Office leasing by technology firms is growing faster than any other segment of the office market, an amazing feat considering that most of the companies involved have only been around since the turn of the century. What’s guiding the current growth in deal size and location can be traced to the tech firms’ battle with each other for educated talent, according to the experts.
Technology companies have led office leasing for the past four quarters, comprising more than 20 percent of U.S. leasing activity, and more than three-quarters of these transactions represent expansions, according to Julia Georgules, director of office research with commercial real estate services firm JLL. This data is not too surprising, as tech firms have dominated leasing since even before the recession, mostly in primary markets, including San Francisco, Silicon Valley, Seattle, Boston and New York City.
However, the top firms in the sector are rapidly outgrowing those cities, and are looking at expansion in secondary college towns. This is significant because, like a Burger King will follow a McDonald’s to a new city, so will mid-tier and start-up tech firms follow the giants such as Google and Microsoft.
“Competition within the industry is at a fever pitch and the war for talent remains one of the biggest obstacles for start-ups and public companies alike,” Georgules says. “Add to that a declining supply of office space in some of the industry’s favorite stomping grounds and the emergence of new tech hubs is not only necessary, but also very appealing as young companies hope to uncover the next hotspot.”
The hiring craze is affecting secondary markets with technology talent across the country, according to Georgules. With relatively low real estate and employee costs in markets like Atlanta, Dallas and Raleigh-Durham, N.C., where average rents are in the low $20s per sq. ft. compared to an average of mid-$50s in the Bay Area and New York City, more and more secondary and even tertiary tech markets will benefit from tech industry’s seemingly infinite expansion plans, she says.
David Ervolina, director with real estate services firm Colliers International, says the companies have been poaching talent from each other since the days of Steve Jobs and Steve Wozniak, but now the push for growth has forced firms to look across the country for smart workers.
“This is the crazy statistic: Google in New York City says it is hiring 100 people per day. Tell me another company that does that kind of hiring,” Ervolina says. “So basically, every day they need another 10,000 sq. ft. or so to house these new employees. And that’s not even including the massive amount of acquisitions the top firms are doing with the new start-ups.”
According to Ervolina, Austin is one of the hotter tech markets right now. Every major tech firm is looking at the popular Texas city, where the state has offered millions of dollars in tax incentives. Apple is opening a 1-million-sq.-ft. operations center there, and Google leased 208,000 sq. ft. in the city’s Central Business District (CBD), at 500 W. 2nd St. The downtown vacancy rate dropped to 7.3 percent in the second quarter, down from 10 percent in June 2014, according to a recent report from real estate services firm Avison & Young.
“There is a lot of development in Austin that’s already pre-leased with tech tenants, and not that much availability of big blocks of space,” Ervolina says. “Austin’s claim to fame is that it has the highest percentage of educated people per population in the country.”
Eric Myers, a principal with Avison Young in Chicago, says tech firms are also flocking to his city for new talent. The firms discovered River North and the Fulton Market sub-markets as they are both close to transportation and entertainment offerings, while featuring non-traditional office buildings with large floorplates, such as the Merchandise Mart and 350 N. Orleans.
“Once Google entered both areas with sizeable leases, the other firms, such as Uber and Rocket Fuel, followed,” Myers says.
Demetri Koutrouvelis, managing director with Savills Studley’s Washington, D.C. office, says office building owners are still trying to attain that “cool factor” to attract the new tech tenants, though the definition can be elusive. “When you have a tech tenant assignment, it can be very challenging, as they’re all competing for the same kind of space, where you have walkability, natural light, high ceilings or even bicycle storage. There definitely is a lack of cool spaces in traditional office sub-markets,” he says.