Why the Biggest Markets for Office Growth Aren’t What You Think

Just two decades old, the 21st century has already dramatically redefined many Americans’ relationship to traditional office spaces. Over 40 percent of companies have increased their flexible workplace offerings during the last half-decade, suggesting that employers are willing to go to great lengths to cater to employee preferences in increasingly tight labor markets.

That said, the rise of telecommuting hasn’t ushered in the fall of centralized office space so much as it has forced companies to reevaluate how and where they ask their employees to work. Coworking spaces, for example, offer startups and small businesses short-term leases and painless scaling, and have accounted for nearly a quarter of all new office leases over the last two years.

What’s more, while central business districts (CBD) in major commercial real estate (CRE) markets remain quite popular — especially among enterprises — office spaces in both secondary markets and “surban” areas of major markets have also seen significant growth in recent years. Utilizing Reonomy’s extensive proprietary datasets, I’ve highlighted several such markets and submarkets below.

Opting Out of the “Tech Hub Premium”

The twin epicenters of the digital revolution—Seattle and Silicon Valley—have remained among the country’s hottest CRE markets for the better part of three decades. As a result, office space in these blue chip locales has become prohibitively expensive for all but the most established companies.

Recently, budget-conscious companies have started migrating their offices to nearby areas in an effort to avoid paying this “tech hub premium.” For instance, the number of office building sales in Bellevue, Washington—just across Lake Washington from Amazon’s sprawling headquarters—jumped from 29 in 2017 Q2 to 48 in 2017 Q4. While still trailing Seattle by a healthy margin in terms of raw sales quantity, the mean office sales price in Bellevue was actually slightly higher than the mean in Seattle during 2017 Q3. Similarly, as office sales in San Jose have steadily decreased since 2017 Q2, sales (and average prices) in both Oakland and, further afield, Sacramento continue to rise.

Taming the Wild West

An influx of tech talent appears to be driving office growth in the inland West, as well. Both Salt Lake City and the broader Wasatch Front — the so-called “Silicon Slopes”—are considered among the hottest emerging tech markets in the country. In fact, according to CBRE’s Scoring Tech Talent in North America 2017 report, Salt Lake’s tech talent pool grew by over 22 percent from 2015 to 2016 alone (the third-highest growth rate in country during that interval).

Microsoft, Adobe, Tesla, and Snapchat have all opened outposts on the Wasatch Front, lifting the average price of the region’s 650-plus office sales over $3 million for 2016 and 2017. Some 600 miles directly south, the Phoenix metro area has enjoyed a similar boom in tech-driven office sales. Not only has the number of quarterly office property sales held steady at an impressive average of 176 since early 2017, but the mean sales price has exploded from $3.2 million in 2017 Q1 to $5.5 million in 2018 Q1.

A New Work State of Mind

In Reonomy’s homebase of New York City, many companies have taken advantage of extensive outer borough rezoning to flee Manhattan for greener—and cheaper—pastures. Nouveau office parks like the 84,000-square-foot New Lab have transformed dilapidated areas like Brooklyn’s Navy Yard into thriving centers of tech-centric commerce. Brooklyn saw the sale of nearly 400 office spaces in 2017 alone, suggesting a bright future for New York’s hippest borough.

Though on a smaller scale, office space in The Bronx is having a moment of its own. 2018 Q1 saw nearly three times as many sales as 2017 Q1, all while the mean sales price increased by over $300,000. If this growth holds steady, the oft-heralded “SoBro” might finally become a reality.

A Central Florida Fairytale

While glamorous vacation destinations like Miami garner the lion’s share of industry attention in The Sunshine State, Central Florida’s robust job markets have made it something of a corporate destination in its own right. Orlando has gained more than 275,000 new residents since 2013, and is expected to attract nearly 400,000 more in the forthcoming five-year period. What’s more, despite its state-low 3.3% unemployment rate, Orlando is set to add 1,000 new jobs per week throughout 2018.

These jobs aren’t materializing out of thin air, however, and the underlying influx of corporate investment has led to the sale of 142 office spaces in Downtown Orlando alone over the past twelve months. Just down I-4, Tampa enjoyed a similarly busy 2017. Roughly 105 office spaces changed hands each quarter, with the average sales price creeping up from $4.3 million to $4.7 million over the course of the year.

Embracing the 21st Century Office

As PwC puts it, Brooklyn and Bellevue are examples of the “new suburbs,” with “access to the CBD and have urban amenities, but are not in the main CBD.” In tandem with secondary CRE markets like Salt Lake City, Phoenix, Orlando, and Tampa, these “new suburbs” will be the driving force behind office space growth in the digital age.

Centralized corporate workspaces aren’t disappearing, just relocating, and the companies that engage with these changes head-on will be best-positioned to win the war for talent—and, by extension, the war for market dominance.

Rich Sarkis is CEO of Reonomy. The views expressed here are the author’s own and not those of ALM’s Real Estate Media.