Tech Companies’ Giant Office Leases Migrating Beyond the West Coast

Big office leases by tech companies aren’t just a West Coast phenomenon. Metro areas such as New York City and Washington, DC, are gaining momentum as tech companies seek new markets for hiring tech workers.

CBRE analyzed the largest 100 US office leases signed last year by tech companies to find several trends. The San Francisco Bay Area remains the US tech-expansion capital with 6.9 million square feet of those largest 100 leases, but its latest tally actually declined by 37% from 2018.

Meanwhile, Manhattan’s share of the largest 100 tech-office leases jumped by 148% to 4.9 million square feet last year. Seattle’s share increased 63% to 3.3 million. And Washington’s share rose 37% to 1.1 million.

GlobeSt.com caught up with Colin Yasukochi, executive director of CBRE’s Tech Insights Center, to do a deeper dive into these trends.

CBRE’s new report shows that the 100 largest U.S. office leases by tech companies last year spanned a cumulative 24.6 million square feet, and that 62% of that space was claimed by software, search and e-commerce companies. What does this tell us about the market?

The tech industry likely will outperform other sectors of the national economy and gain further office-leasing market share as tech products and services become more indispensable to business and consumers. Many innovations such as autonomous vehicles, artificial intelligence and the new capabilities 5G will bring are still in their early stages of implementation with a lot of growth potential that will benefit future employees and real estate markets.

The San Francisco Bay Area lost some leasing momentum last year, if only in the context of these 100 largest leases. Does this mean tech firms are choosing other markets for their expansion or is there more to it than that?

The tech industry has outgrown the Bay Area, its predominant headquarters market, resulting in severe labor shortages and escalating costs for people and real estate.

This has necessitated pursuit of a geographic-diversification strategy for growth that seeks out sources of labor, both existing and in the pipeline, driving expansion into mostly larger markets with universities that produce tech-degree graduates. Cost reduction is also a motivating factor in relation to noncore functions within tech firms, such as sales and administrative support. Most markets outside the Bay Area have more available labor and lower costs for labor and real estate. The average office rent in the Bay Area is about $75 per square foot annually with a 5% vacancy rate as of Q4 2019.

Is there anything that the big gainers in these results have in common?

The markets receiving the most inflow from tech firms have two major things in common: a large existing workforce and university infrastructure. For example, New York and Washington, D.C., are only modestly less expensive to operate in compared with the Bay Area; Their tech growth indicates that talent acquisition and growth potential can be more important than cost savings. Phoenix and Nashville are markets benefitting from their lower costs and available labor supply.

If you do this analysis in 2021, what do you expect we’ll see?

I expect to see a continuation of the geographical diversification trend as tech firms seek out the right talent in the right location that furthers their growth strategies and creates better workforce stability.