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As Tech Office Boom Rolls Into Third Year, Can Growth Maintain Impressive Pace?

Prospects Appear Bright for Continued High-Tech Expansion, Although Short Term May Face Challenges
August 29, 2012
After two years of job growth and strong revenues in the high-tech sector fueling equally strong growth in rental rates and declining vacancies in tech-oriented office markets across the U.S., the question some investors are asking is, can it last?

The tech sector has been a consistent bright spot in the economy even before the recession ended. Between 2009 and mid-2012, high-tech service jobs in the U.S. grew by 9.9%, while non-farm jobs grew by 1.7%, according to a new report (Tech-Twenty Office Markets) released by CBRE Global Research and Consulting. The strong job growth was most evident in the San Francisco, New York City and Silicon Valley office markets.

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Equally far reaching, were the impacts felt in the office submarkets where tech firms dominate. Fifteen of the top 20 tech-oriented office submarkets across the U.S. saw office rents increase in the past two years.

Rental growth was strongest in Silicon Valley's Mountain View submarket, with 83% growth, followed by San Francisco's SOMA submarket, at 59%; Boston's East Cambridge submarket, at 28%; and New York City's Midtown South, at 24%, according to CBRE, which says the high-performing tech markets offsets slower rates of growth seen in other office-using sectors.

"The strengths of these tech-centric office submarkets, with strong rental rate growth and declining vacancies, are major factors supporting the overall office market recovery," said Colin Yasukochi, CBRE's director of research and analysis. "With the high-tech economy growing nearly six times faster than the national average, we expect that these submarkets will continue to outperform, helping to counterbalance tepid job growth in other sectors and the uncertain economic environment."

In its report, CBRE said the high-tech growth cycle is still in early stages with further growth and business cycles ahead. Both consumers and venture capitalists have responded by focusing spending and funding on key high-tech areas that should fuel further growth.

Nonetheless, some economic worries have surfaced regarding high tech as an office market driver.

Where Would Tech Be Without Apple?

Looking at revenue data from some of the San Jose metro (Silicon Valley) market’s most established companies, there is an encouraging trend: Overall revenue growth continues to clock in at new heights, according to Adrian Ponsen, senior real estate economist for CoStar Group, who reported on the phenomenon earlier this past in a client exclusive PPR Daily Update. This is largely what is currently driving local job growth and office absorption, well in excess of what was seen during the housing boom years.

"Upon closer examination, however, revenue growth is a bit more one-sided than it looks," Ponsen noted. "Take Apple out of the mix and the trend looks very different. Revenue growth has leveled off since mid-2010 and first quarter 2012 earnings were underwhelming."

One of Apple’s current advantages is that its sales are tied more directly to the consumer (think smartphones, tablets, etc.) and less tied to businesses, whose spending on IT infrastructure has cooled off since 2010.

"Apple stands to benefit tremendously for selling its high-end devices to the growing middle class in emerging markets," Ponsen said. "But to understand whether leasing in Silicon Valley will remain on fire in the short term, you just need to ask yourself this question: Are you and your friends going to keep buying up Apple devices the way you did during the past two years?"

CRE services firm Jones Lang LaSalle also noted some downside risks in its most recent high technology industry outlook this month.

"Less-than-stellar earnings results and a slowdown in industry job growth will likely translate into tempered demand," Jones Lang LaSalle reported. "The pipeline of active requirements indicates that several million square feet of gross absorption is ahead for the industry, but with many large deals already completed in the last 12 months, the tech industry may be approaching its peak."

"Although slowing, high-tech services employment growth continues to outpace office-using sectors and total nonfarm employment, tech firms are competing for the best talent, offering generous incentive packages to engineers, programmers and marketing personnel. Likewise, venture capital continues to flow to start-ups as one of the most highly funded sectors, but remains measured at levels 70% below peak funding totals seen in the early 2000s," JLL noted.

"While many factors point toward continued expansion, recent lackluster IPO activity has Wall Street raising questions about long-term performance, especially on the heels of recent financial releases that have missed investor expectations. The industry may be approaching its peak, but should continue to fuel the economic fire through the remainder of the recovery cycle," JLL noted

Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday.
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