CBRE: Tech Firms Expanding Into Downtowns, Tech-Adjacent Markets
Technology company willingness and ability to pay a premium for office space in hot tech submarkets is spilling over into neighboring submarkets as available space dwindles, reported CBRE, Los Angeles.
As a result, adjacent submarkets and traditional downtowns with skylines–rather than the brick-and-beam buildings that tech companies have preferred–can benefit, creating commercial real estate investment opportunities, the CBRE Tech-30 report said.
“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 [Ariz.], East Cambridge [Mass.], Minneapolis’s North Loop and south Orange County [Calif.], all of which have very low office vacancy,” said CBRE Research and Analysis Director Colin Yasukochi.
Yasukochi said if technology companies that are accustomed to paying a premium for space in 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.”
Tech submarkets with the lowest vacancy rates include East Cambridge (3.3 percent), Palo Alto, Calif. (3.7 percent) and Mount Pleasant/False Creek, Vancouver, B.C. (4 percent). “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,” CBRE said, noting a 16.2 percent average rent premium in these markets.
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, Ore., Raleigh-Durham, N.C., Dallas/Fort Worth, Texas, Charlotte, N.C. and Nashville, Tenn. have the greatest growth potential, CBRE said.
CBRE Global President of Capital Markets Chris Ludeman noted a growing number of industries are integrating technology into their business models, which supports 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,” he said.
Because ups and downs are a natural part of the business cycle, real estate investors should manage their exposure to the most volatile sectors of the tech industry, Ludeman said, noting the largest technology office markets should continue to expand 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,” he said.
