Tech Tenants Face Rent Premiums in Major Markets

LOS ANGELES—Call it a tech premium. Office tenants looking for space in one of the top 30 tech cities across the US and Canada can expect to pay an aggregate rent premium of 11%, and considerably more than that in the hottest tech markets, CBRE Group said Tuesday.

Although San Francisco has ranked as the leader by a number of measures in CBRE's Tech-Thirty 2015 report, it doesn't command the steepest rent premiums. That distinction goes to the East Cambridge submarket of Boston, with a rent premium of 87%, followed by Los Angeles' Santa Monica submarket with 85% and Silicon Valley's Mountain View submarket with 73%. The latter, of course, is home to Google's corporate headquarters.

There are still discounts to be found in emerging tech submarkets, such as Reston/Herndon, VA within the Washington, DC metro area; the CBD of St. Louis; and Northeast Charlotte. “With rental rates less than the average market rate and a rising pool of talent, these emerging submarkets present opportunity for companies that can't justify the premiums we're seeing in some of the more established tech markets, ” says Colin Yasukochi, director of research and analysis for CBRE. “Furthermore, most of these emerging tech submarkets are recording positive—and in some cases strong—rent growth, creating opportunities for real estate investors in these markets, as well.”

Since 2009, the high-tech software/services industry has created 730,000 new jobs, and was the leading driver of US office market demand through the second quarter of this year, accounting for 20% of major leasing activity. That percentage is even higher in some of the leading tech centers, accounting for 88% of the major leasing in Silicon Valley and 60% or greater in Austin, San Francisco and Seattle through Q2, according to CBRE.

“The high-tech industry is directly supported by consumer demand and a growing number of high-tech integrated businesses, which should keep the industry strong in the years ahead and provide further support for office markets in the Tech-Thirty,” Yasukochi adds. He cautions, though, that investors “must be mindful and have realistic expectations about this historically volatile industry underpinning the health of many 'Tech-Thirty' office markets.”