Google, Lendlease dump $23bn San Francisco development tie up

The move to halt development projects worth billions reflects the dramatic changes in fortunes of both companies and cuts into the Australian company’s massive global pipeline.

Property company Lendlease and tech giant Google have ended a major deal in the US that would have seen them develop $US15bn ($23.3bn) worth of projects in the San Francisco Bay area.

The move effectively brings an end to one of the listed developer’s largest-ever plays outside of Australia and comes as it also faces uncertainties about projects in Britain and locally, and looks to sell off assets.

Lendlease’s share price has been falling on the back of concerns that it will struggle to meet ambitious targets to transform itself from a low-margin builder to a global funds and investment company as the property cycle sours.

Lendlease chief executive Tony Lombardo put the end of the deal down to the groups now chasing different goals but the company said it would still hit its earnings guidance and was aiming to build a $70bn fund empire by the 2026 financial year.

“While we have enjoyed an excellent and highly productive working relationship with Google, it became clear that our respective priorities have shifted. The end of these agreements allows both organisations maximum flexibility to pursue other strategies,” he said.

The San Francisco area project was struck in 2019 and billed as bringing about 15,000 new units in a mix of condos, multi-family, co-living and affordable housing to the region where accommodation is in short supply.

Lendlease and Google signed a partnership agreement to jointly undertake master planning and development of four new neighbourhoods in the San Francisco Bay Area cities of San Jose, Sunnyvale and Mountain View, over the next 15 years.

The residential, retail, hospitality and other associated civic components had an estimated end development value of about $US15bn.

When the tie up with Google was first unveiled, Macquarie estimated the project could generate profits of $US2bn over its life but some investors had not taken this into account due to its long life.

The pair said they had “mutually” reached an agreement to end the development services agreements of the four districts. The move came in the wake of Google undertaking a “comprehensive review” of its real estate investments.

The alliance was set up during a more bullish era for both companies but was hit by the Covid-19 pandemic, which led to construction dates being pushed back several times.

The work was to be split between Google focusing on the office component and Lendlease on the residential and urban spaces. Building was to have started in 2021 and this was then pushed back to 2024.

Google’s real estate strategy has dramatically changed since the pandemic and the rise of working from home. It has already taken impairments on its holdings as it has cut back its office plans.

Around the time the deal was unveiled Google said it would commit $US1bn to boost housing construction in the San Francisco area as workers were facing an affordability crisis.

Google chief executive Sundar Pichai said at the time the tech giant would repurpose about $US750m of company-owned land from offices and data centres to homes.

But earlier this year Google stopped building on its planned campus in San Jose after some demolition works. It also warned that it expected to be hit by costs of about $US500m in the first quarter as it slashed office space around the world.

The venture with Lendlease also let go some staff and the developer said both companies decided that “the existing agreements are no longer mutually beneficial given current market conditions”.

San Francisco has been blighted by a rise in inner-city crime and landlords handing back the keys to major office towers and shopping centres.

As part of the termination, Lendlease will receive an undisclosed payment in consideration for value created through the master planning process.

Lendlease said it will remove the San Francisco Bay project, which was finally slated to kick off construction in fiscal 2026, from its development pipeline.

The company kept its market guidance for this financial year unchanged with a core operating return on equity at the lower end of the 8 per cent to 10 per cent range.

However, hitting this mark partly depends on the company selling all or part of its Australian housing estate business, and progressing its local developments, including a North Sydney tower that is chasing a tenant.

Lendlease has insisted that it is more focused on projects with a faster turnaround like Sydney’s One Circular Quay, where it has already sold more than $1.bn worth of apartments and the under-construction hotel to tycoon Andrew Forrest for about $520m.

Lendlease shares bumped up 6c to $6.37 in early trade but have fallen by about 26 per cent over the last three months.

Originally published as Google, Lendlease dump $23bn San Francisco development tie up