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 report by CBRE, the top 30 tech cities across the U.S. and Canada, showed an aggregate rent premium of 11 percent—a number that jumps significantly higher in the hottest tech submarkets. Notably, Boston’s East Cambridge is outperforming the rest of North America with rent premiums of a whopping 87 percent, followed by 85 percent in Santa Monica and 73 percent in Silicon Valley.
If that’s too steep for companies who want to be in a market with access to tech talent, discounts can still be found in some emerging submarkets including Washington D.C.’s Reston/Herndon (-23 percent), St. Louis (-17 percent) and Northeast Charlotte (-12 percent).
A robust correlation between late-stage VC funding and high-tech hiring has important implications for the office market.
With more affordable rental rates and a rising pool of talent, these emerging submarkets are good options for tech companies on a buget. Furthermore, most of them are recording positive—and in some cases strong—rent growth, creating opportunities for real estate investors.
High-Tech Software/Services Job Growth
Ranked by growth rate, 2012 to 2014
|Rank||Market||2012 to 2014
|2011 to 2013
|10||Salt Lake City||16.2%||15.6%|
Office Market Rent Growth
Ranked by growth rate, Q2 2013 to Q2 2015
Q2 ’13 to Q2 ’15
Q2 ’12 to Q2 ’14
|4||San Francisco Peninsula||21.0%||19.3%|
Source: U.S. Bureau of Labor Statistics, Statistics Canada and CBRE, 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.
From an investor’s perspective, Austin, Salt Lake City, Phoenix and Portland offer further growth potential and are attractive to occupiers. At the same time, Raleigh-Durham, Dallas/Ft. Worth, Charlotte and Nashville offer the best combination of low office rents and a growing high-tech labor pool.
CBRE’s report also found a strong link between high-tech funding, high-tech employment and office market growth. A robust correlation between late-stage VC funding and high-tech hiring has important implications for the office market. Large late-stage funding deals allow companies to scale operations quickly, and expand their employment base, driving large office expansions and leasing transactions. Investors’ willingness to fund technology companies at rising valuations will be critical for continued growth in high-tech hiring and office space demand in primary tech markets.
The full report can be accessed here.