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U.S. Tech-Twenty Office Markets

August 2012

U.S. Tech-Twenty Office Markets

GLOBAL RESEARCH AND CONSULTING

HIGH-TECH INDUSTRY-POWERED MARKETS THRIVE, OTHERS SLOW TO REVIVE
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

Figure 1: U.S. Job Growth for High-Tech and Creative Industries
Index value >100 indicates job growth above 2007 peak

115 110 105

High-Tech Services

Biotech

100 95 90 85 80
Source: CBRE Research and Bureau of Labor Statistics

Media-Ent. U.S. Non-Farm Office Jobs* Design Services High-Tech Manufacturing

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-spaceusing 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

Telecom

2007

2008

2009

2010

2011

2012

* Excludes high-tech service jobs within office job categories (information, prof/bus services and financial)

Figure 2: High-Tech Services Job and Office Rent Growth, Past Two Years*
1. SFO 2. NYC 3. S.VLY 4. RAL-DUR 5. BALT Jobs +41% Jobs +22% Jobs +18% Jobs +15% Jobs +13% Rents +44% Rents +17% Rents +26% Rents -3% Rents -4% 6. POR Jobs +12% Rents -2% 11. BOS Jobs +9% Rents -2% 16. SF PEN Jobs +4% Rents +31% 7. AUS Jobs +10% Rents +0% 12. DEN Jobs +8% Rents -1% 17. DC Jobs +4% Rents +4% 8. SEA Jobs +10% Rents -2% 13. ATL Jobs +7% Rents -1% 18. LA Jobs +1% Rents -1% 9. SLC Jobs +10% Rents -2% 14. CHI Jobs +7% Rents +1% 19. PHL Jobs +0% Rents -1% 10. PIT Jobs +9% Rents +2% 15. SD Jobs +5% Rents +4% 20. O.C. Jobs -2% Rents -7%

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%. August 2012

Source: CBRE Research and Bureau of Labor Statistics * Job growth 2011 vs. 2009 and Rent growth Q2 2012 vs. Q2 2010

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© 2012, CBRE

U.S. Tech-Twenty Office Markets

Figure 3:

OFFICE MARKET PERFORMANCE FACTORS Two-Year Growth Trend – Q2 2012 vs. Q2 2010
Mountain View (SV) SOMA (SFO) Redwood City (SF PEN) East Cambridge (BOS) Midtown South (NYC) River North (CHI) NorthWest (DEN) Santa Monica (LA) North Fulton (ATL) Reston/Herndon (DC) Lake Union (SEA) Sorrento Mesa (SD) RTP/I-40 Corr. (RAL-DUR) Oakland (PIT) Hillsboro (POR) Northwest (AUS) BWI (BLT) Southvalley (SLC) University City (PHL) S.Orange County (OC)
0% 10% 20% 30% 40% 50%

GLOBAL RESEARCH AND CONSULTING

Figure 3.1: Rent Growth – Overall Market
San Francisco San Fran Peninsula Silicon Valley New York Washington, DC San Diego Pittsburgh Chicago Philadelphia Austin Greater Los Angeles Denver Atlanta Seattle Salt Lake City Portland Boston Raleigh-Durham Baltimore Orange County Source: CBRE Research
-10%

Figure 3.2: Rent Growth – Top Tech Submarket

Source: CBRE Research

-10%

10%

30%

50%

70%

90%

Figure 3.3: Net Absorption Growth* – Overall Market
Austin Silicon Valley Seattle San Francisco San Fran Peninsula Orange County Salt Lake City Portland Pittsburgh New York Denver San Diego Baltimore Boston Chicago Raleigh-Durham Greater Los Angeles Atlanta Philadelphia Washington, DC Source: CBRE Research
-1% 0% 1% 2% 3% 4% 5% 6%

Figure 3.4: Net Absorption Growth* – Top Tech Submarket
Lake Union (SEA) Hillsboro (POR) SOMA (SFO) BWI (BLT) Northwest (AUS) Redwood City (SF PEN) Southvalley (SLC) University City (PHL) River North (CHI) S.Orange County (OC) East Cambridge (BOS) Santa Monica (LA) Midtown South (NYC) Sorrento Mesa (SD) NorthWest (DEN) Reston/Herndon (DC) Mountain View (S.VLY) North Fulton (ATL) Oakland (PIT) RTP/I-40 Corr. (RAL-DUR) Source: CBRE Research
-5% 0% 5% 10% 15% 20% 25%

