Te ch -Tw e n ty O ffi ce M a rk e ts A ug us t 2012 © 2012, CBRE Page 2 80 85 90 95 100 105 110 115 2007 2008 2009 2010 2011 2012
The U.S. high-tech economy has grown nearly six times faster than the national average, fueled by demand for mobile, search, social and cloud computing software and service technologies. High-tech services jobs grew 9.9%, while total non-farm jobs grew 1.7% between 2009 and mid-2012 (Figure 1).
Compared to other creative industries, high-tech services is the breakaway leader, with growth well above its 2007 peak. Biotech is modestly above its 2007 peak, but performance has been up and down. Media and entertainment is staging a comeback after diving in 2009, thanks to its increasing connection to the high-tech industry. High-tech manufacturing remains weak and job levels are near historic lows. Compared to key office-space-using industries, the job growth rate of high-tech services was 2.5 times faster between 2009 and mid-2012 (9.9% vs. 3.9%).
These job growth trends for the “Tech-Twenty,” the most influential high-tech oriented cities, show both strength and variance (Figure 2). With limited growth in the office-space-using job categories, the concentration of key high-tech services sectors within these cities is driving both economic and office market performance. San Francisco, New York City and Silicon Valley stand out with very high job and office rent growth. Los Angeles, Philadelphia and Orange County have some pockets of high-tech growth, but not enough to keep their office markets from struggling. Tech-Twenty office submarkets posted even stronger performance (Figure 3). Seven submarkets had two-year rent growth above 10%; Mountain View (S.VLY), at 83%, and SOMA (SFO), at 59%, were the highest. The strongest east coast submarkets were East Cambridge (BOS), at 28%, and Midtown South (NYC,) at 24%. Ten submarkets grew demand or net absorption as a percentage of building stock by more than 10% in two years, led by Lake Union (SEA), at 22%, Hillsboro (POR), at 19% and SOMA (SFO) at 11%.
HIGH-TECH INDUSTRY-POWERED MARKETS THRIVE,
OTHERS SLOW TO REVIVE
Source: CBRE Research and Bureau of Labor Statistics * Job growth 2011 vs. 2009 and Rent growth Q2 2012 vs. Q2 2010
High-Tech Services Biotech U.S. Non-Farm Design Services Office Jobs* High-Tech Manufacturing Telecom Media-Ent.
* Excludes high-tech service jobs within office job categories (information, prof/bus services and financial) Source: CBRE Research and Bureau of Labor Statistics
Index value >100 indicates job growth above 2007 peak
1. SFO Jobs +41% Rents +44% 2. NYC Jobs +22% Rents +17% 3. S.VLY Jobs +18% Rents +26% 4. RAL-DUR Jobs +15% Rents -3% 5. BALT Jobs +13% Rents -4% 6. POR Jobs +12% Rents -2% 7. AUS Jobs +10% Rents +0% 8. SEA Jobs +10% Rents -2% 9. SLC Jobs +10% Rents -2% 10. PIT Jobs +9% Rents +2% 11. BOS Jobs +9% Rents -2% 12. DEN Jobs +8% Rents -1% 13. ATL Jobs +7% Rents -1% 14. CHI Jobs +7% Rents +1% 15. SD Jobs +5% Rents +4% 16. SF PEN Jobs +4% Rents +31% 17. DC Jobs +4% Rents +4% 18. LA Jobs +1% Rents -1% 19. PHL Jobs +0% Rents -1% 20. O.C. Jobs -2% Rents -7% Figure 1: U.S. Job Growth for High-Tech and Creative Industries
Te ch -Tw e n ty O ffi ce M a rk e ts
Figure 3:
OFFICE MARKET PERFORMANCE FACTORS
Two-Year Growth Trend – Q2 2012 vs. Q2 2010
-10% 0% 10% 20% 30% 40% 50%
Orange CountyBaltimore
