Atlanta skyline
ATLANTA—The willingness of tech companies to pay a premium for office space in the hottest tech submarkets is starting to spill over into neighboring submarkets as available space in tech hotspots is dwindling. That's according to CBRE's Tech-30 report.
As a result, neighboring submarkets and traditional downtowns with skylines—rather than the brick-and-beam buildings tech companies have demonstrated a preference for—are primed to benefit. And that creates opportunity for commercial real estate investors.
“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,” Colin Yasukochi, director of research and analysis for CBRE and the report's author, tells GlobeSt.com. “If tech companies that are used to paying a premium for space in the top tech submarkets are forced to move to adjacent submarkets in order to expand, we could start to see significant rent growth in those more traditional markets as well.”
Tenants in Atlanta's top tech submarket, Midtown, benefit from a rich labor pool with talent coming from Georgia Tech, the University of Georgia, Georgia State University and Emory University. Office rents in Midtown, at $29.50, are at a nearly 18% premium compared to the overall market, with the vacancy rate at 14.8%, compared to 17.6% for the overall market. This is leading some tech firms to look to Downtown and North Fulton in order to expand.
(Here's why Atlanta's office sales volume has seen a big drop.)
“The creation of new market opportunities via disruption and a growing number of industries integrating technology into their business models support an optimistic outlook for continued growth ahead,” Chris Ludeman, global president of Capital Markets at CBRE, tells GlobeSt.com. “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.”
From an investor's perspective, 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, Raleigh-Durham, Dallas/Ft. Worth, Charlotte and Nashville, have the greatest growth potential.
“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. Tech-30 office markets should expand further in the near term, albeit at a slower pace,” says Ludeman. “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.”
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