By Meghan Hall
Technology companies today are stronger than ever before, outlasting those of the dot-com era with ease. The Bay Area’s tech ecosystem is particularly rich with startups, unicorns — which the business world defines as a tech start-up that reaches a $1 billion market value — and venture capital funding, and as a result the region is the largest tech cluster in the United States, with close to 4,600 firms in all. According to CBRE’s 2019 Bay Area Techbook Report, that has resulted in 100 million square feet of growth since 2009, for a total of 200 million square feet of occupied office and R&D space.
“That’s an incredible number to get your head around, that 100 million square feet of additional space has been taken by these companies in just under a decade,” said Colin Yasukochi, CBRE’s director of research and analysis.
The bulk of tech activity is in Silicon Valley, which accounts for 70 percent of the tech real estate market. San Francisco’s share, at 15 percent, accounts for the next largest share of the market, although in recent years the city has quadrupled its number of tech jobs. The San Francisco Peninsula and Oakland/East Bay markets follow behind at 10 percent and 5 percent, respectively. All together, tech firms occupy 42 percent of the Bay Area’s total office and R&D inventory. In 2017, tech companies leased 19.4 million square feet of office and R&D space, accounting for 52 percent of the region’s transaction volume.
“Having a higher concentration [of one industry] is probably more of the exception of the norm,” Yasukochi acknowledged when asked how tech’s current share of the commercial real estate market compared historically to other market cycles.
More than 190,000 tech-based jobs have been created over the same period, and 1,500 firms have been founded since the beginning of the market cycle, driving companies’ need for increased space around the region. Job growth continues to rise as the Bay Area’s ability to capture U.S. venture capital funding remains strong. According to CBRE, Bay Area companies received $48 billion in funding in 2018.
Vacancy rates are also at their lowest levels since the dot-com era. In 2000, Silicon Valley had a vacancy rate of 6.2 percent, compared with 8.2 percent today. San Francisco and the Peninsula had vacancy rates of 3.4 percent and 3.3 percent 18 years ago, compared with 4.7 percent and 7.8 percent today. Oakland’s vacancy rate is also higher than the dot-com era but lower than previous years, at 6.9 percent.
CBRE’s report attributes the decline in vacancy not just to growing companies, but a constricted construction pipeline. New construction additions are expected to add 17.78 million square feet to the Bay Area office market through 2021. However, the supply pipeline is 74 percent pre-committed with more than two-thirds leased to tech firms.
Tech continues to grow faster than any other industry, which, along with limited supply, has influenced positive net absorption and declining availability, driving up office rental rates. Rental rates have risen 153 percent in San Francisco, 106 percent in Silicon Valley, 105 percent on the Peninsula and 68 percent in the East Bay, the report states. In San Francisco, where office rental rates are the most expensive, tenants will pay around $78 per square foot. Rents on the Peninsula are not far behind at $67 per square foot. Rents in Silicon Valley go for around $60 per square foot, while the East Bay remains considerably less expensive, at $39 per square foot.
Speculative leasing and unloading of space during 2000 and 2001 destabilized the market’s perception of tech tenants, who were labeled as risky. During the dot-com era, millions of square feet, accounting for 7.6 percent of office inventory, were released onto the sublease market, depressing overall rents.
“During the dot-com era, a lot of technology itself was still emerging. Many of these companies really did not have any meaningful revenue,” said Yasukochi. “They were purely operating on their funding. Once that funding dried up, they were quickly out of business. They took an incredibly sharp growth trajectory and leased a lot more space than they ever really needed, and so when the funding stopped, that space was no longer needed.”
Some experts, CBRE argues, would characterize today’s market as vulnerable to fluctuation, given tech’s impressive share of the market. Leasing activity is 2.3 times higher than the dot-com era, where companies leased 75 million square feet during a shorter, six-year time frame.
“Anytime you have a less diverse market, meaning that you’re more concentrated in one particular industry, if there is a downturn in that industry, it will have a bigger impact on the real estate market,” explained Yasukochi.
However, many tech companies today are larger and more financially stable, leveraging multiple sources of funding and business tactics to ensure their success. More companies are profitable than in the dot-com era, and the result has made leases more stable and durable, contributing to the health of the market long-term.
“The tech industry is tied to the overall economy, in the sense that it’s not on its own cycle like during the dot-com era where it had a hard decline in the industry because it was somewhat independent from the rest of the economy,” said Yasukochi. “Today, the tech industry is so tied into all aspects of business and personal life, and so the cycles are more like the overall economy than a volatile sector, which originally tech had been.”
Headed in 2019, CBRE predicts that tech’s impact on the commercial real estate market will continue to remain strong.
“I think [the tech industry] will continue to grow as 2019 unfolds, because what we see right now in terms of what demand there is in the marketplace, the majority of that still comes from tech companies,” said Yasukochi. “Tech has been very influential here in the Bay Area.”