Google's 80-acre San Jose mega-campus is on hold as company reckons with economic slowdown

In June 2021, Google won approval to build an 80-acre campus, spanning 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 decadelong bull market in technology had just about run its course, and the following year would mark the worst for tech stocks since the 2008 financial crisis. Rising interest rates and recessionary concerns led advertisers to reel in spending, shrinking Google's growth and, for the first time in the company's history, forcing management to implement dramatic cost cuts.

The city of San Jose may now be paying the price. What was poised to be a mega-campus called "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 zero. CNBC has learned that, as part of Google's downsizing that went into effect early this year, the company has gutted its development team for the San Jose campus.

The construction project, which was supposed to break ground before the end of 2023, has been put on pause, and no plan to restart construction has been communicated to contractors, according to people familiar with the matter who asked not to be named due to non-disclosure agreements. While sources are optimistic that a campus will be built at some point and said Google representatives have expressed a commitment to it, they're concerned the project may not reach the scale promised in the original master plan.

The Mercury News, one of Silicon Valley's main newspapers, previously reported that Google was reassessing its timeline. Sources told CNBC that the company started signaling to contractors late last year that the project could face delays and changes.

In February, LendLease, the lead developer for the project, laid off 67 employees, including several community engagement managers, according to filings viewed by CNBC. Senior development managers, a head of business operations and other executives were among those let go.

Last month, Google also removed construction updates from its website for the project, according to internal correspondence viewed by CNBC.

A LendLease spokesperson said in an emailed statement that the company remains "committed in the creation of thriving mixed-use communities in the Bay Area, including the Google developments," and still has a "significant team to aid in delivering these communities."

Alphabet-owned Google is embarking on its most severe cost cuts in its almost two decades on the public market. The company said in January that it was eliminating 12,000 jobs, representing about 6% of its workforce, to reckon with slowing sales growth after head count swelled before and during the Covid pandemic.

About a year ago, Google announced that it would invest nearly $10 billion in at least 20 key real estate projects in 2022. By then, the company had already completed much of its multiyear land grab of downtown San Jose for the future campus.

Things changed in a hurry. On Alphabet's fourth-quarter earnings call, in February, finance chief Ruth Porat said the company expected to incur costs of about $500 million in the first quarter to reduce global office space, and she warned that other real estate charges were possible in the future.

While the tech industry broadly is struggling to adapt to a post-Covid world that appears to be more hybrid and less centered around large campuses, Google is in a particularly precarious spot because of its massive commitment, financial and otherwise, to altering the landscape of a major urban area.

"We're working to ensure our real estate investments match the future needs of our hybrid workforce, our business and our communities," a Google spokesperson said in an emailed statement. "While we're assessing how to best move forward with Downtown West, we're still committed to San Jose for the long term and believe in the importance of the development."

Google spent several years planning for the San Jose complex and invested significant resources in winning over the local community. Opposition in some corners was so fierce that, in 2019, activists chained themselves to chairs inside San Jose's City Hall over the decision to sell public land to Google. A multiyear effort to address community concerns ended with support from some of the project's stiffest early opponents.

To win over the community, Google designated more than half its campus to public use and offered up a $200 million community benefits package that included displacement funds, job placement training, and power for community leaders to influence how that money would be spent.

While some community benefits have already been delivered, the bulk is to be given out upon the development of the office space. Google also promised to build 15,000 residential units in Silicon Valley, with 25% of them considered "affordable," a critical issue in an area with one of the highest homeless populations in the country, according to government statistics. Some 4,000 of those housing units were set to be built at Downtown West.

"We all originally knew that it's going to be a long-term plan," San Jose councilmember Omar Torres, who represents the downtown area, told San Jose Spotlight in February. "But yes, it's definitely concerning that a lot of the money is coming when the cranes are in the air."

The demolition phase of the project took out a number of historic San Jose landmarks and forced the relocation of others. A 74-year-old dancing pig sign for Stephen's Meat Products had to be moved, and only a small part of an old bakery building remains.

Patty's Inn, an 88-year-old beloved pub, didn't survive the teardown.

CNBC visited the site a couple of times in April during the normal workday, to see swaths of land where old buildings have been replaced by cranes, tractors and other construction equipment in a fenced-off area. Nobody was working on site.

Construction projects of this scale take a long time. Google had originally said it would likely need between 10 and 30 years to build out the campus, so it still has a significant cushion to resume development.

LendLease said in 2019 that it struck a $15 billion deal with Google to spend the next 10 to 15 years redeveloping the company's landholdings in San Jose as well as nearby Sunnyvale and Mountain View, where Google is headquartered.

“LendLease will play a key role in helping deliver at least 15,000 new homes on our land,” David Radcliffe, Google's real estate lead at the time, said in a press release.

But Radcliffe left Google in late 2022 after 16 years at the company. He was replaced by Scott Foster, who previously led 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 in spending and more likely to slim down the scale of the campus, especially amid cost-cutting efforts.

With construction at the site currently stalled, San Jose sits without an expected anchor tenant in an empty swath of its downtown. Dozens of vendors and contractors that were expecting work are focusing on other projects as they wait to hear what happens next.

The mood is vastly different from what it was less than two years ago, when Gov. Gavin Newsom stood beside Google Senior Vice President Kent Walker at an event in San Jose, ahead of a city council meeting that would determine whether the project got approved. Newsom used the occasion to sign SB 7, a bill to speed up construction of housing and development projects.

Newsom and officials cited Google's proposed mega-campus several times as an example of the state’s economic “comeback” from the Covid pandemic.

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