Why Tech Companies Will Pay High Office Rents

Office rental rates are heading up. In the first quarter of the year, rates hit $2.66 per square foot, up from $2.59 in the first quarter 2017, according to the Colliers International report. The increase in rental rates is driven largely by tech companies, which are fighting for class-A creative space—a hard find in San Diego. When companies do find quality space, they are willing to pay for it.

“Going from $2.50 per square foot to $3.20 per square foot doesn’t make a difference to these companies, because the cost of real estate compared to the cost of what they are producing in services, is shrinking rapidly,” Tim Cowden, SVP at Colliers International, tells GlobeSt.com. “As a result, there isn’t a lid on what they can pay in rents. This has already been illustrated in office markets like Silicon Valley and San Francisco, where rents are huge.”

Rents are escalating most rapidly in emerging areas where tech companies are congregating. In San Diego, that is the Downtown market. “I have noticed the same trend on a smaller scale in Downtown San Diego,” says Cowden. “Some people see the price increases and say that they are ridiculous, but they aren’t looking at the big picture. It is all about talent now, and we are short on talent. So, these tenants are willing to pay whatever it takes. San Diego is really dirt-cheap commercial real estate compared to other markets.”

Cowden says that the increase in productivity is directly linked to the rapid increase in office rents. Because these companies are more efficient—thanks in large part to technology—they can also use less space and therefore pay more per square foot. “It is all about the explosion in productivity,” he explains. “Technology tools now are so much more productive, and employees can do things on the move or from home. We are seeing quantum leaps in productivity. With commercial real estate, these firms are so much more productive per square foot, and so it almost doesn’t matter what they pay in rent.”

San Diego isn’t the first city to experience the trend, but it may be one of the most recent. The tech-effect and subsequent rising rental rates is taking hold in markets across the country. “It helps to understand the macro picture of what is happening in the economy,” explains Cowden. “We are creating massive economic activity, and it is not a limited pie theory. It is an expanding pie. These niches are driving office activity.”