If the tech giants that have driven office sector momentum in the San Francisco Bay area continue to drive up the city’s rents, where are the newer tech players planting roots?
Nationally, brokerage firm Marcus & Millichap estimates net absorption of nearly 90 million sq. ft. for the office market in 2016. In the first quarter, completions likely increased nationally, according to New York City-based research firm Reis Inc., but not enough to cause a spike in the vacancy rate, which will continue to decline.
Reis places San Francisco as having the third lowest office vacancy rate in the country at the moment, with 10.2 percent, following New York City and runner-up Washington, DC. (Reis calculated office vacancies for both those cities in the low-9.0 percent range.) San Francisco also remains as one of the top two office markets in Marcus & Millichap’s National Office Property Index, alongside San Jose, as a result of its strong employment numbers and low vacancy.
A major reason tech companies are branching out of Silicon Valley and San Francisco are costs, and not just the cost of real estate—the cost of talent as well, according to Ryan Severino, senior economist and director of research at Reis. There are educated workforces in other markets that are equally competent and not as expensive as the San Francisco and Silicon Valley salaried tech office workers.
Business incubators in many of these cities are giving start-ups a place to grow their business, but technology firms are also benefitting from a significant reduction in office rents compared to America’s tech capital. Larger companies, meanwhile, are choosing to move parts of their overall team, such as the sales staff, to less expensive markets, in part to reduce their Bay area office footprints.
“Larger organizations like having an international and national network and the diversity of talent that comes with it,” Severino says. It also gives these companies the ability to offer perks such as flexibility to work between locations.
Another reason to open locations in new markets is the freedom to expand when necessary. With painfully low supply of office space in the Bay area, emerging tech markets offer greater redevelopment opportunities.
Recently named the Silicon Forest, Portland is seeing a surge in tech office demand. There will be 1.3 million sq. ft. of office construction in this market this year, reports Marcus & Millichap.
As of February 2016, asking office rents in the city averaged $21.08 per sq. ft., according to online real estate database LoopNet. The figure represents a 7.5 percent year-over-year increase.
Tech companies that want to stay near Silicon Valley, but lower their real estate expenditures are looking to Los Angeles, also known as Silicon Beach. Although 2.5 million sq. ft. of new construction will be completed this year, Marcus & Millichap forecasts demand will push asking rents up 3.5 percent percent.
As of February, asking rents in Los Angeles averaged $26.21 per sq. ft., an increase of 0.3 percent compared to a year ago.
Oakland is another city in which tech companies are settling to avoid San Francisco rents while remaining on the West Coast. For example, in 2015 Uber purchased the city’s Uptown Station property, an old Sears building. Slated to open in 2017, the Oakland office will be part of Uber’s global headquarters and employ 2,000-3,000 people according to Wire.
However, a slowdown in construction will fail to meet demand and will likely result in 7.2 percent asking rent increase this year, according to Marcus & Millichap. Only 225,000 sq. ft. of new office space will be completed this year, as opposed to 310,000 sq. ft. the year before, the firm’s researchers note.
In February, the average asking rent in Oakland was $29.38 per sq. ft., an increase of 26.5 percent from the year before.
Salt Lake City benefits from a Silicon Valley “spill-over effect,” Severino says. Companies see a plentiful and educated workforce flowing from Brigham Young University and the University of Utah. “The metro is quickly becoming one of the nation’s biggest tech leaders as a mix of established firms and homegrown start-ups call the area home, earning it the nickname the Silicon Slopes. These growing businesses seek architecturally innovative space and amenity-laden buildings to help attract and retain talent,” Marcus & Millichap researchers write.
There will be an increase in office vacancy this year to 10.8 percent, however, as developers complete 3.1 million sq. ft. of new space, most of it in class-A buildings.
The average asking rent in Salt Lake City in February was $18.22, according to LoopNet—up 4.5 percent from February 2015.
Large tech companies continue to add office space in Austin, as do start-ups. Home to Dell Medical School and Dell Seaton Medical Center at the University of Texas, the city has a young, well-educated workforce that specializes in technology and healthcare. “The combination of a talented tech workforce and the addition of a growing medical field will boost the healthcare IT industry, increasing the need for office and medical office space in the metro. Strong demand for space and limited new inventory coming on-line in 2016 will facilitate another year of steep vacancy declines,” notes Marcus & Millichap’s forecast. The firm also notes Apple’s planned 1.1 million sq. ft. expansion in northwest Austin.
Average asking rent in Austin in February was $22.38 per sq. ft., marking an increase of 8.4 percent from the year before.
“There has always been a big connection between the Phoenix market and technology community, says Tiffany Winne, senior vice president and branch manager of the Phoenix office of Savills Studley, a commercial real estate services firm. Tech companies look to Phoenix to deepen their talent pool and for its lower real estate cost structure, according to Winne. Full-service rental rates for an office building currently total $39/sq. ft. at their highest, Winne says. Property owners in the Phoenix market are turning to adaptive reuse of older grocery stores and manufacturing buildings to house the incoming businesses, in addition to investing in new development.
Asking rents for office space in Phoenix currently average $18.48—up 4.8 percent from February 2015.
“Scottsdale and Phoenix are good secondary markets with access to universities,” says Jay Chernikoff, founder and CEO of DeskHub, a provider of shared office space. Yelp opened a Scottsdale office in 2010. Weebly, a San Francisco-based tech start-up that facilitates ‘do it yourself’ websites, also has an office there.
In February, average asking rent in the city was $21.93, an increase of 6.1 percent from the year before.
Denver’s already thriving technology industry earned it the nickname Silicon Mountain. “In the past 10 years, Denver has moved from being an energy-dependent market to a tech-heavy one,” says Jerry Hoffman, president of Hoffman Strategy Group, an urban retail and integral use consulting firm. “It has a whole mix of technology companies, including telecommunications, software development and cable.” Adaptive reuse projects and new office developments are plentiful in RiNo and LoDo districts. Light rail service spanning 48 miles makes commuting easy, and Denver is expanding its light rail service by almost 100 miles, adding lines to service the nearby University of Colorado.
In February, asking office rents in Denver averaged $21.61, a decline of 1.4 percent compared to February 2015.
Omaha is an emerging place for tech entrepreneurs and has been dubbed the Silicon Prairie. The Mastercraft building presents a compelling case study: once a manufacturing facility, it has been turned into an incubator for small businesses with largely tech-oriented tenants. “In the old market area of Omaha, its historic district has undergone ancillary development with adaptive reuse of old buildings, as well as razing of buildings and rebuilding of those with communal space,” Hoffman says.
Asking rents in the city in February averaged $14.44 per sq. ft., down 4.3 percent from the year before.
Located less than 60 miles southwest of Omaha and also part of the Silicon Prairie, Lincoln “presents a specialized community very attractive to tech,” Hoffman says. The local community has embraced the tech worker culture, as start-ups fill old warehouse spaces and supporting businesses such as restaurants and bars open, Bloomberg reports.
Asking office rents in February averaged $12.82 per sq. ft., down 0.7 percent from a year ago.
“There are development projects going up along the river, north of the historical district,” Hoffman says. The city is seeing both adaptive reuse and new office construction that includes indoor and outdoor communal spaces. Health IT giant is headquartered in the city and in 2013 announced plans to build a 236-acre office park in the city’s north. Cerner Corp., a supplier of health information technology, will complete two office buildings in Kansas City. The Kaufman Foundation also runs an entrepreneurship incubator in the city.
The average asking rent in Kansas City in February was $16.74 per sq. ft., up 4.4 percent year-over-year.
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