New CBRE Report Finds High-Tech Companies Account for 20 Percent of Major Leasing Activity in U.S. Thus Far in 2014, Up from 14 Percent in 2013
Robust high-tech employment has played a major role in the recovery of the U.S. office market and has helped fuel double-digit rent growth in eight U.S. markets over past two years, according to CBRE Group, Inc.’s latest research report, U.S. Tech-Twenty: Measuring Office Market Impact. The Bay Area accounted for the top three markets for rent growth – San Francisco, Silicon Valley and the San Francisco Peninsula respectively – followed by Manhattan, Denver, Austin, Boston and San Diego. Atlanta ranked at number 14 for overall rent growth.
The report, which tracks high-tech employment and office market conditions in 20 tech-oriented office markets across the U.S., found a strong correlation between high-tech job growth and accelerating office rents. Atlanta experienced 10.7 percent growth in high tech jobs during the two-year period from 2011 to 2013 and that contributed to 3.3 percent growth in office rents from Q2 2012 to Q2 2014.
Markets experiencing the most growth acceleration in high tech employment during the current period (2011-2013) compared to the previous period (2010-2012) include Austin and Salt Lake City, both experiencing a 4.3 percent faster growth rate to 34.2 percent and 15.7 percent respectively, and Orange County at 3.5 percent to 9.3 percent. Meanwhile the overall growth rate for rents in the current period (Q2 2012 to Q2 2014) compared to the prior period (Q2 2011 to Q2 2013) was led by San Diego (13.7 percent faster to 15.0 percent), Boston (12 percent to 11.2 percent), Orange County (6.7 percent to 5.2 percent) and Pittsburgh (6.5 percent). Seattle, Los Angeles, and Raleigh-Durham also showed strong rates of growth at 3.1, 2.9 and 2.8 percent, respectively.
According to the report, the high-tech sector has accounted for one of every four new office-using jobs nationally since 2009. Within the Tech-Twenty markets, 10 grew their high-tech job base by more than 10 percent, including Austin (34 percent), San Francisco Peninsula (30 percent) and New York (23 percent), between 2011 and 2013. In 11 of the top 20 markets, high tech jobs accounted for more than 20 percent of the total new office employment from 2012 to 2014.
“Within preferred submarkets, which, in many cases, are the neighborhoods of choice for millennials and high-tech companies, vacant space has become increasingly scarce. As a result, nearby submarkets may see increased leasing activity by tech companies,” said Colin Yasukochi, Director of Research and Analysis for CBRE Global Research and Consulting.
From an investor’s perspective, San Diego, Portland, and Orange County offer the greatest potential. These markets are also attractive to occupiers, although Raleigh-Durham offers the best combination of low office rents and a growing high-tech labor pool.
“I expect that we will continue to see growth in Atlanta’s tech sector, both organically from Atlanta-based tech companies (compared to the first half of 2013, the first half of 2014 witnessed an approximate 40% increase in the number of $2M+ venture capital rounds raised by Atlanta based technology companies) and from out-of-town technology companies expanding into Atlanta or growing their existing presence,” said Christian Devlin, Atlanta’s representative in CBRE’s global Technology and Media Practice. “Atlanta will continue to be one of the hottest growing tech hub in the U.S.”
Other highlights of the report include:
- High-tech was the top industry leasing office space in the U.S., accounting for 20 percent of major leasing activity thus far in 2014, up from 14 percent in 2013.
- San Francisco topped the U.S. Tech-Twenty Office Markets list for the third straight year. Over the past two years, San Francisco’s high-tech job base has grown by 51 percent, while average asking rents have climbed 35 percent. The key ingredient to this “tech-effect” on the office market is the concentration of high-tech employment in each market and how dominant new high-tech job creation is relative to overall office-using employment.
- The rent premium commanded by submarkets with heavy high-tech employment is increasing. The average office rent aggregate of the Tech-Twenty submarkets was 18 percent higher than the Tech-Twenty overall markets.
- CBRE’s two-year outlook foresees favorable economic and job creation conditions at the national level and continued outperformance by the high-tech industry, although valuation concerns are surfacing. At the heart of high-tech’s growth is strong demand for products and services from consumers. As long as high-tech companies align themselves with this demand, the unrealistic growth and valuation expectations that defined the dot-com bubble should be avoided.