By Meghan Hall
It is no secret that the Bay Area’s technology industry has experienced an unprecedented level of growth throughout the current market cycle, which has left many to wondering when the region’s tech-driven real estate market is bound to slow down. However, according to new findings released in May 2018 by Berkeley-based real estate economics firm Rosen Consulting Group, while forecasts for the medium term indicate a potential cooling in the market, the region is still poised for long term growth due the Bay Area’s position as a global tech hub.
Seven of the ten of the world’s largest technology firms are based in the Bay Area, and they have averaged an annual revenue growth of almost 10 percent over the last three years. As a result of such rapid financial growth, these firms are continuously expanding by augmenting their headquarters or establishing secondary locations throughout the region. Throughout the current market cycle, the proportion of total office space leased by technology companies has increased; currently 50 percent of all office space in the Silicon Valley and approximately one third of all leased office space in San Francisco and the East Bay are occupied by technology companies.
Leasing activity has also increased exponentially. In 2009, technology tenant leasing activity only accounted for about 36 percent of all transactions in Silicon Valley, while in the Peninsula and San Francisco, technology tenant leasing activity only accounted for six percent and 16 percent of total leasing volume, respectively. As of 2017, tech tenants accounted for nearly 75 percent of office leasing volume in Silicon Valley, while tenant leasing expanded to 46 percent on the Peninsula and 65 percent in San Francisco. While technology firms account for a smaller portion of demand in the East Bay, companies that are priced out of San Francisco and the Peninsula are increasingly looking outward for affordable space, and technology tenants accounted for 20 percent of all office space in the East Bay in 2017.
This does not mean that the Bay Area market does not face any challenges; RCG states that accelerated growth has hampered the region’s affordability, increased housing shortages and created a “war for talent” that many firms are incapable of weathering. Secondary markets, in other, up-and-coming metros such as Austin, Denver, Portland and Nashville, increasingly appeal to companies due to their high concentrations of college graduates and historical ties to the tech industry. According to RCG, tech-related employment in these metros was some of the fastest in the nation over the past two years.
RCG credits the market’s long-term resiliency to an array of factors, but the report primarily focuses on both the importance of the region’s established technology firms and the Bay Area’s well-established reputation as the world’s technology capital. Seven of the 10 largest technology firms are based in the Bay Area and possess a total market capitalization of over $3 trillion. The region’s access to top research institutions, high concentrations of venture capital funding and a highly-educated local populace has increased innovation and allowed the tech industry to boom. The result has been a feedback loop in which companies relocate to the Bay Area and commit to investing more in human capital and resources for close proximity to innovation and access to important funding.
Of the 25 largest technology companies that occupy space in the Bay Area, public companies such as Google, Apple and Facebook account for 97.4 million square feet of office space, or 95 percent of the total, according to the report. These companies possess strong balance sheets and proven earnings potential, generating large cash reserves and strong underlying fundamentals; as a result, these firms are easily capable of sustaining through a potential downturn, stabilizing the market.
Smaller, privately-owned firms that are more susceptible to changes in the market—which RCG calls “unicorns”— only occupy about 5.5 million square feet of space throughout the Bay Area, less than three percent of the total market, the report stated. The most valuable companies in the market represent only a small share of the overall enterprise value of the industry, at only 7.8 percent market capitalization. While some of these unicorns will inevitably fail during the course of a market correction, they are unlikely to impact the greater market in any significant fashion, as they are compensated for by the larger, public companies who occupy a much larger share of the market.
In both the short-term and the long-term, technology companies will continue to fuel significant demand for office space in the Bay Area; approximately 30 million square feet of space is currently under construction, and according to RCG, the majority of it is pre-leased. Due to the primacy of the Bay Area market, many of the region’s top companies are investing their resources close to home. Google has increased its Bay Area footprint to 18 million square feet since 2016, while Apple, which occupies 11 million square feet in Silicon Valley, has expanded by more than 70 percent over the past two years. Genetech has plans to expand its local facilities by nine million square feet, potentially tripling its local employment over the next several years. The largest tech companies are strongly committed to the region, which will keep talent, innovation and funding concentrated locally in the long-term.