Technology Tenants Dive Into Secondary Office Markets

For the last several years, the big news in commercial office space has been the dominance of technology-related firms. Their demand for space –particularly in urban properties near city amenities -has helped to spur rent growth in major markets. Office leasing by technology firms is the fastest-growing segment of the office market, accounting for 20% of U.S. office leasing activity in the past year.

This can be attributed to strong job growth in technology fields. New York City tech jobs are growing by 30%, four times faster than the overall economy. According to one source, Google in New York City says it’s hiring 100 people per day. In other markets, these jobs are growing even faster. Some secondary markets, like Phoenix and Austin, show growth as high as 43%.  Technology is strong everywhere, and as space becomes tighter and ever more pricy in the gateway cities of New York, Washington, Seattle, San Francisco, Boston, and Chicago, employers are turning to secondary markets.

The Attraction to Secondary Markets

Tech companies like to see very specific elements in place when they set up shop in one of these secondary cities. Places like Phoenix, Austin, Indianapolis, and Raleigh-Durham are attractive for several reasons. These cities offer a fresh labor pool with high levels of educational attainment, thanks to universities in the area. They also offer generous tax incentives, and rents are considerably lower than in the primary markets. Rents in secondary cities usually run in the low $20’s per square foot, while those in New York or the Bay Area congregate around the mid-$50’s per square foot or more.

In addition to these favorable numbers, the secondary cities have an untapped supply of the type of offbeat buildings that draw tech firms. This type of company is generally not interested in generic suburban office space. They aim to attract a certain type of employee, and prefer to lease space that matches their taste. Many of those top employees are millennials, with a preference for urban locations close to city attractions, dining, and transportation.

Finding Alternative Spaces

In many of these secondary markets, unused warehouse and industrial spaces are being repurposed and designed to appeal to the tech market. A Wall Street Journal article describes some examples of this, including Twitter’s headquarters in San Francisco. Called Market Square, this is an 11-story former wholesale furniture mart in a fairly tough neighborhood, but it is commanding rents that approach those who paid for a high-end towers downtown. It has the type of space and character that tech companies are looking for. They have an eye out for exposed brick, open space, and high ceilings. In Los Angeles, media and tech companies fill a former U.S Postal Service mail-sorting facility, which sold this year for over $800 per square foot.

As these unique types of space become scarcer in the primary markets, and prices climb due to intense competition, the secondary towns are repurposing older buildings to create tech-worthy office space as well. In Austin, Apple is opening a 1-million square foot. operations center, and Google has leased 208,000 square feet of space in the Central Business District.

As tech firms compete for the best talent, they’re looking outside of major cities, and in many cases they’re finding both the workforce they need and more affordable office space.

About NAI Global

NAI Global is the single largest, most powerful global network of owner-operated commercial real estate brokerage firms. NAI Global provides a full range of corporate real estate services, including brokerage and leasing, property and facilities management, real estate investment and capital market services, due diligence, global supply chain and logistics consulting and related advisory services. NAI Global Member firms, leaders in their local markets, are actively managed to work in unison and provide clients with exceptional solutions to their commercial real estate needs. Founded in 1978, today NAI Global has more than 375 offices strategically located throughout North America, Latin America, Europe and Asia Pacific, with over 6,700 local market professionals, managing over 380 million square feet of property. Supported by the central resources of the NAI Global network, Member firms deliver market-leading services locally and combine their in-market strengths to form a powerful bond of insights and execution for clients with multi-market challenges.

NAI Global was acquired in 2012 by C-III Capital Partners, a leading commercial real estate services company engaged in a broad range of activities, including primary and special loan servicing, loan origination, fund management, CDO management, principal investment, online capital markets, title services and multifamily property management. C-III’s principal place of business is located in Irving, TX, with additional offices in New York, NY, Greenville, SC and Nashville, TN.

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