7%

Figure 3.5: Vacancy Rate Decline – Overall Market
Austin San Francisco Silicon Valley San Fran Peninsula Orange County Seattle Denver San Diego Chicago Salt Lake City Pittsburgh New York Raleigh-Durham Portland Baltimore Greater Los Angeles Boston Atlanta Philadelphia Washington, DC Source: CBRE Research
-2% 0% 2% 4% 6% 8% 10%

* Two-year total (Q2 12–Q3 10) as a % of net rentable area or building stock

Figure 3.6: Vacancy Rate Decline – Top Tech Submarket
SOMA (SFO) Hillsboro (POR) Redwood City (SF PEN) Northwest (AUS) Southvalley (SLC) Lake Union (SEA) S.Orange County (OC) River North (CHI) East Cambridge (BOS) Santa Monica (LA) Midtown South (NYC) BWI (BLT) Mountain View (S.VLY) Reston/Herndon (DC) University City (PHL) RTP/I-40 Corr. (RAL-DUR) Sorrento Mesa (SD) NorthWest (DEN) North Fulton (ATL) Oakland (PIT) Source: CBRE Research 0%

August 2012

3%

6%

9%

12%

15%

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© 2012, CBRE

U.S. Tech-Twenty Office Markets

CYCLE AND MARKET POSITIONING MATTERS
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 Office Market Strength 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.

GLOBAL RESEARCH AND CONSULTING

Figure 5: CBRE High-Tech Power Index Diagram
100 90 80 70 60 50 40 30 20 10 0 0 Source: CBRE Research and Bureau of Labor Statistics 10 20 30 40 50 60 70 80 90 100 Pittsburgh Lagging New York San Diego Chicago Salt Lake City Denver Portland Boston Baltimore Emerging Growth Leaders San Francisco Peninsula Austin Seattle Silicon Valley San Francisco

High Potential

Orange County Philadelphia Los Angeles Atlanta Washington DC

Raleigh-Durham

High-Tech Services Job Strength
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 hightech 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.

Figure 4: CBRE U.S. Office Market Rent Cycle, Q2 2012 Rental Decline Accelerating
1
Rent Cycle Position Number

Rental Decline Slowing
5 9

Rental Growth Accelerating
13

Rental Growth Slowing
1 New York

T

Tech Twenty Composite Q2 2009

N
Atlanta Baltimore Philadelphia Raleigh-Durham Salt Lake City

A B P R S W

C Chicago D Denver L Los Angeles P Portland S San Diego S Seattle
Q2 2012

San Francisco

S

Q2 2010

T

Washington DC

A Austin S Silicon Valley

Orange County

O

T
Q2 2011

T

B Boston P Pittsburgh S San Francisco Peninsula
August 2012

Source: CBRE Research

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© 2012, CBRE

U.S. Tech-Twenty Office Markets

GLOBAL RESEARCH AND CONSULTING

ECONOMIC AND HIGH-TECH INDUSTRY OUTLOOK
The recent deceleration of U.S. and global economic activity 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 hightech 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. 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.
100 95 90 85 80 75 70 65 Source: Consumer Electronics Association
2007 2008 2009 2010 2011 2012

Figure 6: Index of Consumer Technology Expectations (for spending)

August 2012

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© Copyright 2012 CBRE Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist. © 2012, CBRE

U.S. Tech-Twenty Office Markets

Global research and consultinG

CBRE GLOBAL RESEARCH AND CONSULTING Global Research and Consulting is an integrated community of preeminent researchers and consultants who provide real estate market research, econometric forecasting, and corporate and public sector strategies to investors and occupiers around the globe.

fOr MOre infOrMaTiOn regarding ThiS repOrT, pleaSe cOnTacT: Colin Yasukochi Director, Research & Analysis CBRE Global Research and Consulting t: +1 415 772 0190 e: colin.yasukochi@cbre.com Asieh Mansour, PhD. Head of Research, Americas CBRE Global Research and Consulting t: +1 415 772 0258 e: asieh.mansour@cbre.com Follow Asieh on Twitter: @AsiehMansourCRE

August 2012

Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist.

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© 2012, CBRE, Inc.