Decoding Apple's North San Jose Land Mystery
Apple has big plans for north San Jose. In the past few months, Apple has spent more than $300 million quietly purchasing or leasing land close to San Jose International Airport and only 11 miles away from Apple Campus 2. When adding up the possible square footage of office space that can be built on this land, Apple would be able to erect another "Apple Campus 2." At initial glance, there are three likely scenarios that can explain Apple's motivation buying land in north San Jose. However, after looking closer at Apple's employee and office space growth as well as the company's product development strategy and pipeline, the most likely scenario is that Apple is building an R&D center for Project Titan, specifically a prototyping and testing facility for a range of automobile products.
The Property Transactions
After a few months of rumors within Silicon Valley commercial real estate circles, Apple's play for north San Jose began to take shape this past July when reports came out that the company signed a lease for a 290,000 square foot office building close to San Jose International Airport. Over the following four months, Apple has reportedly had three additional transactions resulting in the company owning or leasing nearly 90 acres.
July, 9, 2015. Apple reportedly leases a 290,000 square foot building from Ellis Partners at 2325 Orchard Parkway. The building is able to support 1,450 employees with 12 adjacent acres approved for 665,000 square feet of additional office space. The proximity of this building and open land to San Jose international airport (bottom left corner) can be seen below.
Apple's initial land transaction in north San Jose.
August 3, 2015. Apple purchases 43-acres of open land for $138 million from Lowe Enterprises at 2347 North First St. The 2.8M square feet that is approved for the land could support up to 14,000 employees. As shown below, the 43-acre plot of land is touching land Apple had been leasing from Ellis Partners.
Apple's second land transaction in north San Jose.
September 25, 2015. Apple buys a building previously leased from Ellis Partners, along with 12 adjacent acres of open land, for $166 million. Apple now owns enough land to support approximately 3.8 million square feet of potential office space.
Apple's third land transaction in north San Jose.
October 22, 2015. Apple leases a 202,000 square foot building at 2509 Orchard Parkway from Steelwave. The land is adjacent, as shown below, to previously purchased land from Ellis Partners and Lowe Enterprises. Apple now owns enough land to support approximately 4.3 million square feet of potential office space.
Apple's fourth land transaction in north San Jose.
Three Possible Explanations for Apple's Land Purchases
When contemplating Apple's plans with these land transactions, three scenarios seem to rise to the top: stockpiling land for eventual use in the future, building additional office buildings for a growing employee base, and building a research and development facility for Project Titan and Apple's growing automobile ambitions.
Stockpiling Land for the Future. This theory is mostly based around the fact that land in Silicon Valley is a hot commodity. With little to no leased office space remaining in Cupertino and Sunnyvale (one estimate pegged Apple as representing 40% of Cupertino's office jobs), this theory positions that Apple management is looking to buy land in order to have room for future growth. While Apple may not have immediate plans for the land, the optionality provided by owning land in an up-and-coming geographic area somewhat close to Cupertino would give management enough reason to begin "stockpiling" land.
Upon closer examination, there are a number of holes in this stockpiling land theory that lead me to believe Apple is not just simply buying land to hold on to it for some undetermined future use down the road. The first is that Apple has never shown the desire to buy land indiscriminately without having a specific purpose or function for the land. Apple's focus mantra does not fit with a strategy of just buying large swaths of land with no clear agenda in mind. When looking at prior Apple land transactions, everything has had a purpose or reason. Apple purchased the land that is now home to Apple Campus 2 from HP years before construction began. Management has since gone on record to say the land had been purchased with a new headquarters in mind. Across the U.S. and the world, Apple's land transactions (both purchased and leased) have been conducted with specific growth plans in mind and include various locations in California, Austin, Texas, data centers in various states, Ireland, and recent sustainable forest transactions in North Carolina and Maine, as well as renewable energy initiatives in China.
One can also question the viability of a strategy where a company is spending close to $300 million dollars on land (much of it open land) simply out of fear of not having enough space to grow in the future. It just doesn't add up. Similar to how the Apple Campus 2 land became available due to rough times at HP, it is unreasonable to assume additional land wouldn't eventually become available around the Valley during an economic downturn or simple evolution of technology. It doesn't seem likely that Apple is stockpiling land in north San Jose just in case it may need it in the future. Recent reports seem to validate this stance as Apple is already working toward a development agreement with city officials. Apple has something specific in mind for this land.
