Top Tech Cities in U.S. Commanding Hefty Office Rent Premiums

Top Tech Cities in U.S. Commanding Hefty Office Rent Premiums

Commercial News » San Francisco Edition | By Michael Gerrity | September 2, 2015 11:25 AM ET

If you are a businesses looking for office space in the nation's hottest tech markets should expect to pay a premium - and a hefty one in many of the top tech cities across the U.S.

According to a new report by CBRE, which analyzed the top 30 tech cities across the U.S. and Canada, showed an aggregate rent premium of 11 percent across all 30 markets--a number that jumps significantly higher in the hottest tech submarkets. Notably, Boston's East Cambridge is outperforming the rest of North America with rent premiums of 87 percent, followed by 85 percent in Santa Monica (Los Angeles) and 73 percent in Mountain View (Silicon Valley). 

If that's too steep for companies who want to be in a market with access to tech talent, discounts can still be found in some emerging submarkets including Washington D.C.'s Reston/Herndon (-23 percent), St. Louis CBD (-17 percent) and Northeast Charlotte (-12 percent).

"With rental rates less than the average market rate and a rising pool of talent, these emerging submarkets present opportunity for companies that can't justify the premiums we're seeing in some of the more established tech markets, " said Colin Yasukochi, director of research and analysis for CBRE . "Furthermore, most of these emerging tech submarkets are recording positive--and in some cases strong--rent growth, creating opportunities for real estate investors in these markets, as well."

CBRE Research analyzed the Tech-Thirty markets in terms of office-demand-generating high-tech software/services job growth and the resulting office rent growth. The top 10 markets can be seen in the charts below.

The U.S. high-tech software-services industry has created 730,000 new jobs since 2009 and was the leading driver of U.S. office market demand, accounting for 20 percent of major leasing activity, through Q2 2015. In many leading tech markets, the sector is even more dominant: in Silicon Valley, Austin, San Francisco and Seattle, high-tech companies accounted for 88 percent, 63 percent, 62 percent and 60 percent of major leasing activity through Q2 2015, respectively.

"The high-tech industry is directly supported by consumer demand and a growing number of high-tech integrated businesses, which should keep the industry strong in the years ahead and provide further support for office markets in the Tech-Thirty," Mr. Yasukochi added. "Commercial real estate investors must be mindful and have realistic expectations about this historically volatile industry underpinning the health of many 'Tech-Thirty' office markets."

From an investor's perspective, Austin, Salt Lake City, Phoenix and Portland offer further growth potential and are attractive to occupiers. At the same time, Raleigh-Durham, Dallas/Ft. Worth, Charlotte and Nashville offer the best combination of low office rents and a growing high-tech labor pool.

The report also found a strong link between high-tech funding, high-tech employment and office market growth. A robust correlation between late-stage VC funding and high-tech hiring has important implications for the office market. Large late-stage funding deals allow companies to scale operations quickly, and expand their employment base, driving large office expansions and leasing transactions. Investors' willingness to fund technology companies at rising valuations will be critical for continued growth in high-tech hiring and office space demand in primary tech markets.

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