“The convergence of emerging technologies is not only transforming industries, but also revitalizing office spaces as vacancies decline in 11 promising tech markets.”
Office expansion and the growth of the tech sector usually go hand in hand. However, a new report from Moody’s Analytics CRE suggests that the current state of the tech sector is diverging from this trend.
Before the pandemic, established tech markets in the US were driving national office performance as tech companies thrived. However, the effects of the pandemic and layoffs in the tech industry have taken their toll. While coastal tech markets have seen an increase in hiring related to artificial intelligence, they have also experienced significant layoffs. This has resulted in sluggish overall office performance in these markets.
Since the start of 2023, established tech metros have seen an increase in office vacancy rates and a decrease in average effective rents. San Francisco, Austin, and Raleigh-Durham have all experienced rising vacancy rates throughout Q3 2023. However, the story of America’s office space is complex and in flux.
Investors and developers may want to consider emerging tech markets, where the dynamics of office space are different. These markets, dispersed geographically, have outperformed their long-term established tech market peers. While established tech hubs have seen a 20-basis point increase in vacancy rates this year, emerging tech markets have recorded a remarkable 70-basis point decline on average.
The national average for occupancy and rent changes between 2019 Q1 and 2023 Q3 were 1.2% and 5.7% respectively. Some of the top emerging tech markets include Nashville, Wichita, Lexington, Miami, and Buffalo. These markets have shown a decline in vacancy rates and positive rent changes.
In recent quarters, the majority of emerging tech market vacancies, beyond the top five, have declined. Knoxville, Norfolk, San Bernardino/Riverside, and Greenville have all seen vacancy rates drop by more than 100 basis points since the beginning of 2023.
Although Miami is technically an outlier in terms of vacancy rates, it still performs well as a top metro office performer with a vacancy rate of 16.1%.
There are some factors that may contribute to the success of these emerging tech markets. Buildings with more than 100,000 square feet have seen an increase in vacancy rates over the past four to five years, while buildings with less than 20,000 square feet have seen a decrease in vacancy rates. Smaller buildings tend to attract midsize or smaller companies and are often located in suburban areas rather than central business districts.
Overall, the office space dynamics in the tech sector are shifting. While established tech markets have faced challenges, emerging tech markets are showing promise. Investors and developers may find opportunities in these emerging markets where office performance is more favorable.