The commercial real estate market has seen its share of ups and downs so far in 2012, and experts say the ups are due in no small part to a vibrant U.S. technology market. Tech firms in select metro areas have been buying up office space while their growing pools of employees add a jolt to the multifamily housing market. Some cities that are enjoying these tech-cluster booms are San Jose (Calif.), San Francisco, Seattle, Portland (Ore.), Boston, Denver and Seattle, although San Jose and San Francisco lead the pack by a wide margin thanks to their proximity to Silicon Valley. For more on this continue reading the following article from National Real Estate Investor.
Amid a backdrop of sluggish economic growth and lackluster payroll figures, one sector of the economy continues to shine: technology.
The vibrancy of technology in the U.S. permeates beyond the financial outlook of firms in the sector. It directly influences commercial real estate in metro areas where tech firms are the most active. In fact, an analysis of tech-heavy metros reveals that multifamily and office properties are among the many beneficiaries of a dynamic local technology cluster.
Nine metros were identified for this analysis, each of which boasts a tech sector that is a major driving force in the local economy. The metros selected include: Austin, Texas; Boston; Denver; Portland, Ore.; Raleigh-Durham, N.C.; San Diego; San Francisco; San Jose, Calif.; and Seattle.
San Francisco and San Jose are the stand-outs here, given their proximity to Silicon Valley, but all of these metros support a strong local tech cluster. Data from metros with a large technology base indicate above-average rent growth and occupancy gains over the past several years across commercial real estate property types.
For example, it is well known that demand for multifamily properties is strong across most metro areas. The vast majority (approximately 90 percent) of the 82 major metros that Reis tracks showed declines in vacancy for the past eight quarters. However, demand in tech-heavy metros is decidedly more robust than other markets.
The current vacancy rate for the nine tech-oriented metros is 3.6 percent, well below the 4.9 percent rate of all other metros combined. Since vacancies topped record highs in late 2009, tech metro vacancy rates have declined 360 basis points versus a decline of 330 basis points for non-tech metros.
Given the relative tightness of space markets in most metros, the vacancy rate is nearing historic lows for specific markets. At this point in the cycle, many landlords switch their focus from improving occupancy to jacking up rents. The data show that landlords in tech-oriented metros wield a greater degree of pricing power.
During the second quarter, tech-oriented metros saw asking and effective rents rise by 1.2 percent and 1.4 percent, respectively. All other major metros exhibited rent increases of 1.0 percent and 1.2 percent, respectively. This outperformance is even more distinct when longer time periods are considered.
Over the last 12 months, asking and effective rent increases for tech markets were 3.3 percent and 4.2 percent, respectively. Non-tech markets posted markedly less growths at 2.6 percent and 3.3 percent, respectively. Since the cyclical trough for each variable, tech markets have shown asking and effective rent increases of 6.9 percent and 8.7 percent, well above the 5.1 percent and 6.7 percent of all other metros.
Similar differences in fundamental trends between tech and other markets exist for office properties as well. Since peaking in late 2010, vacancy declines have been more pronounced for tech markets, declining 151 basis points, while all other markets fell by just 31 basis points. (The gap between these two figures is much greater than for apartments, but much of this has to do with the lower bound in vacancies that many tech-heavy apartment markets now face.) The variation is just as notable for rents; from trough to present, asking and effective rents are up 4.2 percent and 5.0 percent, respectively, for tech markets versus increases of 2.1 percent and 2.6 percent for all other markets.
Net absorption figures yield another measure through which tech markets shine. The nine tech-oriented metros identified in this study adds up to only 15 percent of overall office inventory, but generated 35 percent of the increase in occupied stock from late 2010 to mid-2012.
Perhaps all this is driven by tight supply conditions, versus strong demand. This is decidedly not the case. Yes, supply growth has been relatively tight for both apartment and office properties leading up to the recession–that meant less of a glut to deal with as demand contracted.
However, supply growth pressures have actually been greater for landlords and building owners in tech-oriented markets, both before the recession and since it began in 2008. In the six years prior to the recession, tech market apartment supply rose by 6.3 percent versus 3.6 percent for all others. In the four years since the onset of the recession, inventory for tech markets rose 5.2 percent; the figure for the rest of the U.S. was 3.8 percent.
For the office sector, tech markets did have slightly less supply growth leading up to the recession, but from 2008 onwards tech-metro inventory grew by 3.2 percent versus 1.4 percent for all others.
The story is really about robust demand from tech firms in these metros swamping any competitive pressure from additions to new supply, and boosting rents and occupancies. Tech-oriented metros are simply the boats that are getting more of a lift from the rising tide.
This article was republished with permission from National Real Estate Investor.