Office rents on the rise in all 30 top tech submarkets in CBRE’s annual Tech-30 report
San Diego County CA— San Diego was among the top markets in the country for rising office rents over the past two years, according to CBRE’s annual Tech-30 report, which measures the tech industry’s impact on office rents in the 30 leading tech markets in the U.S. and Canada. On the list of 30 markets, San Diego saw the eighth greatest rent growth; Orange County took the number one spot.
The influence of tech job creation on office market rent growth is pervasive across the U.S. and Canada, with 13 of the Tech-30 markets posting rent growth of 10 percent or more between Q2 2015 and Q2 2017. San Diego’s high-tech employment grew 4.4 percent over 2015 and 2016, with average office asking rents rising 13.7 percent to $34.08 from Q2 2015 to Q2 2017.
According to CBRE’s Tech-30 report, the willingness of tech companies to pay a premium for office space in the hottest tech submarkets is starting to spill over into neighboring submarkets as available space in tech hotspots is dwindling. As a result, adjacent submarkets and traditional downtowns with skylines—rather than the brick-and-beam buildings tech companies have demonstrated a preference for—are primed to benefit, creating opportunity for commercial real estate investors.
“Office rents have increased in every primary tech submarket over the past two years, illustrating stiff competition among tenants to locate in talent-rich areas such as Tempe, East Cambridge, Minneapolis’s North Loop and South Orange County, all of which have very low office vacancy,” said Colin Yasukochi, director of research and analysis for CBRE and the report’s author. “If tech companies that are used to paying a premium for space in the top tech submarkets are forced to move to adjacent submarkets in order to expand, we could start to see significant rent growth in those more traditional markets as well.”
The research found that the top tech submarkets with the lowest vacancy rates are East Cambridge (3.3 percent), Palo Alto (3.7 percent) and Mount Pleasant/False Creek in Vancouver (4 percent) as of Q2 2017. The office rent premium paid by tenants in these markets continues to widen, with average rents for top tech submarkets increasing faster than their broader markets, with an average premium of 16.2 percent (also based on Q2 2017 data). That figure jumps substantially for markets at the top of the Tech-30 list, including East Cambridge (120 percent), Palo Alto (71 percent) and Santa Monica (92 percent). Tenants in San Diego’s top tech submarket, Sorrento Mesa, pay a premium of 3.3 percent compared to the broader market.
Conversely, several emerging tech submarkets have rent discounts, including Hillsboro, Oregon (-19 percent) and Northeast Charlotte (-18 percent).
San Diego’s diverse tech subsectors like med-tech, defense and fin-tech often have varying needs, which influence where they locate in San Diego. Sorrento Mesa and Downtown remain the key submarkets for tech office, but Rancho Bernardo, UTC and Carlsbad have been driving much of the tech office leasing activity this year.
“Traditionally, Sorrento Mesa has been the top tech market in San Diego, however we are seeing the majority of new development and redevelopment in emerging tech markets such as Mission Valley, downtown and UTC, said Matt Carlson, senior vice president of CBRE in San Diego. “Tech tenants are now looking for amenity-rich campuses, similar to Ampersand in Mission Valley. The former San Diego Union-Tribune building is a great example of a repurposed creative office campus—this suburban urban location is attractive for tech tenants because of where it is situated but also because of the wide variety of on campus and other walkable amenities.”
“The creation of new market opportunities via disruption and a growing number of industries integrating technology into their business models support an optimistic outlook for continued growth ahead. Commercial real estate investors should benefit from the trends that have given the tech industry greater stability and a wide economic base compared with previous economic cycles,” said Chris Ludeman, Global President, Capital Markets, CBRE.
“Ups and downs are a natural part of the business cycle, and real estate investors should manage their risk and exposure to the most volatile sectors of the tech industry accordingly. Tech-30 office markets should expand further in the near term, albeit at a slower pace. Realistic growth expectations, valuations and viable exit strategies by tech firms will protect investors from potential losses that were unforeseen during the last tech cycle,” added Mr. Ludeman.
Top Job Growth Markets
For the sixth consecutive year, San Francisco was the top Tech-30 market for high-tech job growth; its high-tech job base grew by 39.4 percent over the past two years, while its average asking rent increased by only 7.1 percent. Charlotte (31.6 percent), Pittsburgh (31.4 percent) and Indianapolis (27.8 percent)—all low-cost markets—had the next highest job growth rates and rent increases of 16.9 percent, 3.5 percent and 6.5 percent, respectively.
Top Rent Growth Markets
Double-digit office rent growth was achieved in 13 markets over the past two years, led by Orange County (23.3 percent), Nashville (21.2 percent), Atlanta (17.6 percent) Charlotte (16.9 percent) and Silicon Valley (16.8 percent).
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.