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CBRE: Looking For Office Space In A Top Tech City? Be Prepared To Pay A Hefty Premium

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New report from CBRE Group, Inc. shows San Francisco as top-ranked market for both tech job and office rent growth Bay Area high-tech industry created 60 percent of new office space using jobs

San Francisco, September 11, 2015 – Businesses looking for office space in the nation’s hottest tech markets should expect to pay a premium – and a hefty one in many of the top tech cities, according to a new research report by CBRE Group, Inc. The report, which analyzes the top 30 tech cities across the U.S. and Canada, showed an aggregate rent premium of 11 percent across all 30 markets—a number that jumps significantly higher in the hottest tech submarkets, including Mountain View in Silicon Valley, which had the third-highest rent premium in North America at 73 percent, trailing Boston’s East Cambridge at 87 percent and Santa Monica in Los Angeles at 85 percent.

San Francisco topped the Tech-Thirty office markets list for four straight years; its high-tech job base (46 percent) and office rents (31 percent) grew at the fastest rate over the past two years. From 2012 to 2014, the three Bay Area markets added 47,494 high-tech jobs, representing 60 percent of all new office jobs.

“Tech industry growth in San Francisco may be at the top of the charts, but it could be even stronger if the supply of talent and office space were higher and rents and operating costs were lower. Many Bay Area-based tech firms have exported jobs to other markets in search of talent and lower operating costs,” said Luke Ogelsby, Senior Vice President of CBRE. “Those markets benefiting from Bay Area growth include Phoenix, Austin, Seattle, Salt Lake City, Portland and Chicago.”

Tech heavy submarkets are commanding average asking rent premiums throughout the Bay Area. At 34.9 percent, Mountain View topped the list of tech submarkets in terms of office rent growth from Q2 2013 to Q2 2015. Silicon Valley as a whole ranked first in net absorption growth over the same time period. Since the beginning of 2014, 4.6 million square feet in new development projects has been pre-leased, 99.5 percent by tech companies. Severe space constraints have caused many tech companies to expand southward into areas like Santa Clara and North San Jose.

The Redwood City submarket was fourth-ranked of the top tech submarkets in each market in terms of office rent growth from Q2 2013 to Q2 2015. San Francisco Peninsula as a whole was fourth-ranked in terms of office rent growth with a 21 percent increase from Q2 2013 to Q2 2015. With the overall market at 8 percent vacancy, limited available space has spurred development in downtown Redwood City; at the same time, some tech companies are moving to North County in search of lower rental rates.

“With several large tech household names buying local commercial real estate for their own consumption, we have seen lease rates trending upward and expect for this to continue in the near-term,” said Jerry Inguagiato, Senior Vice President of CBRE. “Many of our Peninsula-based clients are expanding their search criteria to include stretching south into Santa Clara & North San Jose, as well as East Bay locations like Fremont and Newark to escape rapidly increasing peninsula rates which some simply cannot afford anymore.”

While San Francisco Peninsula ranked slightly lower for high-tech job growth, its new tech jobs accounted for 42.8 percent of new office jobs, making it one of the highest concentrated markets.

High-Tech Software/Services Job Growth

Ranked by growth rate, 2012 to 2014

Rank Market 2012 to 2014 Growth Rate 2011 to 2013 Growth Rate
1 San Francisco 42.7% 50.9%
2 Phoenix 42.7% 18.6%
3 Austin 33.0% 33.7%
4 Silicon Valley 27.0% 20.0%
5 Nashville 22.7% 29.6%
6 New York 22.6% 22.7%
7 Seattle 18.3% 17.0%
8 Indianapolis 18.0% 20.7%
9 Charlotte 17.3% 13.4%
10 Salt Lake City 16.2% 15.6%

 

Office Market Rent Growth

Ranked by growth rate, Q2 2013 to Q2 2015

Rank Market Q2 ’13 to Q2 ’15 Growth Rate Q2 ’12 to Q2 ’14 Growth Rate
1 San Francisco 30.7% 34.6%
2 Silicon Valley 28.1% 21.4%
3 Raleigh-Durham 23.4% -0.9%
4 San Francisco Peninsula 21.0% 19.3%
5 Vancouver 18.4% 14.3%
6 Orange County 16.1% 5.2%
7 Boston 14.4% 11.2%
8 New York 14.1% 17.5%
9 Dallas/Ft. Worth 13.4% 12.0%
10 San Diego 12.7% 8.6%

Source: U.S. Bureau of Labor Statistics, Statistics Canada and CBRE Research, July 2015.

The high-tech software/services industry has created 730,000 new jobs since 2009 and was the leading driver of U.S. office market demand, accounting for 20 percent of major leasing activity, through Q2 2015. In many leading tech markets, the sector is even more dominant: in Silicon Valley, Austin, San Francisco and Seattle, high-tech companies accounted for 88 percent, 63 percent, 62 percent and 60 percent of major leasing activity through Q2 2015, respectively.

“The high-tech industry is directly supported by consumer demand and a growing number of high-tech integrated businesses, which should keep the industry strong in the years ahead and provide further support for office markets in the Tech-Thirty,” said Colin Yasukochi, director of research and analysis for CBRE. “Commercial real estate investors must be mindful and have realistic expectations about this historically volatile industry underpinning the health of many ‘Tech-Thirty’ office markets.”

“In the Bay Area, demand remains deep and strong, although the sustainability of this high-tech boom is being questioned,” said Ham Southworth, Executive Vice President of CBRE. “With real estate prices nearing and exceeding dot-com levels, traffic and congestion clogging roads and freeways and the region’s cost of living climbing ever higher, commercial real estate could be plateauing, creating more tenant-friendly times ahead.”

About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.