Google’s 80-acre mega campus in San Jose is on maintain amid the financial slowdown
Google’s construction site at San Jose’s future megacampus sits idle as the company halts development to cut costs.
In June 2021, Google received approval to build an 80-acre campus with 7.3 million square feet of office space in San Jose, California, the third-largest city in the country’s most populous state. The estimated economic impact: $19 billion.
The timing couldn’t have been worse.
A decade-long tech bull market had just ended, and the following year would be the worst for tech stocks since the 2008 financial crisis. Rising interest rates and fears of a recession caused advertisers to ramp up spending, Google’s growth dwindled and, for the first time in the company’s history, forced management to cut costs drastically.
The city of San Jose can now be pay the price. What was planned as a mega-campus dubbed “Downtown West” with thousands of new housing units and 15 acres of public parks is largely a demolition zone at risk of becoming a long-term eyesore and economic nil. CNBC has learned that the company has gutted its development team for the San Jose campus as part of Google’s downsizing that took effect earlier this year.
The construction project, which was due to start before the end of 2023, has been put on hold and contractors have not been given a plan to resume construction, according to people familiar with the matter, who asked not to be named, under the terms of the disclosure agreements. While sources are optimistic that a campus will eventually be built and Google officials have committed to it, they worry the project may not reach the scale promised in the original master plan.
The Mercury News, one of Silicon Valley’s top newspapers, previously reported that Google was rethinking its schedule. Sources told CNBC that the company started signaling contractors late last year that the project could face delays and changes.
In February, LendLease, the project’s lead developer, laid off 67 employees, including several community engagement managers, according to filings seen by CNBC. Among those fired were senior development managers, an operations manager, and other executives.
Last month, Google also removed construction updates from its website for the project, according to internal correspondence seen by CNBC.
A LendLease spokesperson said in an emailed statement that the company “remains committed to creating thriving mixed-use communities in the Bay Area, including Google developments,” and still has a “significant team to support.” in providing these communities”.
Alphabet-owned Google begins the most severe cost-cutting in its nearly two decades in the public market. The company said in January it was shedding 12,000 jobs, about 6% of its workforce, to anticipate a slowdown in revenue growth after headcount surges before and during the Covid pandemic.
About a year ago, Google announced it would invest nearly $10 billion in at least 20 major real estate projects in 2022. By then, the company had already completed much of its multi-year land grab in downtown San Jose for the future campus.
Money comes “when the cranes are in the air”
Things changed in a hurry. On Alphabet’s fourth-quarter conference call in February, CFO Ruth Porat said the company expects to incur costs of about $500 million in the first quarter for reducing its global office space, and warned that more real estate costs are possible in the future .
While the tech industry at large is struggling to adapt to a post-Covid world that appears to be more hybrid and less focused on large campuses, Google is in a particularly precarious position due to its massive financial and other commitments that Landscape of a metropolitan area.
“We are working to ensure our real estate investments meet the future needs of our hybrid workforce, business and communities,” a Google spokesperson said in an emailed statement. “As we evaluate how best to move forward with Downtown West, we have a long-term commitment to San Jose and believe in the importance of development.”
Google spent several years planning the San Jose complex and invested significant resources in winning over the local community. So fierce was opposition in some corners that activists chained themselves to chairs at San Jose City Hall in 2019 over the decision to sell public land to Google. A multi-year attempt to allay community concerns ended with support from some of the project’s fiercest early opponents.
To win over locals, Google made more than half of its campus available for public use and offered a $200 million community benefits package that included eviction funds, job placement training and empowerment for community leaders who to influence the use of this money.
While some community services have already been provided, the majority are to be allocated to the development of office space. Google also pledged to build 15,000 housing units in Silicon Valley, 25% of which are considered “affordable,” a critical issue in an area with one of the highest rates of homelessness in the country, according to government statistics. About 4,000 of these housing units should be built in Downtown West.
“We all knew originally that it was going to be a long-term plan,” Omar Torres, the San Jose City Councilman who represents downtown, told the San Jose Spotlight in February. “But yeah, it’s definitely worrying that a lot of money will come when the cranes are in the air.”
The Google construction site is idle on a Tuesday afternoon.
The demolition phase of the project destroyed a number of San Jose’s historic landmarks and forced the relocation of others. A 74-year-old dancing pig sign for Stephen’s Meat Products had to be removed, and only a small portion of an old bakery building survives.
Patty’s Inn, an 88-year-old popular pub, did not survive the demolition.
‘This is a pub but I never thought of it as a pub. It was just Patty’s Inn,” Jim Nielsen, an executive at RBC Wealth Management and longtime patron of the bar, told Mercury News at the time. “It’s hard to see these places go away because they can’t be replaced.”
The new campus should bring around 20,000 jobs to the city.
CNBC visited the site a few times during the normal workday in April to see patches of land where cranes, tractors and other construction equipment have replaced old buildings in a fenced-in area. Nobody worked on site.
Construction projects of this magnitude take a long time. Google originally said it would likely take between 10 and 30 years to build the campus, so it still has a significant cushion to resume development.
LendLease announced in 2019 that it had struck a $15 billion deal with Google to spend the next 10 to 15 years using the company’s properties in San Jose, as well as near Sunnyvale and Mountain View, where Google has its headquarters to rehabilitate.
“LendLease will play a key role in providing at least 15,000 new homes on our land,” said David Radcliffe, then Google’s head of real estate, in a press release.
But Radcliffe left Google in late 2022 after 16 years with the company. He was replaced by Scott Foster, who previously ran global real estate for financial firm RBC. Sources familiar with Google’s real estate projects described Foster as someone who is expected to be more conservative on spending and more likely to downsize the campus, especially given cost-cutting efforts.
With construction at the site currently stalled, San Jose sits in an empty strip of downtown without an expected anchor tenant. Dozens of vendors and contractors awaiting work focus on other projects while waiting to hear what happens next.
The mood is very different from less than two years ago, when Gov. Gavin Newsom stood next to Google’s senior vice president Kent Walker at an event in San Jose ahead of a city council meeting set to decide on approving the project. Newsom took the opportunity to sign SB 7, a law designed to accelerate housing and development projects.
Newsom and officials repeatedly cited Google’s proposed mega-campus as an example of the state’s post-Covid economic “comeback.”
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