Square, the digital payments company founded by Jack Dorsey, has been making major moves into the real estate industry in recent years. The company has invested billions of dollars buying buildings and land as an alternative investment for its growing cash reserves. In this article, we will provide a comprehensive review and analysis of Square’s real estate investment strategies. We will examine the types of properties they are acquiring, their investment rationale, risks and opportunities, and evaluate the potential returns for Square. There are several notable aspects of Square’s real estate plays, including their focus on elite markets like New York and San Francisco, preference for iconic and historic buildings, and blending of retail, office and residential spaces. As a fast-growing tech firm, real estate provides diversification and inflation hedging for Square in addition to financial returns. However, they face challenges around managing large commercial properties and ensuring adequate tenant demand. Overall, real estate represents an intriguing new direction for Square that provides steady income streams but requires hands-on operational expertise compared to other asset classes.
Square has focused real estate investments on major metro areas like New York and San Francisco
Square’s real estate acquisitions have primarily targeted large, established metro areas, especially New York and San Francisco. In New York, they acquired a historic building in Soho for $300 million and recently spent $147 million on two buildings in Midtown Manhattan. In San Francisco, Square purchased the historic U.S. Mint building for $30 million. The advantage of these elite coastal markets is their limited supply and relatively inelastic demand. As technology and financial hubs, New York and San Francisco provide a strong tenant base of high-credit firms to occupy Square’s buildings. The downside to these markets is the extremely high property prices. However, Square likely views real estate in top-tier cities as a smart long-term inflation hedge.
Square’s portfolio focuses on trophy assets and historic properties with unique character
In addition to location, Square has shown a preference for assets with historic or landmark designations. They have invested in buildings like the U.S. Mint in San Francisco, which is on the National Register of Historic Places, as well as the Soho building in New York which is known for its cast-iron facade. The rationale behind this strategy is likely twofold. First, iconic, one-of-a-kind buildings create branding and prestige for a tenant. Second, there are tax credits and preservation incentives available to owners who maintain the historic integrity of these properties. The tradeoff is that renovations and upkeep on historic buildings can prove costly. From an investment perspective, Square is betting these unique properties will appreciate strongly over time and provide LEED credits or other sustainability perks.
Square’s properties integrate retail, office and residential spaces
Unlike some corporate investors who stick to a single property type, Square has taken a blended approach to real estate. For example, their Soho building has retail tenants like Whole Foods on lower floors, Class A office space in the middle, and luxury residential condos on the upper floors. This creates multiple revenue streams within a single property. Having an anchor retail tenant can also help secure financing and provide foot traffic. On the other hand, the differing needs of residential, office, and retail occupants makes property management more complex. It remains to be seen how successful Square will be juggling these varied tenant groups.
Square gains portfolio diversification, inflation protection, and income streams from real estate
Square’s motivations for investing in real estate are manifold. As a high-growth technology company, Square generates abundant cash flows but has limited needs for physical assets. Real estate offers a productive alternative for Square’s cash rather than keeping it parked in low-yield bonds and Treasuries. Also, real estate returns have a low correlation to tech stocks, providing Square diversification benefits. The inflation protection of real estate is also a major perk, with lease revenues and property values typically rising during periods of inflation. And real estate produces quarterly income streams from tenant rents, giving Square stable cash inflows to partly fund future growth. As long as Square can maintain tenant occupancy and rent levels, real estate should continue generating handsome risk-adjusted returns over the long run.
Managing large commercial properties poses a new challenge compared to Square’s core software business
To date, Square’s business has focused on software, hardware, payments processing and other digital realms. Their real estate push represents a foray into an entirely new arena. Operating commercial properties at scale requires specialized skills around property management, leasing, maintenance, financing, legal, tax and more. Square has shown a willingness to pay top dollar for prime assets, but extracting optimal value from real estate involves intensive hands-on management. It remains to be seen how successful Square will be adapting to this brick-and-mortar aspect of the business. In the short term, they may need to hire external firms to handle day-to-day property operations. But further down the line, Square may need to build an in-house real estate team to maximize their returns.
Demand from creditworthy tenants is imperative to sustain Square’s real estate income streams
The success of any commercial real estate portfolio hinges on having creditworthy tenants willing to pay top rental rates. Square’s focus on major metro markets helps in this regard. But within these markets, tenant demand can fluctuate significantly. In a recession, office vacancy rates can easily spike while rents decline. Retail is also at existential risk from e-commerce disruption. Square’s historic buildings add uniqueness, but may lack modern amenities or floorplans demanded by today’s tenants. Maintaining full occupancy will require adjusting lease rates and terms, concessions, renovations and repositioning strategies. If Square misjudges market demand or tenant needs, their properties could suffer from high vacancy and squeezed income. The tenant experience will be crucial for Square to maximize NOI and achieve their target risk-adjusted returns.
Square’s real estate strategy has intriguing potential but higher risks than bonds or venture capital
Square’s push into commercial real estate is one of the more interesting asset allocation moves made by a technology firm. The potential benefits around income, diversification, and inflation protection are certainly compelling. At the same time, managing large-scale property portfolios is an enormous challenge requiring specialized expertise. Tenant demand is also cyclical and difficult to predict. For Square, real estate appears to offer more inflation protection than bonds but less upside than venture capital or growth equity. In terms of risk-adjusted returns, Square’s real estate investments likely fall somewhere between their public equity and debt portfolios. If executed well, the strategy should earn Square moderate but consistent risk-adjusted returns for decades to come.
Square’s major real estate investments in elite markets like New York and San Francisco provide diversification benefits while positioning Square for potentially higher inflation. But realizing optimal risk-adjusted returns will require hands-on property expertise and managing fickle tenant demand.