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Report: Tech Industry Drive Office Space Demand in San Francisco, Seattle

Savills, Seattle, Puget Sound, technology

By Nancy Amdur

The technology industry is driving office demand in cities nationwide, but the Bay Area stands as one of the most impacted markets, with high-tech companies accounting for more than half of the major leasing activity in many of the region’s cities, according to new research by CBRE Group, Inc.

“In the Bay Area, demand remains deep and strong,” said Ham Southworth, a Palo Alto-based executive vice president at CBRE.

High-tech software and services firms created more than 730,000 new jobs and accounted for 20 percent of major leasing activity nationwide from 2009 through the second quarter 2015, the commercial real estate company’s Tech-Thirty 2015 report said. The report measures the tech industry’s impact on office markets in North America.

“Office markets in the Tech-Thirty should expand further in the near term”

In Silicon Valley, tech companies comprised 88 percent of major leasing activity and in San Francisco comprised 62 percent. Austin and Seattle also saw significant leasing activity in the tech sector, with 63 percent and 60 percent, respectively. Square footage of the office space measured in the study varied by market, ranging from as small as 5,000 square feet, said Colin Yasukochi, director of research and analysis at CBRE in San Francisco.

San Francisco for the fourth straight year is growing at the fastest pace of all markets studied, with its high-tech job base jumping 43 percent and office rents rising 31 percent over the past two years, the report said.

Silicon Valley saw a 27 percent hike in its tech job base, placing it fourth on the list, and its rent increase of 28.1 percent during the same period was the second highest among markets studied. The Peninsula tech job base grew by 15 percent while rents rose by 21 percent, ranking it 12th and fourth on the respective lists.

However, the Bay Area may be unable to maintain this rapid growth, partly due to talent and infrastructure issues, Southworth said.

“The sustainability of this high-tech boom is being questioned,” Southworth said in a statement about the report. “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.”

“My primary concern on sustainability is from a labor supply standpoint,” Southworth told The Registry. “You can pay people a lot of money, but that doesn’t mean that they’re going to be willing to come to the Bay Area.”

“If the supply of labor is not going to expand, that’s going to put a major crimp in growth,” he added. “As much as everybody likes the Bay Area and a lot of companies think its really important to be here, I think as time passes and costs go up and life here becomes more and more challenging, they’ll start thinking about other locations.”

Some Bay Area-based firms have already opened offices in markets such as Phoenix, Austin, Seattle, Salt Lake City and Portland, the report said.

For now, the Bay Area’s tech industry growth does not seem to be slowing down and office rents are climbing. The tech-heavy submarket of Mountain View, for instance, saw higher office rent growth than any other submarket studied, with rents rising 34.9 percent between the second quarter 2013 and the same quarter in 2015.

“Tenants are willing to pay a premium to be in the areas that top tech talent prefer,” the report said. This leads to space constraints in some tech submarkets. Mountain View posted a vacancy rate of 1.4 percent during the second quarter 2015.

Tech firms also are scooping up large amounts of tech space in Silicon Valley, which ranked first in net absorption growth over the past two years. Between early 2014 and the second quarter this year, 4.6 million square feet in new development projects was pre-leased in the market, 99.5 percent by tech companies.

Business and consumer demand for tech services and innovation are helping to keep economic fundamentals strong “for continued improvement in the high-tech industry,” CBRE’s report said. “Accordingly, office markets in the Tech-Thirty should expand further in the near term.”