Office Rents Increase Faster in Tech Hubs

Office rents are growing the fastest in tech hubs, or that is where technology industries are critical to the local economy. In the recent Tech Cities 2.0 report from Cushman & Wakefield, San Diego ranked as a tech critical market, and its office rent growth reflects the ranking. From 2010 to 2018, office rents have increased 31.4%, compared to 24% in the US. Tech has also had a significant impact on office leasing activity and has helped to fuel the rise of co-working space in the market.

“The tech sector has been an important driver of demand and value in current real estate cycle,” Jolanta Campion, director of research for San Diego, tells GlobeSt.com. “Rents have increased faster in tech markets than in the rest of the U.S. metro areas and most substantially in tech critical cities such as San Diego. For occupiers, any sharp increase in rents may make these markets less attractive. However, compared to San Francisco where rents have increased 135%, San Diego offers less expensive space, plenty of tech talent and is located an hour flight away from San Francisco.”

As of midyear 2018, technology tenants leased 1.06 million square feet of office space. As a result, it is the region’s second leading office industry. According to the report, tech industries accounted for 18.7% of leasing activity since early 2017. Technology-related industries made up a significant portion of leasing activity. Life sciences accounted 16.1% of leasing activity, defense accounted for 8.6% and telecom for 2.3%. “Collectively these industries—tech, directly and indirectly related industries—accounted for 45.7% of the total leasing activity,” says Campion. “For example, defense/federal government is the biggest customer of the tech industry in the region, particularly for technology advanced naval, aviation and communication sectors of the military establishments and therefore plays a significant role in supporting San Diego’s tech sector.”

Technology industries have been a leading industry sector in San Diego for the last five years, and it is continuing to grow. “As of mid-year 2018 tech tenants have already reached 82% of their 2017 total leasing volume,” says Campion. “The share of office space leased by tech tenants is up from 16.6% for all 2017 to 19.1% through mid-year 2018. Adding industrial, tech tenants accounted for 12.2% of space leased in 2017 compared to 12.8% as of mid-year 2018.”

In addition to fueling standard office activity, the tech market has also given way to the rise of co-working models as well. “The San Diego region is also now home to 90 coworking spaces totaling 1.2 over million square feet, compared to 70 totaling 951,000 square feet last year,” says Campion. “Coworking spaces provide affordable space without long-term commitment while avoiding isolation for startup entrepreneurs.”

Tech companies have been a major driver of office leasing activity over the last three years, but if you factor in industrial space, the impact increases. “Notably, tech tenants leased the highest amount of space compared to all other office industry sectors for years 2014 and 2015,” adds Campion. “A key figure to highlight is that tech tenants have leased a collective 6.2 million square feet over the last four and a half years or 18 quarters. If we factor industrial space, this figure jumps to a 9.1 million square feet leased combined across these two product types.”