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Dwindling Availability of Tech Office Space Creating Opportunity for Investors

DENVER — The willingness of tech companies to pay a premium for office space in the hottest tech submarkets is starting to spill over into neighboring submarkets, as available space in tech hotspots is dwindling, according to CBRE’s annual Tech-30 report, which measures the tech industry’s impact on office rents in the 30 leading tech markets in the U.S. and Canada. As a result, adjacent submarkets and traditional downtowns with skylines — rather than the brick-and-beam buildings tech companies have demonstrated a preference for — are primed to benefit, creating opportunity for real estate investors.

Local submarkets that have already benefited from this trend – and are primed to benefit further – include East Boulder and downtown Denver’s Central Business District (CBD). These areas are seeing interest from tech companies who are not willing to pay the high lease rates or cannot find the amount of space they need in Colorado’s more-established tech hubs of downtown Boulder and Lower Downtown (LoDo). Downtown Boulder consistently records the highest average asking office lease rates in the entire metro, coming in at $41.74 per square foot at the end of the second quarter of 2017. In comparison, the larger Boulder market, including East Boulder, averaged only $30.60 per square foot in Q2. When it comes to downtown Denver, the LoDo/Central Platte Valley submarket saw office lease rates of $38.73 at the end of the second quarter, compared to only $31.77 for the mid-central CBD.

“Boulder continues to be the epicenter of the start-up ecosystem that put Colorado on the map for the tech industry, but as companies evolve from startups to successful businesses, they realize that downtown Boulder is not sustainable from a space or price perspective. Many companies are moving to East Boulder, where rents are significantly less and parking is free. Downtown Denver is experiencing the same trend, as many tech companies are priced out of new construction in LoDo and RiNo. Traditional office buildings in the heart of the CBD are benefitting from their ability to accommodate a fast growing tech company at a much lower price point,” said Alex Hammerstein, senior vice president with CBRE’s Tech and Media Practice in Denver.

In the face of one of the lowest unemployment rates in the nation, CBRE found that Denver experienced a high-tech job growth rate of 11.5 percent during 2015 and 2016, which translates to 6,347 new high-tech jobs in Denver over that period. In terms of office rent growth, Denver ranked right in the middle of markets studied (#15) with an 8.3 percent increase in office market rents from Q2 2015 to Q2 2017. Although not included in the Tech-30 analysis, Boulder experienced office market rent growth of 18.7 percent over the same time period.

“Office rents have increased in every primary tech submarket over the past two years, illustrating stiff competition among tenants to locate in talent-rich areas with very low office vacancy,” said Colin Yasukochi, director of research and analysis for CBRE and the report’s author. “If tech companies that are used to paying a premium for space in the top tech submarkets, like downtown Boulder, are forced to move to developed and available submarkets, like downtown Denver’s CBD, in order to expand, we could start to see significant rent growth in those more traditional markets as well.”

From an investor’s perspective, markets that are attractive to occupiers and offer the best combination of low office rents and a growing high-tech labor pool, such as Denver, Portland, Raleigh-Durham, Dallas/Ft. Worth, Charlotte and Nashville, have the greatest growth potential.

“The creation of new market opportunities via disruption and a growing number of industries integrating technology into their business models support an optimistic outlook for continued growth ahead. Commercial real estate investors should benefit from the trends that have given the tech industry greater stability and a wide economic base compared with previous economic cycles,” said Chris Ludeman, global president, Capital Markets, CBRE.

“Ups and downs are a natural part of the business cycle, and real estate investors should manage their risk and exposure to the most volatile sectors of the tech industry accordingly. Tech-30 office markets should expand further in the near term, albeit at a slower pace. Realistic growth expectations, valuations and viable exit strategies by tech firms will protect investors from potential losses that were unforeseen during the last tech cycle,” added Mr. Ludeman.

The CBRE report also sorted markets according to both job growth and rent growth over the past two years.

  • Top Job Growth Markets — For the sixth consecutive year, San Francisco was the top Tech-30 market for high-tech job growth; its high-tech job base grew by 39.4 percent over the past two years, while its average asking rent increased by only 7.1 percent. Charlotte (31.6 percent), Pittsburgh (31.4 percent) and Indianapolis (27.8 percent)—all low-cost markets—had the next highest job growth rates and rent increases of 16.9 percent, 3.5 percent and 6.5 percent, respectively. Denver’s high-tech job base grew 11.5 percent.
  • Top Rent Growth Markets — Double-digit office rent growth was achieved in 13 markets over the past two years, led by Orange County (23.3 percent), Nashville (21.2 percent), Atlanta (17.6 percent) Charlotte (16.9 percent) and Silicon Valley (16.8 percent). Denver’s office market rent growth from Q2 2015 to Q2 2017 was 8.3 percent.
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