CBRE: Hefty Premiums for Offices in Tech Markets

Businesses looking for office space in technology markets should expect to pay a premium–and a hefty one in many of the top tech cities, reported CBRE Group, Los Angeles. 

“Growth in the high-tech software/serviced industry is significantly outpacing broader and office-using employment growth, fueling robust demand for office space in primary tech markets and submarkets,” CBRE’s Tech Thirty report said.

CBRE analyzed the top 30 tech cities across the U.S. and Canada and found an 11 percent rent premium compared to other markets. That figure jumps significantly higher in the hottest tech submarkets. Boston’s East Cambridge outperformed the rest of North America with rent premiums of 87 percent, followed by 85 percent in Santa Monica (Los Angeles) and 73 percent in Mountain View (Silicon Valley), Calif. 

But office occupiers can still find discounts in some emerging submarkets including Reston and Herndon, Va. in the Washington, D.C. metro (-23 percent), central business district St. Louis, Mo. (-17 percent) and northeast Charlotte, N.C. (-12 percent), said Colin Yasukochi, director of research and analysis with CBRE.  

“With rental rates less than the average market rate and a rising pool of talent, these emerging submarkets present opportunity for companies that can’t justify the premiums we’re seeing in some of the more established tech markets,” Yasukochi said. “Furthermore, most of these emerging tech submarkets are recording positive and in some cases strong rent growth, creating opportunities for real estate investors in these markets, as well.” 

Top markets for office rent growth include San Francisco, where rents grew 42.7 percent between 2012 and 2014 as new high-tech jobs grew 55.1 percent. Phoenix also saw 42.7 percent rent growth as its high-tech jobs grew 31.3 percent. Austin, Texas had 33 percent rent growth and 34.4 percent tech job growth. 

The technology software/services industry created 730,000 new jobs since 2009 and represents the leading U.S. office market demand driver, accounting for 20 percent of major leasing activity through the second quarter, CBRE said. In many leading tech markets, the sector dominates even more: in Silicon Valley, Austin, San Francisco and Seattle, high-tech companies accounted for 88 percent, 63 percent, 62 percent and 60 percent of major leasing activity through the second quarter, respectively. 

“The high-tech industry is directly supported by consumer demand and a growing number of high-tech integrated businesses, which should keep the industry strong in the years ahead and provide further support for office markets,” Yasukochi said. But he noted that commercial real estate investors “must be mindful and have realistic expectations about this historically volatile industry underpinning the health of many ‘Tech-Thirty’ office markets.” 

From an investor’s perspective, Austin, Salt Lake City, Phoenix and Portland offer further growth potential, CBRE said. “At the same time, Raleigh-Durham, Dallas/Ft. Worth, Charlotte and Nashville offer the best combination of low office rents and a growing high-tech labor pool,” the report said.