CHICAGO — Even as the technology industry begins to normalize after two years of major growth, the nation’s tech markets remain winners in the race for talent and, by extension, office leasing. This according to JLL’s recently released Tech Office Outlook report.
From the second quarter of 2015 to the second quarter of 2016, tech office leasing volume fell 9.6 percent. However, despite tech industry growth hitting a relative plateau, it will continue to outpace the national economy and is creating strong real estate conditions across the country, according to the report.
“The technology sector is the leading industry for real estate expansion in the U.S. and is driving nearly 25 percent of office leasing activity across the nation over the past two years for leases of 20,000 square feet or more,” states the report. “Also, 63 percent of these tech companies are in growth mode. And this demand is driving office rents up. The most expensive rents can be found in San Francisco Peninsula’s Menlo Park, at $102.16 per square foot, followed by Palo Alto in Silicon Valley ($100.79); San Francisco’s Mission Bay/China Basin ($84.70) and Hudson Square in New York ($83.11).”
The 9.6 percent year-over-year dip in second-quarter leasing activity this year likely represents a return to normal.
“A healthy tech sector, particularly a ‘hub’ that anchors a vibrant tech ecosystem, has become the hallmark of a strong local economy,” says Steffen Kammerer, senior vice president and leader of JLL’s technology group. “Tech employment growth continues, but this past year has brought people back down to reality. It still outpaces U.S. employment growth by more than two to one.”
Big Markets Bounce Back Faster
Despite the overall strength of the industry, tech companies and investors are still seeking the most resilient markets. In response, JLL created a market score tool designed to help investors and tech companies identify which markets will stand the test of time.
To spot the most resilient real estate markets, JLL selected 16 variables across four major categories — including economic momentum, talent pool, innovation and cost.
The top five locations include:
- Silicon Valley: Market Score 95.4 (out of 100). Despite the rising cost of living, demand for new office development has yet to slow, providing more options for established tech tenants in the market.
- San Francisco: Market Score 87.3. San Francisco remains a highly resilient market. However, discrepancy between public and private valuations, poor IPO performance and general market volatility has dampened deal flow. But access to talent, funding and amenities provide a base for sustained growth.
- Austin: Market Score 84.2. Austin is attracting both people and companies, including Google and Facebook expansions, with 157 new people moving in per day.
- Seattle-Bellevue: Market Score 82.3. As one of the best markets in the country for STEM grads, its thriving job market, unique natural environment and restaurant scene make it a top destination for Millennials.
- Boston: Market Score 82.2. Maintaining its spot with the nation’s second largest volume of tech employees, Boston’s highly educated workforce continues to be a major draw for employers seeking talent, financial resources and innovation.
“Newer tech hubs can also be resilient, such as Minneapolis, northern Virginia, Dallas and Atlanta,” says Kammerer. “Additionally, San Francisco, Austin, Seattle-Bellevue and Boston share many of the same qualities as Silicon Valley today with highly educated populations, active patent activity and strong net migration.”
— Haisten Willis