by Brianna Crandall — September 3, 2014—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 the past two years, including San Francisco, Austin, Manhattan and Silicon Valley, according to global commercial real estate services and investment firm CBRE Group’s latest research report on the top 20 tech-dominated office markets.
(Click on image to enlarge)
According to U.S. Tech-Twenty: Measuring Office Market Impact, the relationship between high-tech job growth and accelerating rents was especially pronounced within tech-dominated submarkets, led by Redwood City in the San Francisco Peninsula, where rents have increased 30% over the past two years; Midtown South in Manhattan (up 29%); and River North in Chicago (up 26%).
“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.
According to the report, which tracks high-tech employment and office market conditions in 20 tech-oriented office markets across the United States, the high-tech sector has accounted for one of every four new office-using jobs since 2009. Within the Tech-Twenty markets, 10 grew their high-tech job base by more than 10%, including Austin (34%), San Francisco Peninsula (30%), and New York (23%), between 2011 and 2013.
Other highlights of the report include:
- High-tech was the top industry leasing office space in the USA, accounting for 20% of major leasing activity thus far in 2014, up from 14% 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%, while average asking rents have climbed 35%. 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% higher than the Tech-Twenty overall markets.
- 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.
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, concludes CBRE.
