Some cities have seen vacancy rates decline by more than 100 basis points since opening in 2023.
Typically, office expansion and the growth of the technology sector follow a similar path. When these businesses are busy, they need employees and space.
However, according to a new report by Moodys Analytics CRE, the situation in the technology sector is currently slightly different from the usual binary path.
Moodys noted that prior to the pandemic, leading, established technology markets were driving country office performance as U.S. technology companies prospered. But as layoffs gripped the U.S. tech industry late last year, the effects of the pandemic took their toll before the AI revolution began.
However, as offshore technology markets have seen a large number of AI-related layoffs as everyone seems to want to create their own chatbot, there have also been a lot of layoffs beforehand. Instead, tech companies’ embrace of dynamic return-to-office (RTO) models means overall office performance in these markets has been sluggish at best.
Since the beginning of 2023, the nation’s 15 largest tech metropolises have seen their vacancy rates increase from 18.0% to 18.2% overall, and average effective rents have fallen from $48.33 to $48.13 per square foot, Moodys reports. Vacancy rates were rising in established tech hubs like San Francisco, Austin and Raleigh-Durham in the third quarter of 2023, but the history of office space in America is complex and in constant flux.
Instead, investors and developers can look to emerging technology markets where office space dynamics are different.
According to Moodys, the country’s vacancy rate is controlled in part by 11 emerging technology markets with significant geographic dispersion. They have outperformed their long-established competitors in the technology market. While established tech titans have seen a 20 basis point (bps) increase in vacancy rates so far this year, emerging tech markets have seen a remarkable decline of 70 basis points on average.
National average occupancy and rent changes between Q1 2019 and Q3 2023 were 1.2% and 5.7%, respectively. Here are the stats for the top emerging tech markets: Nashville: 12.5%, 12.5% Wichita: 6.1%, 3.7% Lexington: 5.4%, 2.5% Miami: 4.9%, 10, 0% Buffalo: 4.1%, 6.1%
In recent quarters, 91% of vacancies in emerging markets outside the top five have declined. Knoxville, Norfolk, San Bernardino/Riverside and Greenville have seen vacancy rates decline by more than 100 basis points since opening in 2023.
Miami is technically an outlier in this regard, with a vacancy rate still at just 16.1%, which still puts it at the top of the metro office rankings.
While the Nashville office vacancy rate increased from 13.6% in the first quarter of 2019 to 17.2% in the third quarter of 2023, this was the result of a dynamic period of construction that resulted in over 5.5 million square feet of new office space, increasing metro stock by a significant 17.4% in less than five years, Moodys wrote.
There were several correlated success factors (so it is not certain that they are necessarily causal). For larger buildings over 100,000 square feet, the average vacancy rate has increased by 370 basis points over the past four to five years, while for buildings less than 20,000 square feet, the average vacancy rate has declined by 60 basis points. Smaller buildings tend to attract mid-sized or smaller companies (and are often not overly dependent on a single tenant) and are often located in suburban locations rather than central business districts.
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Image Source : www.globest.com