Tech Driving Office Markets Beyond Silicon Valley

In the commercial real estate recovery, the U.S. office market has lagged other sectors such as apartments and industrial.But it has been rebounding as the economy improves and adds jobs. A lot of the strength has been driven by high tech. Where tech companies are on the move, office fundamentals are strengthening.

Take San Francisco. Twitter (NYSE:TWTR) was one of the first in. And with new space being taken by tech companies such as Salesforce.com (NYSE:CRM), Dropbox and Splunk (NASDAQ:SPLK), among others, the city has become one of the strongest U.S. office markets.

Commercial real estate brokerage Marcus & Millichap (NYSE:MMI) ranks it No. 1 on its National Office Property Index for 2015, a forward-looking survey released this week.

Cranes jut through fog with San Francisco landmarks in 2013. This year tech is putting the metro area at the top of a U.S. office property index.

Cranes jut through fog with San Francisco landmarks in 2013. This year tech is putting the metro area at the top of a U.S. office property index. View Enlarged Image

The index sorts markets by improvements expected in 2015 based on factors such as new office supply, employment growth, and vacancies and absorption.

Close behind San Francisco are tech hot spots San Jose, Calif., and Seattle, which bumped New York for third place due largely to Amazon’s (NASDAQ:AMZN) expansion in its hometown. San Jose kept its No. 2 spot as tech firms such as Google (NASDAQ:GOOGL) and LinkedIn (NYSE:LNKD) continue to take up huge blocks of space in the area.

“The tech markets are absolutely holding their strength, no doubt about it,” said Alan Pontius, national director of commercial property groups at Marcus & Millichap. “Tech is not limited to Silicon Valley/San Jose at this point.”

U.S. office leasing activity is increasingly focused in the high-tech sector, concurs commercial real estate services giant CBRE Group (NYSE:CBG).

Tech Takes 1 Of 5 Big Leases

In CBRE’s latest office-market study, also out this week, it noted that high tech accounted for 19% of the largest U.S. lease transactions in 2014, up from 13.6% in 2013.

“What jumps out to me is how much market share high tech has taken for leasing activity,” said Sara Rutledge, CBRE’s research and analysis director.

She says high tech has become an important driver in rising office-market fundamentals in “all regions” of the country.

“In the Midwest, high tech accounted for 14% of the leasing activity in 2014,” she said, making tech the No. 2 leasing sector there after health care and life sciences.

While Marcus & Millichap sees San Francisco’s office market improving most this year, Pontius views it also as “absolutely the best” office market in America today.

“Supply and demand fundamentals are simply the strongest,” he said. “You’re talking about the U.S. capital for technology.”

In the commercial real estate recovery, the U.S. office market has lagged other sectors such as apartments and industrial.But it has been rebounding as the economy improves and adds jobs. A lot of the strength has been driven by high tech. Where tech companies are on the move, office fundamentals are strengthening.

Take San Francisco. Twitter (NYSE:TWTR) was one of the first in. And with new space being taken by tech companies such as Salesforce.com (NYSE:CRM), Dropbox and Splunk (NASDAQ:SPLK), among others, the city has become one of the strongest U.S. office markets.

Commercial real estate brokerage Marcus & Millichap (NYSE:MMI) ranks it No. 1 on its National Office Property Index for 2015, a forward-looking survey released this week.

Cranes jut through fog with San Francisco landmarks in 2013. This year tech is putting the metro area at the top of a U.S. office property index.

Cranes jut through fog with San Francisco landmarks in 2013. This year tech is putting the metro area at the top of a U.S. office property index. View Enlarged Image

The index sorts markets by improvements expected in 2015 based on factors such as new office supply, employment growth, and vacancies and absorption.

Close behind San Francisco are tech hot spots San Jose, Calif., and Seattle, which bumped New York for third place due largely to Amazon’s (NASDAQ:AMZN) expansion in its hometown. San Jose kept its No. 2 spot as tech firms such as Google (NASDAQ:GOOGL) and LinkedIn (NYSE:LNKD) continue to take up huge blocks of space in the area.

“The tech markets are absolutely holding their strength, no doubt about it,” said Alan Pontius, national director of commercial property groups at Marcus & Millichap. “Tech is not limited to Silicon Valley/San Jose at this point.”

