By Meghan Hall
The Bay Area technology industry has grown at an unprecedented rate, leading the nation in sustained, consistent expansion for the past six years, according to CBRE’s recently released Tech 30 report. The report, which measures the tech industry’s impact on commercial real estate fundamentals in the top 30 markets throughout the U.S. and Canada, released new data that shows Seattle overtaking the Bay Area as the fastest growing high-tech job market in the nation. Seattle has been the main beneficiary of Bay Area expansion, which as totaled 3.5 million square feet of space over the past five years.
“The Puget Sound region is an attractive place for tech companies to expand because of the deep labor market of skilled tech workers as well as the quality of life—the active and outdoorsy lifestyle here fits well with the tech demographic, and the cost of living, though rising still has not caught up with the high costs of the Bay Area,” said Matt Walters, a vice president at CBRE based in Seattle.
Since 2013, the tech industry has accounted for the largest share of office leasing activity nationwide, with much of that leasing activity dominated by larger firms planning for future growth. That share continues to grow; in 2016, the tech industry accounted for 18 percent of office leasing activity, compared to 19 percent in 2017 and 21 percent in 2018.
Bay Area tech companies have grown quickly over the past five years, expanding by 25 million square feet in the region alone. They are continuing to actively pursue markets away from their headquarters, however, leasing more than 18 million square feet in markets outside of the Bay Area. According to CBRE ‘s Director of Research and Analysis for the San Francisco Bay Area Colin Yasukochi, there are several factors driving tech expansion, including the nature of the Bay Area’s competitive commercial real estate market and a tight labor pool.
“Many of these tech companies are growing so quickly, they can’t do it in one place,” explained Yasukochi. “They really have to take a more distributed approach to their workforce.”
According to Yasukochi, tech companies are also driven to expand in an effort to be closer to their customers and other emerging tech clusters across the country.
“The pattern we’ve noticed across the country is that many of the tech companies are both complementary and competitive; they want to be in each other’s markets,” added Yasukochi.
While San Francisco’s high tech job base grew by 22 percent, Seattle’s grew by nearly 26 percent. Seattle also posted the fourth highest rate of office market rent growth at 13.9 percent, behind Atlanta, Los Angeles and Orange County. Silicon Valley ranked 16th for market rent growth at 7.2 percent while San Francisco ranked 23rd with an office market rent growth rate of just 3.9 percent. Portland ranked just behind Seattle for office market rent growth at 13.8 percent and 12th overall in high-tech job growth, indicating that it too is an emerging market for the sector.
CBRE believes that high-tech job growth will continue strongly, but slower than in past years due to lack of available commercial office space and tight labor conditions. According to CBRE, tech companies can grow their labor forces much faster than can build new office space to accommodate them, adding to supply and demand issues in not just the Bay Area, but in Seattle, as well. Given that many metros in both the San Francisco Bay Area and Seattle region are already pressed for developable parcels, companies are even more constrained in their expansion.
“Large, rapidly growing tenants are taking up much of the development pipeline before it hits the market, which is tightening the office market considerably,” said CBRE Senior Vice President Brian Biege, regarding tech industry expansion in competitive markets such as the Bay Area and Seattle. “Due to land constraints on either side of the water, new development is not keeping pace with supply and will not likely do so for the next few years. The tight market conditions we’re seeing will most likely get worse before they get better. Prosperity definitely comes with its own set of challenges and growing pains.”
The result has been that many companies will lease space far in advance, with pre-leasing becoming a new standard especially in the Bay Area, according to Yasukochi. Developers now also prefer to secure a tenant before they start construction, since it often makes it easier to secure financing and lowers the amount of financial risk.
Despite the challenges that the tech industry faces in its expansion, however, CBRE experts believe that the industry will continue to do well even as the market slows down. Yasukochi attributes this to the fact that tech companies are more easily able to monetize their products compared to businesses in the dot com era, and that expansion to other markets is led by the largest and most financially capable companies.
“I think we’re pretty optimistic about the tech industry long term,” said Yasukochi. “We feel that the tech industry is in a unique position to better weather an economic downtown, no matter how mild or severe that might be, just because their products and services are so configured into everything we do as individuals.”