been fully occupied by Google itself. The Grand Mill Quay building is a little different in that Google only occupies part of the building. Other firms, including the US finance giant BlackRock, also occupy part of the building.
Crucially though, most of the other occupants are on short leases that expire in the next year or two. The smart money is on those leases not being renewed and Google taking over the space as it needs to.
One of the biggest problems that thriving companies face is running out of space. Google in Dublin has added more than 500 staff in the last two years and it is still expanding. Companies that are "landlocked" and have nowhere to put new staff often end up using serviced offices around Dublin. That is fine as a short-term solution but long term, Google needed to ensure it had access to office space that it doesn't need now, but may do in a few years' time.
Google's decision to buy rather than lease is not surprising to the IDA. In its submission to Dublin City Council ahead of the new development plan for the Docklands area, the IDA made plain that tech firms in particular want a self-contained "campus-style" head office.
The agency's chief executive Barry O'Leary says Google's purchase is an endorsement of Dublin and Ireland in general, and serves to copper fasten the company's presence in this country.
"The fact that Google has bought some of its offices here probably reflects the market and the fact that there is still reasonable value available," he says.
Google tends to be the driver of much of the growth in the Docklands area. It was the first big tech firm to set up there in 2004, and is still by far the biggest single employer in the immediate area.
It is unquestionably the trendsetter in the area. Does that mean that if Google is buying up property, are others such as Facebook about to follow? After all, Mark Zuckerberg's company is already moving to new offices at Grand Canal Square as it looks to increase the size of its operations here.
In the short term, however, that is unlikely.
"Google has been very active in the property market but they are probably in the minority," believes BNP Paribas Real Estate head of offices Tom Carthy.
"Companies like Google might be cash rich but they didn't make that money in real estate. Now, if an opportunity came up for a LinkedIn or whoever to buy office space there, who is to know what they would do. For now though, most firms are content to sign leases instead," he adds.
Facebook declined to comment on whether it would follow Google's lead and buy office space in Dublin. Informed sources, however, say it is something the social network would consider down the line.
"You have to remember that Facebook is still at a much earlier stage in its life than Google. It has a bit more than 500 staff in Ireland now. That is about 20 per cent of what Google has here," said one source.
"If the opportunity came up to buy offices in Ireland in a few years' time, there is a good chance they would at least look very closely at it," the source added.
Google is somewhat unusual in that it clearly prefers to own its office space. Two years ago, it signed a €750m deal to buy land in central London for its new campus in that city. It has similar projects around the world. Other firms prefer to have the flexibility that they can get with a lease instead.
Still, the fact that Google has committed to buy the last of its offices that it doesn't own is a strong endorsement of Ireland and will be used by the IDA to sell Ireland to other overseas firms.
"Having Google here is a huge selling point for Ireland," says Barry O'Leary.
"It is a fantastic brand so our guys, particularly in the US, would leverage up their success here. It's a good selling point because you are not selling a concept, but rather a solid success story. You also have to remember that some of the companies we are working on bringing here may not have even heard of Ireland before so Google's name makes them sit up and take notice."
Despite the presence of Facebook, LinkedIn, Twitter and many other technology firms in Dublin's Docklands, Google is unquestionably the dominant player in the neighbourhood. That is something of a double-edged sword. Its presence alone has attracted many companies here, but the upshot of its success is that a huge number of businesses moving to Ireland want to set up in Grand Canal Dock, where space is fast running out.
O'Leary has repeatedly warned about the lack of suitable office space in the city centre and says new construction is badly needed.
Long term though, BNP's Carthy thinks the "Silicon Docks" could end up crossing the river and taking over the IFSC as well.
"It is the natural progression, especially if the lack of new builds persists. There is a fair amount of vacant offices in the IFSC and it is a natural extension of the Grand Canal Dock area," he says.
"Space in the South Docks is very much in demand, the technology companies want to cluster together and if a firm wants to hire staff away from Google, say, they have to be able to offer them at least comparable conditions. Working in an industrial estate on the outskirts of the city is not an option in that case."
The price Google has agreed to pay for the 96,500 sq ft Grand Mill Quay -- €65m -- is about 40 per cent more than the original asking price for the property and has sparked concerns about another property bubble in the commercial sector.
For comparison, when Google bought Montevetro, it paid €99m for a building with 210,000 sq ft.
However, DTZ Sherry FitzGerald's Ronan Corbett -- who counts numerous tech firms among his clients -- disagrees.
"The fact is though that there is enormous demand for office space in the South Docks, and limited available space.
"Around the world, where Google and Facebook are, other companies want to set up there so prices in the area are likely to continue heading up, and show few signs of slowing down," he says.
When the crash happened, the good times seemed to continue unabated in the South Docks, and it doesn't look like they'll end any time soon.