Why Tech Tenants Are Expected to Continue Dominating Office Demand in 2020

With the responsibility of more than 1/5 of new major office-leasing activity, technology companies are leasing more of the nation’s total office space than ever before. According to CBRE, this growth can be heavily attributed to an increased number of tech jobs and employment. As a result, the tech industry has grown more quickly post-recession than all other sectors regarding job growth. In fact, it is predicted that office-using employment expected will increase by 0.3%, or 45,700 jobs in 2020 alone. As this growth expands, tech tenants are expected to continue dominating and creating an influx of office space demand throughout the United States.

 

Read ahead to discover why tech tenants will continue to heavily influence and dominate the office sector as throughout 2020.

 

Tech Firms Use Commercial Real Estate as a Recruitment Tool

The demand for tech talent is on the rise and showing no signs of slowing down in 2020. This year, the demand for talents is expected to grow from 1.7% to 2.4% with an anticipated accelerated wage growth to 3.3% due to the relatively fixed supply of workers in the U.S.. As the need for qualified employees grows, tech companies are seeking more creative ways to attract new talent – and an investment in employee-centric office buildings is at the forefront of how tech firms are attracting top talent. Employee-centric offices equipped with amenities such as social gathering spots, wellness rooms, and ergonomic seating are important to the 93% of tech industry employees who indicate that they would stay longer at a company that offered such benefits.

 

Tech Firms Have a Tendency to “Cluster”

The office leasing decisions of one pioneering tech firm can heavily influence the establishment of an area as a “tech destination”. As a result, technology companies tend to group and develop in the same locations. Particularly, startups in the early stages gravitate towards highly clustered areas in search of a closer proximity to resources, industry trends, and even technological developments – which can lead to growth and expansion for the firm. As the firm expands, so will the need for adequate office spaces to accommodate current and future talent.

As of mid-2019, approximately 4,000 tenants sought after more than 174 million square feet of office space, with tech tenants representing the largest share. Although tech firms usually seek office spaces in large, major markets like Silicon Valley, a countless number of tech companies are now expanding into secondary markets. As these firms migrate into other areas, “clusters” are beginning to form in new locations and the commercial real estate industry is seeing a rise in tech companies as major clients.

 

Tech Firms Are Driving Office Rents and Construction Activity

Tech has been a key driver in the rise in office rents, particularly in the top 25 tech cities. In these cities, the cost-per-square foot for office space rose 59% (from an average of $199 to $316 per square foot) between 2000 and 2018. Additionally, 15 of the top 20 markets for new construction in 2018 were deemed tech markets, revealing a direct correlation between industry demand and office development. Today, the tech industry is continuing to drive strong construction activity. Specifically, the industry is driving construction in markets including Austin, San Jose, Salt Lake City, San Francisco, and Nashville. In 2020, these five markets are expected to see extremely high rates of net absorption.

 

The 2020 outlook for office demand, specifically for that of tech tenants, is anticipated to be full of growth. The technology industry accounted for 21.6% of overall leasing activity in H1 2019, topping that of the financial services and insurance, business services, government and non-profits, and legal industries. Office demand has been on a steady rise since 2018 with signs of continued growth during the new year.

Read 2020 Multifamily Real Estate Market Outlook for more resources on the commercial real estate outlook for the new year.