By Meghan Hall
2020 started off as a bright year for the tech industry and tech-centric markets such as San Francisco and Seattle. Since 2010, the industry has created more than 1.5 million jobs, with job creation still gaining momentum prior to the start of the pandemic. The tech industry was critical to maintaining business activity during shelter-in-place orders and will likely lead the next growth cycle—but only once in-person business operations can fully resume.
“The long-term, underlying fundamentals that were here in January, we’re pretty confident they will be here once this actually becomes a post-COVID-19 environment,” explained CBRE’s Director of Research and Analysis Lexi Russell. “But we are not there yet.”
Prior to the advent of the pandemic, the technology sector accounted for one of every four new office jobs requiring office space. The current recession has many companies to put expansion plans on hold and those that support highly impacted industries—hospitality, leisure, retail and transportation—have had to adjust the most. However, overall, the industry proved fairly resilient. Between March and August of this year, jobs within the tech sector declined 1.6 percent. Other office using industries on average declined 4.6 percent, and the U.S. overall saw jobs decrease by 7.6 percent. During the Great Recession, U.S. employment dipped by 5.5 percent between 2008 and 2010.
Throughout the second quarter, office leasing by the high-tech industry was down 46 percent from the 2019 quarterly average, while leasing across all industries was down 44 percent. Sublease space within CBRE’s Tech-30 markets—typically considered some of the strongest in the country—increased by 42 percent or by 27 million square feet from the end of 2019 to August of 2020.
For some markets, such as San Francisco, recovery will take some time. Although the city saw some of the highest rates of job growth prior to COVID-19 at 27 percent, CBRE also noted there is some risk to be found in the market. Across all of CBRE’s Tech-30 markets, there is a 2.1 percent sublease availability rate of total inventory. By comparison, San Francisco has a 5.9 percent sublease availability rate and has the highest concentration of sublease availability from technology companies.
Russell noted that these numbers are certainly higher than normal, San Francisco and the wider Bay Area in general both have had extremely active sublease markets historically.
“Back then, there were a lot of companies placing sublease space on the market, but in San Francisco and Silicon Valley, it was coming off almost as quickly… [The markets were] very active leasing in sublease space,” stated Russell “…There was a whole mini ecosystem, so technology companies are very used to putting sublease space on the market and there being some demand to backfill it.”
Through the second quarter of 2020, San Francisco did still see rent increases, and rents remained stable for a relatively long time. Rents are beginning to soften and concessions are up, although price discovery has still proven difficult. CBRE estimates rents in San Francisco has decreased by about eight percent.
On a brighter note, while there is a large amount of sublease space on the market, original direct leases are still in place, meaning that landlords are still receiving rent payments. Additionally, venture capital funding is still flowing into San Francisco, supporting a variety of companies as they navigate the current market.
“Overall we think tech is resilient, but we’re also being realistic with how tech is impacting each of the markets it has a face in,” said Russell.
Seattle was also one of CBRE’s top markets for tech growth heading into the beginning of 2020. Less developed than San Francisco, the market has still seen some stability thanks to big names within the region. By the end of the second quarter, for example, Seattle’s South Lake Union neighborhood maintained one of the lowest vacancy rates in the country, at three percent.
“Seattle is an interesting market because while it is a younger tech market, it is still dominated by older, more established companies,” said CBRE’s Senior Research Analyst for the Pacific Northwest Nolan Watson. “It’s the local giants that are driving the growth, and because they can afford to do longer-term planning, the fundamentals still exist fairly positively…These companies are at an advantage because they can plan.”
At the end of the second quarter, Seattle had about 3.1 million square feet of sublease space on the market and a vacancy rate of 9.6 percent. Like San Francisco, venture capital funding is also at a record high, and companies continue to grow, providing a silver lining for the future.
CBRE predicts that short-term, markets could become more favorable to tenants as companies push off large expenditures and decisions until more information becomes available. Russell and Watson believe strong fundamentals will return—but only when companies can return entirely to the office in a safe manner.
“We have different outlooks on work from home, but we did a survey that showed there is going to be an evolving process,” said Russell. “I think what we’re seeing [in the market] right now holds…Some of these markets are going to be more tenant-favorable. But once we are in the all-clear to re-enter in a very strong way, there will be more favorable markets.”