Demand From Technology Firm Spills Into Secondary Office Markets

Demand From Technology Firm Spills Into Secondary Office Markets

Not content to have taken over every major gateway city, technology tenants are leeching into secondary office markets, adding new competition for talent, raising rents and encouraging new development.

According to a new study by commercial real estate services firm CBRE Tech Thirty 2015, the industry, which includes firms specializing in bio-technology, computer systems design and software publishing, has created almost 750,000 new jobs since 2009. It has accounted for 20 percent of all office leasing so far this year, and is now the leading driver of office space demand in the United States.

Of course, it’s well-known that Silicon Valley, San Francisco and Seattle, the birthplace of the digital craze, have enjoyed the most office leasing and rent growth connected to the technology sector, followed by New York City, Boston and Chicago. Millennial tech workers want to be near the big cities and tech firms have followed.

However, secondary cities including Phoenix, Austin, Texas and Raleigh-Durham, N.C. are starting to show tremendous growth in office demand from tech tenants as well, as firms look for cheaper, but still urban-orientated, markets that will offer fresh labor pools, but with lower operating costs. Phoenix matched the San Francisco tech job growth at 43 percent from 2012 to 2104, with a few secondary cities not far behind: Austin (33 percent), Nashville, Tenn. (23 percent), Indianapolis (18 percent), Charlotte, N.C. (17.3 percent) and Salt Lake City (16.2 percent).

Colin Yasukochi, a director of research and analysis for CBRE, says the top tech firms have realized that to compete, they need to fan out across the country in search of talent. “The firms have now reached into cities where you wouldn’t think of tech workers, such as Indianapolis,” he says. “They realize that not all the workforce has to be placed in the main, higher cost cities. With rental rates in emerging tech markets less than the average market rate and a rising pool of talent, these secondary cities present opportunity for companies that can’t justify the premiums we are seeing in the main tech markets.”

Tech firms are also competing for Millennial workers, the generation that has brought back the urban living trend. Not only do Millennials want to live and work near transportation and entertainment amenities, they also want the cool office spaces, according to a recent report by real estate services firm JLL. Todd Burns, president of JLL project and development services for the Americas, said in a statement that office building owners have increased their tenant improvement spending by more than 14 percent in the past two years to attract this talent. He said developers are building with Millennials in mind.

“Companies will continue to grab vacant property both in primary and secondary markets, and build out offices to fit shifting trends,” Burns said.

Even though global markets experienced massive swings in recent weeks, mostly due to worries about China, there’s no sign that demand from technology tenants will diminish in the office sector. While the first tech boom, and subsequent bust, more than a decade ago is a concern for the massive bubble of new tech companies today, Yasukochi says there’s evidence that this cycle will be different, that the boom may be slow to diminish.

“Of course, real estate investors need to be mindful of the expectations that tech firms can’t continue double-digit growth forever. That down cycle seems to be at least a few years away, however, as most companies today cannot live without utilizing technology,” he says.

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