Raleigh-DurhamBoston
Portland
Salt Lake CitySeattle
Atlanta Denver
Greater Los AngelesAustin
PhiladelphiaChicago
Pittsburgh San Diego
Washington, DCNew York
Silicon Valley
San Fran PeninsulaSan Francisco
-10% 10% 30% 50% 70% 90%
S.Orange County (OC)University City (PHL)
Southvalley (SLC)BWI (BLT)
Northwest (AUS)Hillsboro (POR)
Oakland (PIT)
RTP/I-40 Corr. (RAL-DUR)Sorrento Mesa (SD)
Lake Union (SEA)
Reston/Herndon (DC)North Fulton (ATL)
Santa Monica (LA)NorthWest (DEN)
River North (CHI) Midtown South (NYC) East Cambridge (BOS)
Redwood City (SF PEN)SOMA (SFO)
Mountain View (SV)
-1% 0% 1% 2% 3% 4% 5% 6% 7%
Washington, DCPhiladelphia
Atlanta
Greater Los AngelesRaleigh-Durham
ChicagoBoston
Baltimore
San DiegoDenver
New York
PittsburghPortland
Salt Lake City Orange County
San Fran PeninsulaSan Francisco
Seattle
Silicon ValleyAustin
-5% 0% 5% 10% 15% 20% 25%
RTP/I-40 Corr. (RAL-DUR)Oakland (PIT)
North Fulton (ATL)
Mountain View (S.VLY)Reston/Herndon (DC)
NorthWest (DEN) Sorrento Mesa (SD)
Midtown South (NYC)Santa Monica (LA)
East Cambridge (BOS)
S.Orange County (OC)River North (CHI)
University City (PHL)Southvalley (SLC)
Redwood City (SF PEN)Northwest (AUS)
BWI (BLT) SOMA (SFO) Hillsboro (POR) Lake Union (SEA)
Washington, DCPhiladelphia
AtlantaBoston
Greater Los AngelesBaltimore
Portland
Raleigh-DurhamNew York
Pittsburgh
Salt Lake CityChicago
San DiegoDenver
Seattle Orange County
San Fran PeninsulaSilicon Valley
San FranciscoAustin
Oakland (PIT)
North Fulton (ATL)NorthWest (DEN)
Sorrento Mesa (SD)
RTP/I-40 Corr. (RAL-DUR)University City (PHL)
Reston/Herndon (DC)
Mountain View (S.VLY)BWI (BLT)
Midtown South (NYC)Santa Monica (LA)
East Cambridge (BOS)River North (CHI)
S.Orange County (OC)Lake Union (SEA)
Southvalley (SLC)Northwest (AUS)
Redwood City (SF PEN)Hillsboro (POR)
SOMA (SFO)
Figure 3.1: Rent Growth – Overall Market Figure 3.2: Rent Growth – Top Tech Submarket
Figure 3.3: Net Absorption Growth* – Overall Market Figure 3.4: Net Absorption Growth* – Top Tech Submarket
Figure 3.5: Vacancy Rate Decline – Overall Market Figure 3.6: Vacancy Rate Decline – Top Tech Submarket
* Tw o-ye ar t ot al (Q2 12 –Q3 10 ) as a % of ne t re nt abl e are a o r bu ildi ng sto ck
Source: CBRE Research Source: CBRE Research Source: CBRE Research Source: CBRE Research
Te ch -Tw e n ty O ffi ce M a rk e ts A ug us t 2012 © 2012, CBRE Page 4 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 A Rental Decline
Accelerating Rental Decline Slowing Rental Growth Accelerating Rental Growth Slowing
A B B C D L N O P P R S S S S S S W T 13 1 5 9 1 New York San Francisco Austin Silicon Valley Boston Pittsburgh
San Francisco Peninsula
P Chicago Denver Los Angeles Portland San Diego Seattle Atlanta Baltimore Philadelphia Raleigh-Durham Salt Lake City Washington DC Orange County T T T Tech Twenty Composite Q2 2009 Q2 2010 Q2 2012 Q2 2011 The Tech-Twenty office markets are experiencing
recovery and moving briskly along the rent cycle curve (Figure 4). Between the second quarters of 2009 and 2011, the composite of all twenty markets moved from an accelerating rent decline 3.9 position to a bottom of the market 9.1 position. The past year showed further improvement to a current 10.1 position of rent growth acceleration. The markets with the fastest improvement and highest current position numbers are New York, San Francisco, Austin and Silicon Valley.
