Tech Driving U.S. Office Leasing Market, Creating Resilient Local Economies

Tech Driving U.S. Office Leasing Market, Creating Resilient Local Economies

Commercial News » San Francisco Edition | By Michael Gerrity | September 12, 2016 12:58 PM ET

According to JLL and its latest Tech Office Outlook report, the U.S. tech sector growth continues to outpace the national economy in 2016 and is creating strong real estate conditions across the country. Even as the technology industry begins to normalize after two years of stratospheric growth, the nation's most resilient tech markets remain winners in the race for talent.

According to JLL's report released today, the technology sector is the leading industry for real estate expansion in the U.S. and is driving nearly 25 percent of office leasing activity across the nation over the past two years for leases of 20,000 square feet or more. Also, 63 percent of these tech companies are in growth mode. And this demand is driving office rents up. The most expensive rents can be found in San Francisco Peninsula's Menlo Park, at $102.16 per square foot (psf); Palo Alto in Silicon Valley $100.79; San Francisco's Mission Bay/China Basin, $84.70 psf followed by Hudson Square in New York at $83.11 psf.

A small 9.6 percent dip in second quarter leasing activity this year represents a return to normal and a sign of a deeper correction down the road.

"A healthy tech sector, particularly a 'hub' that anchors a vibrant tech ecosystem, has become the hallmark of a strong local economy," observed Steffen Kammerer, Senior Vice President and leader of JLL's Technology group. "Tech employment growth continues but this past year has brought people back down to reality; it still outpaces U.S. employment growth by more than 2 to 1 after an astronomical 4 to 1 in 2014 and 2015."

"Another sign of strength is that CEOs remain unwilling to negotiate on location. They're willing to pay a premium for resilient markets with a rich blend of talent, innovation and economic momentum. And they're also willing to tap into new, promising economies for expansion," said Kammerer.

Most Resilient Tech Markets

And yet despite the strength of the industry, it's no surprise that tech companies and investors are seeking the most resilient markets. So, to identify the markets that will weather both strong and weak economic cycles, JLL has created a proprietary Market Score tool to help investors and tech companies quickly identify which markets will stand the test of time.

To spot these resilient real estate markets, JLL selected 16 variables across four major categories - including economic momentum, talent pool, innovation and cost. The higher the score, the more resilient the market.
The top five locations include:

1. Silicon Valley; Market Score 95.4: Despite the rising cost of living, demand for new office development has yet to slow, providing more options for established tech tenants in the market.

2. San Francisco; Market Score 87.3: San Francisco remains a highly resilient market. However, discrepancy between public and private valuations, poor IPO performance, and general market volatility has dampened deal flow.  But access to talent, funding, and amenities provide a base for sustained growth.

3. Austin; Market Score 84.2: Austin metro attracting both people and companies (including major Google and Facebook expansions), with 157 new people moving in per day.

4. Seattle-Bellevue; Market Score 82.3: As one of the best markets in the country for STEM grads, its thriving job market, unique natural environment, and restaurant scene make it a top destination for millennials.

5. Boston; Market Score 82.2: Maintaining its spot with the nation's second largest volume of tech employees, Boston's highly-educated workforce continues to be a major draw for employers, seeking talent, financial resources, and innovation.
"Not just any valley will do, but newer tech hubs can also be resilient, like Minneapolis, Northern Virginia, Dallas and Atlanta," noted Kammerer. "Additionally, San Francisco, Austin, Seattle-Bellevue, and Boston share many of the same qualities as Silicon Valley today with highly educated populations, active patent activity, and strong net migration."

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