Tech Company Demand Inflates Rents

Tech companies are popping up like toadstools and investors are falling over one another trying to snap up office space in primary markets that will likely be the …

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Tech companies are popping up like toadstools and investors are falling over one another trying to snap up office space in primary markets that will likely be the next target of the latest startup or established tech firm. Areas like San Francisco, Seattle and Boston, well-known havens for the tech industry, have seen significant rent increases for the kind of mixed-use office space tech firms enjoy. The demand has grown so robust that investors are even looking to secondary markets where tech companies are driving gentrification of areas heretofore unfamiliar with the industry. For more on this continue reading the following article from National Real Estate Investor.

Investors who want to jump onto the high-tech tenant bandwagon, but believe that that the prices have become too high, need not worry—virtually every industry that leases office will likely be adding a ton of tech jobs in the next decade.

True, the cores of Washington, D.C., San Francisco, Boston, Seattle and San Jose, Calif., will continue to dominate leasing, as IT and software firms keep growing, feeding off nearby research universities and scouring dwindling talent-pools for well-paying jobs, according to a new report by CBRE. However, these cities will also see large increases in rents that follow the demand—pushing firms to explore other neighborhoods and even secondary markets, says John Vitou, a senior research analyst for CBRE and author of “Scoring Tech Talent: Implications for U.S. Commercial Real Estate in the Digital Age.”

“The thinking about whether to acquire an asset requires a level of consciousness about modern office industry life that just didn’t exist 10 years ago,” Vitou says. “The centers of gravity have shifted away from the main core financial sector and to the areas where tech firms want to go, and to properties that tend to be more mixed-use and heavy with retail, entertainment and multifamily.”

The major tech markets, along with the energy markets dominated by Texas cities, now enjoy dropping vacancy rates and increasing rents. For example, rents in San Francisco increased almost 13 percent from mid-year 2012 to mid-year 2013, according to a recent Avison Young market report. Vacancy is expected to possibly fall to 8 percent, as tenants such as Salesforce, Macy’s.com, Riverbed Technology and Yelp move into large blocks of space in 2013 and 2014.

These rent jumps are pushing firms into gentrifying neighborhoods in core markets, such as Union Square and South of Market in San Francisco, Vitou says. In New York City, class-B buildings are attracting more attention in some submarkets than class-A towers; the better to attract the tech firms. Investors in the Big Apple have jumped on the bandwagon, however, and plans are in place for a $2 billion applied sciences university on Roosevelt Island. A collaboration called Cornell NYC Tech, between Cornell University and the Technician-Israel Institute of Technology, promises to attract high-tech firms to the area, Vitou says.

If the core tech price range has boiled over and rents are too high for more investors, there are still many places to grab tech tenants in secondary markets, he says. He says New Orleans and Columbus have enjoyed attention from tech firms because of a large pool of computer-educated workers. Tech firms in Chicago have committed to adding more than 2,000 jobs by 2015. Coca Cola has announced it will consolidate its IT center to downtown Atlanta, with plans to occupy 275,000 sq. ft. at SunTrust Plaza in the city. In the Raleigh-Durham market, MetLife said it will open a new global technology and operations center in Cary, N.C., creating about 1,200 jobs.

 “IT is a growing share of the entire workforce, it’s not just the Googles and Amazons of the world,” Vitou says. “There’s a large part of the tech force that is easily transferrable to the markets that have lower labor costs and rents, and where there’s more incentives for business.”

This article was republished with permission from National Real Estate Investor.

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