Tech Tenant Trends Push Down on Office Leasing

Many office owners have depended on tech companies of all sizes to take space. It’s been a dependable bet, but that’s likely to be changing according to a new report, The Tech Tenant, from Savills Research and Data Services.

The report notes that big tech firms have been carrying “strategic vacancy” space to enable growth. In most industries, this is a small percentage of empty space. But tech, at least the biggest firms, had been keeping between 30% and 40% strategic vacancy room though 2022 in anticipation of major headcount expansion in 2023.

As inflation kept high, venture capital firms and others pulled back from funding, many startups couldn’t get the money to establish themselves, and leaps in generative artificial intelligence made clear that was an important market for all of them, the expansions didn’t happen. Instead, there were layoffs: 1,064 companies laying off 165,269 people in 2022; 1,191 companies letting go of 263,180 employees in 2023; and so far in 2024, 219 companies bidding goodbye to 50,841 workers, according to Layoffs.fyi, a site that tracks tech layoffs.

As a result, tech companies are thinking twice about how much space they need for personnel, let alone nap pods, coffee bars, massage rooms, and game rooms.

“Emerging technology companies are finding opportunities within this landscape in 2024,” Savills wrote. “Those who believe in the power of in-person work stand to benefit from the current tenant-friendly market conditions, including the potential to sidestep substantial capital costs by leveraging the infrastructure and furnishings left by previous occupants.”

In 2023, the firm wrote that 21.9% of total leasing activity was from the five top leases: IBM doing a sale leaseback of 774,000 sq. ft. in Raleigh, NC; OpenAI subleasing 486,600 sq. ft. in San Francisco; AMD’s renewal of 444,000 sq. ft. in Austin; Amazon’s renewal of 260,000 sq. ft. in North Virginia; and Cisco Meraki’s renewal of 234,537 sq. ft. in San Francisco. And 42.6% of completed leases nationally last year were signed in the last quarter. The 9.0 million square feet signed in 2023 was down from 16.6 million sq. ft. in 2022 and 22.6 million sq. ft. in 2021.

One factor that might help is an expected resurgence of venture capital. “Funding in 2023 was uplifted by large rounds in the artificial intelligence (AI) vertical and new activity from other transformative technologies,” Savills wrote. “An uptick in VC funding could fuel innovation and expansion, necessitating office space for startups that believe in-person work will enable them to create groundbreaking technologies, raise funding, and reach go-to-market milestones more efficiently than working remotely.”