CBRE: Tech Grows to 20% of Office Leasing

Technology-related leasing accounted for 20 percent of all first-half 2016 office leasing–up from 18 percent a year ago–despite slowing tech job creation, reported CBRE Group, Los Angeles.  

CBRE analyzed the 30 leading U.S. and Canadian technology metros. It found that the hottest tech submarkets where tech job creation continues to boom–led by East Cambridge (Boston), Palo Alto (San Francisco) and Santa Monica (Los Angeles)–“significantly” outperform their overall markets in both leasing activity and rent premiums.

Strong demand for highly skilled tech talent fuels this demand, CBRE said. The real estate services firm noted that the resulting low vacancy and higher costs in many top technology submarkets is starting to shift demand to new neighborhoods to meet continuing demand from tech employers.

Boston and New York represent two cities undergoing these demand shifts, said CBRE Head of Americas Research Spencer Levy. “Although tech is very much at the center of the East Cambridge submarket, we have seen some demand in Boston shift to the Seaport and the central business district, which have larger available blocks and more adaptive space,” he said. “Similarly, in New York, Brooklyn, Downtown and Midtown have attracted tech companies as Midtown South pricing has increased and space options have diminished.” 

CBRE said office rents for the top submarket in each of the 30 cities analyzed increased in all but one submarket between 2014 and 2016. 

“The highest rent growth in this period occurred in both established and up-and-coming tech submarkets, illustrating stiff competition among tenants to locate in areas rich in talent such as University City (Philadelphia), Oakland/East End (Pittsburgh) East Cambridge, Palo Alto and Tempe (Phoenix),” CBRE’s Tech Thirty report said. 

The report said 20 of the top 30 tech markets saw momentum gains in high-tech software/services job creation, including Toronto, Charlotte, N.C. and Dallas/Ft. Worth, Texas. Even in the markets that showed slowing tech job creation from 2013 to 2015 compared to 2012-2014, growth remained relatively strong–Silicon Valley, Calif., Austin, Texas, Nashville, Tenn., Salt Lake City, Utah and Portland, Ore. all saw 16 percent or higher growth, far outpacing the 13.7 percent national average. 

“The changing velocity and pattern of tech job creation has uniquely impacted office markets,” said CBRE Director of Research and Analysis Colin Yasukochi. “Markets that have experienced accelerated job creation are seeing faster rent growth and decreasing vacancies while slower-growing markets have seen more balanced conditions between landlords and tenants.”

CBRE also analyzed the top 30 tech markets for high-tech industry job growth. San Francisco ranked highest for the fifth consecutive year; its high-tech job base grew nearly 50 percent between 2013 and 2015 while average asking rents increased 22.7 percent from 2014 and 2016. More than half of the top 30 tech markets outperformed the U.S. average for job growth in high-tech software/services; Phoenix (44.5 percent), Austin (33.3 percent), Charlotte (33.2 percent) and Indianapolis, Ind. (27.9 percent) rounded out the top five.

Over the past five years, the software/services industry created 780,000 new jobs at a 7.3 percent growth rate and accounted for nearly 20 percent of major leasing activity, CBRE said. But tighter labor and volatile capital market conditions in first-half 2016 slowed job creation to a 4 percent annual growth rate, which slight affected certain office markets including Washington, D.C., New York and the San Francisco Bay Area. 

Looking ahead, “advanced technology has integrated itself into business productivity and although the talent pool is limited, strong demand for technology services from both businesses and consumers is expected to support hiring by high-tech firms,” Yasukochi said. “The skills of the available labor pool do not appear to align with available jobs, causing a structural barrier to growth. This demand for technology should support growth among high-tech companies and high-tech office market clusters.”