Metro Phoenix tech industry leads rebound in office-leasing activity
The tech industry led a rebound in U.S. office-leasing activity in 2021, fueled by increased hiring and demand for tech products and services, according to CBRE’s annual Tech-30 report. Tech companies claimed a 22 percent share of U.S. office-leasing activity in the second and third quarters combined, up from 17 percent for all of 2020.
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• The greater Phoenix market showed office rent growth of 8.3 percent between the second quarters of 2019 and 2021, partially buoyed by increasing growth in tech jobs. That compares with a 7.5 percent increase between the prior period from Q2 2017 to Q2 2019. This growth rate places Phoenix in seventh place, after Denver and ahead of Los Angeles.
• The Phoenix metro also was one of six markets that showed overall positive net absorption between Q3 2019 and Q2 2021 with a particular emphasis on its Tempe submarket where leasing activity has been particularly strong, buoying rents by 13.6 percent.
• The greater Phoenix market has benefitted from the migration of tech companies based in many higher-cost markets, such as the Bay Area. Recent remote working trends due to the COVID-19 pandemic have supported this movement. Since 2013, expanding tech companies from the Bay Area have leased 1.2 million square feet in Phoenix metro.
CBRE’s Tech-30 report, now in its 10th year, measures the industry’s impact on office demand and rents in the 30 leading tech markets in the U.S. and Canada, as well as certain tech-heavy submarkets. This year, tech companies’ office leasing activity increased by 122 percent on average in the second and third quarters, compared to the first. In addition, more than two thirds of the top 30 North American tech markets registered office-rent growth from the second quarter of 2019.
Over this two-year period, four markets posted double-digit percentage gains in office rents: Seattle, Charlotte, Vancouver and Austin. Separately, six markets posted gains in net absorption – the net amount of office space newly occupied or vacated – since mid-2019. Those are Charlotte, Raleigh-Durham, Nashville, Salt Lake City, Indianapolis and Phoenix.
The gains in tech’s office leasing underscore the industry’s resilience during the pandemic. U.S. tech employment now exceeds its pre-crisis level by 3.3 percent, surpassed only by the life sciences industry (6.9 percent). The tech industry expanded by 219,000 jobs in the U.S. since May 2020. The top Tech-30 markets for tech-job growth in 2019 to 2020 are Toronto (a gain of 26 percent), Seattle (22 percent), Vancouver (21 percent), New York (18 percent) and Austin (16 percent).
Yet the tech industry still poses a challenge for office markets in one regard: sublease space. Office space listed for sublease by tech companies in the Tech-30 markets nearly doubled from last year’s first quarter to this year’s third, now totaling 134 million sq. ft. Tech companies currently account for 23 percent of all office space listed for sublease in those markets, up from 14 percent in 2019. Still, indicators of leasing activity show that the U.S. total of sublease space likely peaked last quarter.
Among the most resilient office markets in this downturn are leading tech submarkets, which often are located near universities. CBRE has found that office lease rates in leading tech submarkets carry a 23 percent premium, on average, to rates for their cities as a whole. Those with the largest premiums are East Cambridge in Boston (114 percent), Palo Alto in Silicon Valley (66 percent) and Santa Monica in Southern California (63 percent). Tech submarkets also tend to generate some of the strongest rent gains and office-space absorption in their cities.
CBRE’s report also identifies markets well positioned for resiliency and continued growth based on tech job growth and momentum, office market performance and demand recovery. Those are Charlotte, Montreal, New York, Phoenix, Pittsburgh, Raleigh-Durham, Seattle, Silicon Valley, Toronto and Vancouver.
To read the Tech-30 report, click here.