U.S. office leasing activity is increasingly focused in the high-tech sector, concurs commercial real estate services giant CBRE Group (NYSE:CBG).

Tech Takes 1 Of 5 Big Leases

In CBRE’s latest office-market study, also out this week, it noted that high tech accounted for 19% of the largest U.S. lease transactions in 2014, up from 13.6% in 2013.

“What jumps out to me is how much market share high tech has taken for leasing activity,” said Sara Rutledge, CBRE’s research and analysis director.

She says high tech has become an important driver in rising office-market fundamentals in “all regions” of the country.

“In the Midwest, high tech accounted for 14% of the leasing activity in 2014,” she said, making tech the No. 2 leasing sector there after health care and life sciences.

While Marcus & Millichap sees San Francisco’s office market improving most this year, Pontius views it also as “absolutely the best” office market in America today.

“Supply and demand fundamentals are simply the strongest,” he said. “You’re talking about the U.S. capital for technology.”

Marcus & Millichap notes that tech firms now occupy significant space in San Francisco’s financial district along with South of Market, the Mission District and South Beach area. Salesforce recently committed to 710,000 square feet in the renamed Salesforce Tower in the South of Market district, it noted.

Office-using sectors added 407,100 jobs in the U.S. in 2014, a 2.4% gain over 2013, to 17.2 million, says CBRE. It’s 2 million more office jobs than at 2009’s cyclical low.

They’re not all high tech, of course. “Both employment and leasing activity is broadening to other office-using services such as financial services and other business services,” Rutledge said.

CBRE says Los Angeles and Dallas/Fort Worth each saw more than 40,000 new office jobs last year, in varied fields.

According to Marcus & Millichap’s office report, six Florida markets show improving strength this year. Miami moved up the index four places to No. 7, and Tampa-St. Petersburg six notches to No. 24. Other rising office markets include West Palm Beach, Orlando, Fort Lauderdale and Jacksonville.

The reason: little new office construction has occurred in the Sunshine State in more than five years, while population growth and homebuilding has outpaced the national average, Pontius says.

“You’re seeing a pickup in office demand with no pickup in supply,” he said. Retirees and other newcomers “need services,” he said, such as health care, legal, insurance, mortgages and banking.

Nationwide, net absorption of office space in 2014 — some 52.7 million square feet — was the highest since 2007, CBRE noted. But CBRE expects that rate to moderate over the next few years to around 42 million square feet annually, closer to the historic average.

Space Race: Use Less Of It

Besides coming off a high mark in 2014, another reason may be the secular trend in the way office space is designed and used.

“Demand is positive but users of office space tend to use less space per worker than they used to,” said Jeanette Rice, CBRE’s head of Americas investment research.

Even with that dynamic, CBRE says, demand for office space nationwide is outpacing supply, which means vacancy rates will continue to fall, pushing rents up.

Office vacancies in 2014 reached their lowest level since 2008, CBRE said, ending the year at 13.9%. The lowest vacancy rate in the U.S. was in Manhattan’s Midtown South area, at 5.5%, followed by downtown San Francisco at 6.6%.

Manhattan, home of Wall Street and a center for financial services, has also attracted lots of tech companies in expansion mode, such as Google and Amazon. Samsung plans to lease as much as 1 million square feet of additional space, Marcus & Millichap notes.

Amid lackluster government employment, Washington, D.C. dropped two rungs in Marcus & Millichap’s 2015 office index. More than 20% of the D.C. metro area’s office stock will sit empty this year, Marcus & Millichap said.

Energy capital Houston also is coming under pressure, but for another reason: the steep fall in oil prices and its impact on local employment at a time when a lot of new office supply is entering the market.

There’s no doubt oil’s drop creates “a degree of pause,” said Pontius.

So far this year in Houston, 1.3 million square feet of existing office space has been put on the market for subleasing, Rutledge of CBRE says. That brings available office sublease space to 2.7% of the total office market. At that point, it “starts to impact the overall rental rate (downwards),” she said.

Despite new office supply in some markets, such as Houston, San Francisco, San Jose and New York, very little new office supply is expected nationwide. New office construction nationwide will amount to no more than 1% of existing office supply, Pontius says.

“That is statistically almost nothing,” he said. “So you have time for the demand side to impact absorption and leasing. We expect a rising trendline on the demand side as the job market continues to expand.”

Investors.com

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