High-tech services job growth is largely responsible for this movement and when combined with the strength of each office market, the CBRE High-Tech Power Index reveals both insight and opportunity (Figure 5). The growth leaders in the San Francisco Bay Area are well known and well advanced in the current market cycle. Emerging and high potential markets represent opportunity for both occupiers and investors. Salt Lake City, Denver, Portland and Boston all have high potential. New York, San Diego and Pittsburgh are emerging growth markets where high-tech is having broader impact on demand and market performance.
Offi ce M ar ke t S tre ng th
High-Tech Services Job Strength
Silicon Valley San Francisco San Francisco Peninsula Austin Seattle Raleigh-Durham Salt Lake City Denver Boston Baltimore New York Washington DC San Diego Pittsburgh Atlanta Philadelphia Chicago Orange County Los Angeles Growth Leaders Emerging High Potential Lagging Portland
The High-Tech Power Index measures the relative strength of the Tech-Twenty office markets on a scale of 0 to 100. The job strength index includes high-tech services job growth over the past two years and their current concentration within office-using job categories. The office market strength index includes rent and net absorption growth over the past two years. The quadrant lines represent the average index for each strength measure.
CYCLE AND MARKET POSITIONING MATTERS
Rent Cycle Position Number
Figure 5: CBRE High-Tech Power Index Diagram
Figure 4: CBRE U.S. Office Market Rent Cycle, Q2 2012
Source: CBRE Research and Bureau of Labor Statistics
Te ch -Tw e n ty O ffi ce M a rk e ts A ug
ECONOMIC AND HIGH-TECH INDUSTRY OUTLOOK
The recent deceleration of U.S. and global economicactivity may spell near-term trouble for the overall U.S. office market, but not necessarily for high-tech. Economic data shows a slowdown in the labor markets, consumer spending and business investment that may lead to a loss in leasing momentum for the remainder of 2012. While most high-tech driven markets have been largely immune to broad economic trends for years, the protracted slow growth scenario that’s emerging could cool off the hottest markets. Equity and venture capital markets are pausing to reassess valuations and growth trajectories in light of the global economic headwinds encompassing the eurozone, China, and a U.S. economy unable to shift into higher gear.
While economic worry may be surfacing within the high-tech industry, all signs point to further growth ahead. Venture capital investment dollars are still flowing into the high-tech industry and increased scrutiny has resulted in greater funding focus on software and the internet sector, as well as the most promising start-ups. According to 2012 Thomson Reuters data, venture capital investment in software is at an all-time high of 30% of total funding volume, and that volume remains near the robust levels of 2011. Just like real estate investors, venture capitalists remained focused on the top metro markets in the San Francisco Bay Area, New York and Boston, with an eye on opportunity in other emerging geographies.
Figure 6: Index of Consumer Technology Expectations (for spending)
65 70 75 80 85 90 95 100 2007 2008 2009 2010 2011 2012
Source: Consumer Electronics Association
Furthermore, the nature of this high-tech business cycle is more disciplined, with constant equity market scrutiny of earnings and growth projections. Business models for many firms are based on unique product offerings and large volumes of micro revenues. Slower consumer spending overall seems unlikely to have major impact on high-tech as consumers allocate more toward gadgets and apps. The Index of Consumer Technology Expectations, which measures consumer expectations about their technology spending, has steadily risen since 2009 (Figure 6). The online and mobile growth trend is still in its early stages with tremendous long-term growth and undoubtedly several business cycles ahead. The main threat to high-tech growth is another financial-crisis-type event.
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August 2012
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