Tech-Dominated Cities Prosper as Office Rents Decline Nationally

A clear separation is emerging between markets that depend on traditional companies for office space demand and markets fueled by tech and creative sector firms, reported Savills Studley, New York.

The firm’s annual Effective Rent Index report tracks tenant effective rent–what tenants actually pay for Class A office space and landlord effective rent–what landlords ultimately walk away with.

“Compared to prior years, 2017 showed a much greater variance due to the emergence of the tech industry in select cities,” said Savills Studley Director of U.S. Real Estate Analytics Keith DeCoster. “In tech centers such as Seattle, the Bay Area of northern California, Boston and Austin, Texas, companies are pursuing talent and space to house them almost with less concern for the cost. In contrast, traditional professional/business services firms and law firms are still keeping an eye on out-of-pocket expenditures.”

DeCoster said “ample” supply in many gateway markets is compelling landlords to offer record concessions, “making conditions ideal for tenants.” Concession packages of free rent and tenant improvement allowances increased in 12 of the 20 markets profiled in the report, lowering those 12 cities’ effective rents. Concessions rose significantly in downtown Manhattan (24 percent), Washington, D.C. (21.7 percent), Denver (16.7 percent), Orange County (12.3 percent), Houston (12 percent) and Chicago (6.6 percent).

Tenants in several of these markets saw lower effective rents, including midtown Manhattan (-11.2 percent), northern New Jersey (-9.0 percent), downtown Manhattan (-7.8 percent) and Denver.

“Bucking the national trend, concessions are down in cities where tech companies and tech jobs make up a large portion of the market,” the report said. “In these tech cities, demand outpaces supply and tenants are willing to pay higher rents for workplaces that will help them win the war for talent.” Cities with shrinking concession packages included Atlanta (-4.1 percent), Seattle (-3.1 percent), Sunnyvale/Santa Clara, Calif. (-3.2 percent) and Austin (-2.6 percent). Effective rents are also rising in these same cities as landlords increase their prices where tech firms are expanding: Atlanta (12.7 percent), Seattle (9.7 percent), Austin (5.9 percent) and Sunnyvale/Santa Clara (3.8 percent).

Savills Studley CEO and Chairman Mitch Steir said increased concession packages and reduced effective rents across the country create an opportunity for companies to invest in modern workplaces that lure the best talent. “In tighter tech markets, the office perks are a requirement and seizing on premium space becomes a competitive challenge,” he said.