Additional Office Buildings for Employees. The next plausible theory is that Apple needs additional office space for a growing employee base. This essentially represents the safe answer as to what Apple may be doing in north San Jose, and it is the one often paraded around in the press. Apple discloses its total employee count in 10-K filings each year. However, additional work is needed to break down this number into Retail Segment employees, temporary or part-time workers, and full-time non-Retail employees. Upon closer examination, I estimate Apple has approximately 60,000 full-time non-Retail employees across the world. As seen in the exhibit below, this employee count has grown significantly in the past five years and, assuming 10-15% growth each year over the next few years, it will not be long before Apple crosses 100,000 non-Retail full-time employees. It would then seem logical that Apple is looking to buy land to house all of these additional employees.
However, a few things about this theory don't quite sit right with me. The first is that Apple is building a brand new headquarters (Apple Campus 2) with the stated goal of having most of its employees located in one large building in order to foster collaboration. Apple management has been very vocal with this reasoning, even taking journalists to tour the construction site to highlight the building's unique layout. Apple is taking pride in what they are building at Apple Campus 2.
In order to gain perspective on how much land Apple now has in north San Jose, Apple Campus 2 will have 3.4 million square feet of office space compared to the 4.3 million square feet of potential office space in north San Jose. I'm doubtful Apple is looking to build a sprawling campus that is larger than Apple Campus 2. The much bigger reason that I'm skeptical is that building an even bigger campus away from headquarters just doesn't fit with Apple's long-standing narrative as to how it views its functional organizational structure.
Additional doubts that Apple is planning on building another large Apple Campus in north San Jose are raised when looking at some of the details around Apple's employee base. Apple Campus 2 will be able to house 14,200 employees. While large, the building is not large enough to house the roughly 20,000 Apple employees that work in the Cupertino/Sunnyvale area. Accordingly, Apple will continue to use its current headquarters at 1 Infinite Loop (home to 3,000 employees) and surrounding buildings. Run the math and once Apple Campus 2 is finished, Apple would actually be able to consolidate buildings. Why would management spend hundreds of millions of dollars to buy enough land in north San Jose to be able to build another Apple campus for nearly 20,000 employees when Apple Campus 2 has been the multi-year focus and cornerstone of the company's infrastructure development? I suspect the reason is that Apple isn't actually planning on building 4.3 million square feet of office buildings for 20,000 employees in north San Jose. Instead, Apple has a different type of structure in mind for the land.
Research Facility for Project Titan. What if instead of building another large office building in north San Jose, Apple is looking to build a research facility? What if this facility is actually a giant R&D complex in order to work on automobiles prototypes and conduct regulatory and safety testing? All of the evidence seems to point to such a thing.
While we have no confirmation from Apple that they plan on building an electric car, there are enough clues to have a very high level of certainty that Apple is actively working on a self-driving electric car. Everything from a litany of recent automobile-related hires to Apple's interest in self-driving car testing facilities, a recent ramp in R&D spending, and overall automobile industry trends, not to mention accurate reporting from WSJ and at a handful of other publications, point to Apple planning something big with personal transport.
Recent rumors peg Apple's Project Titan as being housed in leased office space in Sunnyvale, California, closer to Apple HQ. Apple has reportedly leased additional space in Sunnyvale to accommodate Project Titan employee growth. While this location might be a suitable place for employees to work, it is unlikely there is enough room to conduct a full range of electric car testing, including researching manufacturing techniques.
Even though I suspect Apple is looking to build a Project Titan facility in north San Jose, I have doubts that this location will become the official Apple Car factory. As seen in the map below, there are currently two plots of land (shaded in red) that Apple has still not purchased or leased in north San Jose that are adjacent to Apple's recent land acquisitions. One is open space and the other has three buildings located on it. Even If Apple were to buy these two pieces of land, Apple's total ownership would measure approximately 140 acres. While this plot of land is indeed massive, it's quite small for it to be the location where an "Apple Car" would be manufactured at any level of scale. The lack of nearby rail also raises doubts that this location will become the primary location for manufacturing cars as rail is a cost effective way to transport finished product, not to mention receive raw material. Instead, this site's acreage would be more suitable for R&D purposes, a fact that even Apple has gone on record to discuss when questioned over these recent land purchases.
Apple's previously acquired/leased land (green) and property currently not owned by Apple (red).
