LOS ANGELES—The newest beneficiaries of the tech sector's continuing expansion may be office landlords outside of the hottest submarkets. The diminishing amount of available space in these top-tier neighborhoods is causing a spillover into neighboring submarkets, CBRE says in its annual Tech-30 report, which measures the sector's impact on office rents in the 30 leading tech markets across North America.
“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, East Cambridge, Minneapolis's North Loop and South Orange County, all of which have very low office vacancy,” says Colin Yasukochi, director of research and analysis for CBRE and the report's author. “If tech companies that are used to paying a premium for space in the 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.” These include traditional downtowns with skylines, rather than the brick-and-beam buildings tech companies have favored.
Currently, East Cambridge leads the roster of tech submarkets with the lowest vacancy rates; just 3.3% of office space there wasn't spoken for as of the second quarter of 2017. It's followed by Palo Alto, CA at 3.7% and Mount Pleasant/False Creek in Vancouver at 4%.
Rent premiums over the broader markets are reflected in these vanishingly low vacancy rates: 120% for East Cambridge and 71% for Palo Alto, and CBRE also cites Santa Monica with a 92% premium. Conversely, several emerging tech submarkets have rent discounts, including Hillsboro, OR (-19%) Northeast Charlotte (-18%) and Reston/Herndon, VA in the Washington, DC suburbs (17%).
The submarket rent premium over the broader top 30 tech markets has grown increasingly wide since Q1 of 2010, CBRE data show. Overall, the average rent premium for tech submarkets is 16.2%.
Within the leading tech submarkets is a different if related concern: an increasing inventory of sublease space. “Tech's share of major leasing activity is 19% this year—nearly double that of 2011,” the report states. “This outsized share is causing concern that the tech industry may be over-leasing office space,” as the energy sector did recently.
CBRE's report notes a sizable increase in sublease availability last year, and that this now totals 65.3 million square feet, a 16% increase. Tech tenants account for 14% of that sublease inventory, a lower percentage than in 2016 and heavily concentrated in larger tech markets, such as Silicon Valley. The potential risk in these markets stems from tech firms that have leased more space than they currently need, with either downsizing or space banking behind two-thirds of the available sublease space in the Tech-30.
“Ups and downs are a natural part of the business cycle, and real estate investors should manage their risk and exposure to the most volatile sectors of the tech industry accordingly,” says Chris Ludeman, CBE's global president, capital markets. “Tech-30 office markets should expand further 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.”
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
