Lack of Office Space in Core Markets Forcing U.S. Tech Firms to Expand in Adjacent Submarkets
According to CBRE’s annual Tech-30 Report, which measures the tech industry’s impact on office rents in the 30 leading tech markets in the U.S. and Canada, the willingness of tech companies to pay a premium for office space in the hottest tech submarkets is spilling over into neighboring submarkets as available office space dwindles.
As a result, adjacent submarkets and traditional downtowns with skylines–rather than the brick-and-beam buildings that tech companies have preferred–are primed to benefit, creating opportunity for commercial real estate investors.
“Office rents have increased in every primary tech submarket over the past two years, illustrating stiff competition among tenants to locate in talent-rich areas such as Tempe, East Cambridge, Minneapolis’s North Loop and South Orange County, all of which have very low office vacancy,” said Colin Yasukochi, director of research and analysis for CBRE and the report’s author. “If tech companies that are used to paying a premium for space in the top tech submarkets are forced to move to adjacent submarkets to expand, we could start to see significant rent growth in those more traditional markets as well.”
The research found that the top tech submarkets with the lowest vacancy rates are East Cambridge (3.3 percent), Palo Alto (3.7 percent) and Mount Pleasant/False Creek in Vancouver (4 percent) as of Q2 2017. The office rent premium paid by tenants in these markets continues to widen, with average rents for top tech submarkets increasing faster than their broader markets, with an average premium of 16.2 percent. That figure jumps substantially for markets at the top of the Tech-30 list, including East Cambridge (120 percent), Palo Alto (71 percent) and Santa Monica (92 percent). Conversely, several emerging tech submarkets have rent discounts, including Hillsboro, Oregon (-19 percent) and Northeast Charlotte (-18 percent).
From an investor’s perspective, tech markets that are attractive to occupiers and offer the best combination of low office rents and a growing high-tech labor pool, such as Portland, Raleigh- Durham, Dallas/Ft. Worth, Charlotte and Nashville, have the greatest growth potential.
“The creation of new market opportunities via disruption and a growing number of industries integrating technology into their business models support an optimistic outlook for continued growth ahead. Commercial real estate investors should benefit from the trends that have given the tech industry greater stability and a wide economic base compared with previous economic cycles,” said Chris Ludeman, Global President, Capital Markets, CBRE.
“Ups and downs are a natural part of the business cycle, and real estate investors should manage their risk and exposure to the most volatile sectors of the tech industry accordingly. Tech-30 office markets should expand further in the near term, albeit at a slower pace. Realistic growth expectations, valuations and viable exit strategies by tech firms will protect investors from potential losses that were unforeseen during the last tech cycle,” added Mr. Ludeman.
CBRE also reports:
- Top Job Growth Markets — For the sixth consecutive year, San Francisco was the top Tech-30 market for high-tech job growth; its high-tech job base grew by 39.4 percent over the past two years, while its average asking rent increased by only 7.1 percent. Charlotte (31.6 percent), Pittsburgh (31.4 percent) and Indianapolis (27.8 percent)–all low-cost markets–had the next highest job growth rates and rent increases of 16.9 percent, 3.5 percent and 6.5 percent, respectively.
- Top U.S. Office Rent Growth Markets — Double-digit office rent growth was achieved in 13 markets over the past two years, led by Orange County, Ca (23.3 percent), Nashville (21.2 percent), Atlanta (17.6 percent) Charlotte (16.9 percent) and Silicon Valley (16.8 percent).