By Meghan Hall
Just as New York is known as a pivotal location for the world’s bustling financial markets, the San Francisco Bay Area has established itself as the world’s premier technology market. According to a new report released in March of 2018 by Berkeley-based real estate economics consulting firm Rosen Consulting Group (RCG), technology firms are the most valuable and profitable companies in the world, and with seven out of the 10 largest firms headquartered in the Bay Area, physical and financial in-migration to the region are poised for continued growth.
RCG attributes the market’s projected growth to greater worldwide technology assimilation and digital disruption. Currently, 93 percent of U.S. millennials own a smartphone, compared with 97 percent in Italy, 95 percent in Australia and 94 percent in Japan. RCG purports that as millennials fill job positions and obtain leadership roles, they will continue to push corporate offices to incorporate more technology into their day-to-day operations. This pressure to increase IT capabilities is far reaching; no industry will be unaffected by digital disruption. The more the corporate sector relies on technology, the greater will be the need for new innovation.
Growth in annual IT spending is expected to remain at around three percent for the next four years and is increasing across all key sectors such as professional services, healthcare and banking. This, combined with the technology sector’s incredibly high revenue growth, in which the Big Five (Alphabet, Amazon, Apple, Facebook and Microsoft) created $1.5 trillion in enterprise value between 2011 and 2016, has created a resilient market with strong operating fundamentals.
The Bay Area’s strong, stable market has made it the focus of corporate R&D; annual investment grew by 24 percent over the course of the past five years while spending on next generation technologies is expected to increase 81 percent between 2017 and 2021. The Bay Area accounts for 16 percent of the world’s top 100 corporate R&D spenders, outpacing entire countries such as Japan and Germany. Venture capital investment has also expanded; since 2007, the Bay Area’s share of total VC investment has grown from 32.6 percent to 55.6 percent.
With increasing investments and demand for technology, the Bay Area has also attracted some of the nation’s top talent, which, according to RCG, is producing GDP growth and buying power that is significantly outpacing other markets. The Bay Area ranked the highest in annual GDP per employed worker. High levels of productivity are also driving overall job growth. Between 2010 and 2015, job growth in the Bay Area averaged 3.1 percent, almost twice the national average, with job growth expected to remain above the national average through 2022. Between 2016 and 2017 alone, just over 20,000 professional, scientific and technical services jobs were added in the Bay Area, and STEM employment in the region accounts for 14.6 percent of the national total, compared with 13.2 percent in Seattle and 11.7 percent in Raleigh.
The high productivity of the Bay Area’s workforce is one of many factors that continues to lure companies to the Bay Area and encourages the region’s existing companies to reinvest and expand. The region’s major tech firms are expanding close to their headquarters in the Bay Area. In San Jose alone, Google has proposed 6,000,000 square feet of additional space, while Apple as proposed 4,800,000 square feet. Genetech announced plans for 9 million square feet of space the region, which can increase the number of its employees from 11,000 to 30,000 in the coming years.
With local tech companies expanding and new companies establishing themselves in the region, demand for office space largely outstrips supply. Tenants with requirements of greater than 100,000 square feet exceed available space in San Francisco, and available space is quickly closing in Silicon Valley and the Peninsula. As of 2018, active tenant requirements in the Bay Area came to 14.9 million square feet of space. The region’s strong, sustained leasing has increased rents and made the Bay Area’s office market competitive with other global markets such as Hong Kong, New York and London.
Surprisingly, however, the influx of new companies to the Bay Area has not greatly affected residential rents when compared to the historical average. While residential rents are high, both San Francisco and Silicon Valley are more affordable when compared to historical averages when comparing income-to-rent ratios. Additionally, RCG found that San Francisco’s rising rents are closely correlated with rising incomes. RCG found that housing affordability in the Bay Area is following a similar trend: housing affordability in the Bay Area remains on par with the area’s historical average. About 25.3 percent of the population is able to afford a median-priced home in the region, compared with an over 20-year running average of 27.3 percent.
RCG concludes that the Bay Area office market will remain strong through 2022, thanks in part to the region’s status as a global leader of the tech sector and a leader in innovation-based economy, which will continue to encourage existing companies to expand and new companies to enter the local market.