It is difficult to discuss electric automobile testing and assembly in Silicon Valley without mentioning Tesla's Fremont Factory (shown below), the former Toyota car factory located only 20 minutes away from north San Jose. Coming in at 340 acres (nearly four times the size of Apple's current north San Jose land holdings), the Fremont factory is overwhelming. Most of Tesla's assembly occurs on only roughly 120 acres of the site. However, it is important to remember that Tesla is only producing 50,000 vehicles a year, a far cry from the millions produced by the automobile industry's giants. One takeaway from the Fremont Factory is that building electric cars involves much more than just one big building. Instead, the ancillary buildings needed for handling incoming raw materials, producing components, assembly, and parking lots for finished product and transport infrastructure (like railroads), all point to these factories resembling cities rather than just factories. Looking at Apple's north San Jose land holdings, it's tough to see a similar operation like the Fremont Factory being built unless Apple plans on buying out dozens of additional buildings and hundreds of acres of land, something that doesn't seem too realistic or logical when looking at a map of the surrounding area.
The Tesla Factory in Fremont, California
Additional evidence suggesting Apple would need much more space to actually manufacture an Apple Car in north San Jose can be found with BMW. The company's i-series electric cars, along with other models, are produced in a factory that measures 23 million square feet. As a reminder, Apple's acquired land holdings in north San Jose amount to 4 million square feet of possible space.
The clearest answer for what Apple has in mind for north San Jose likely rests with Apple's product philosophy and strategy. Apple will likely rely on the same manufacturing process undertaken with most of its products, including the iPhone. Instead of actually building its own car in its own factories, Apple would look to contract manufacturers to build components and conduct the actual assembly. The important point about this strategy is that Apple would still need to conduct vehicle prototyping and research in order to figure out what should or shouldn't be included in an Apple Car. Testing facilities for Apple Car would likely require a hundred acres by itself. The scale required for car development cannot be stressed.
Elon Musk is right when he said two months ago in an interview with a German newspaper that Apple can't just go to Foxconn and say, "build me a car." Look at how the iPhone became a reality. Apple didn't just go to Foxconn saying, "build us a phone." Instead, Apple needed to figure out how to put together an iPhone and come up with new machinery and processes along the way. Only after that R&D phase had been conducted, did Apple executives head to China and work with Foxconn on learning and replicating the process. As Tony Fadell recalled about iPhone development, building the first iPhone was the easy part. The much harder part was being able to produce millions of iPhones. While early stage iPhone prototyping was done at Apple HQ, in addition to testing (recall Apple's iPhone antenna labs), the actual assembly occurred in China.
When looking at north San Jose, Apple could turn its recently purchased land into an Apple Car R&D campus complete with a giant testing facility and several smaller office buildings supporting more clerical aspects of testing and more nuanced design R&D efforts.
Future Clues in North San Jose
Apple is reportedly fast-tracking its north San Jose development plans, having submitted preliminary plans with San Jose officials. If Apple were looking to build an Apple Car R&D facility, I would expect pretty quick progress towards construction to be made in the coming months. The speed at which Apple acquired the land may be a sign of Apple's urgency. The WSJ had previously said Apple is targeting a 2019 "ship" date for an electric car. While the exact definition of a ship date is up for a debate, it's clear that Apple won't likely sit on this land for too long without much action if an Apple Car R&D facility is the ultimate goal.
I would expect Apple to remain as tight-lipped and secretive as possible in regards to these land purchases and subsequent construction activities. While we will undoubtedly be able to track the project's physical development (via drone), Apple could end up building one large, relatively generic structure with most details hidden from the public. Management would also be able to conveniently use CarPlay or other generic R&D initiatives as reasons for the facility.
Main Takeaway: Apple Is Making Progress With Project Titan
When news first broke that Apple was thinking about designing its own electric car, many company observers were doubters. The thought of a company that had spent years building computers that can fit in a pocket all of a sudden building an automobile was just too much for many to believe. Apple would need to acquire such a significant amount of talent, in addition to constructing new R&D labs, all the while figuring out who would even build the product. However, over the past nine months, we are seeing Apple make progress toward addressing these exact concerns and doubts. Apple has been hiring the people needed for a car, and these land purchases in north San Jose would be the first tangible sign of Apple building the infrastructure for electric car testing and research. If we zoom out and look at the big picture, Apple is moving incredibly fast with its electric car plans. Apple has likely been able to work on much of the internal components of an Apple Car, including the passenger compartment. More granular work involving the battery, electric drive train, and autonomous driving software is also likely to be conducted in relatively traditional office space/commercial real estate. We are likely approaching the next stage requiring much more space and infrastructure. While 2019 seems like still a long time out, it is in fact a very aggressive timeline to develop an electric car considering that iPhone and Apple Watch were developed in 2-3 years.
Apple's $304 million of land purchases in north San Jose hint at something much larger than simple office buildings, yet not quite large enough for a sprawling electric car manufacturing facility. Instead, a R&D complex for prototyping and testing various personal transport initiatives is the leading candidate.
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