This article was produced by Moody’s Analytics CRE by authors David Caputo and Thomas P. LaSalvia, PhD.
Successful local industries fuel healthy office markets and, in recent years, technology has slipped into this fold more than any other industry. Higher occupancy and rent levels tend to concentrate in markets with skilled tech workers, so as tech thrives in a given market, the office sector follows suit.
In a time of great uncertainty around the workplace of the future, tech companies have taken the opposite approach of typical professional service firms by increasing their footprint instead of scaling back. This trend can partly be attributed to tech businesses thriving during the pandemic, creating larger revenues and budgets that are not as affected by real estate costs compared with your average tenant, who is more concerned with cost cutting.
What is a tech market exactly? We classify a metropolitan area as one if computer and math employment makes up 5 percent or more of total employment OR the metro has over 100,000 jobs in those occupations. Tech jobs include: Computer and Information Analysts, Database and Network Administrators, Software and Web Developers, Computer Programmers and Data Scientists.
The Top Tech Markets in the United States
Currently, 15 metros meet these qualifications. While a diverse list, there’s little surprise it skews toward larger gateway markets. Seattle, Atlanta, San Francisco, San Jose, Raleigh, Dallas, Chicago, Los Angeles, New York, Baltimore, Austin, Colorado Springs, Boston, Denver and Washington, D.C. round out the top tech markets in the US.
At the end of 2021, these tech markets averaged $39.23/SF for office rents compared to the national average of $21.36/SF. Predictably, these metros are growing faster than most. Tech rents rose by 50.9 percent compared to 40.0 percent nationally dating back to 1999 when the sector was in its infancy.
After the Great Financial Crisis of 2010, tech markets overpowered the 12.5 percent national average by growing 42.8 percent. In the last five years alone, tech markets outpaced the US average by more than fivefold at 11.7 percent compared to a measly 2.3 percent.
Figure 1
Where Tech’s Emerging and What’s Driving the Growth
While some tech hubs like Silicon Valley in San Jose have been around for decades, others are just starting to emerge. Classic urban economics theorizes an established cluster cannot expand indefinitely and will inevitably spread to other markets.
Generally, a well-managed company in a great location understands the tug-of-war between efficiency gains from remaining in an established cluster and the increasing cost of business to stay there. Concentrations of labor, intermediate input and information sharing are classic examples of efficiency gains when in an established market. The high tenant demand tends to increase both rent levels and wages particularly in areas with limited buildable land.
If costs overshadow benefits, firms will look elsewhere and likely land in cheaper spots, but with fewer benefits, particularly human capital or skill. Shifting migration patterns partially upended by the pandemic somewhat dissipated human capital throughout the country. Most moved to the Sunbelt and Mountain West, but also into regional cities like Columbus, Ohio.
With skilled labor relocating beyond the bounds of established tech hubs and fleeing the lofty rents and wages within them, larger tech firms may rethink their roots. Silicon Valley, Seattle, or Boston will likely remain top tech hubs, but there is movement towards tech sector balance spreading throughout the country.
What Cities Are Gaining Employment and a Greater Share of Tech’s Interest?
Emerging tech markets encompass any metropolitan area that has at least 10 percent more growth in employment for computer and math occupations than the national average since 2018 OR at least 4 percent more median annual wage growth for computer and math occupations since 2015 compared to nationally.
The 12 qualifying metros were Ventura, Buffalo, Greensboro, Miami, Greenville, Knoxville, New Orleans, Norfolk, San Bernardino, Nashville, Lexington, and Wichita. Figure 2 shows how employment growth remained high in these 12 markets versus both established tech and the national average, particularly in the early stages of the pandemic. Specifically, emerging tech markets grew 5.4 percent in 2020, while established ones only saw 1.2 percent growth and the national average just 0.8 percent.
Figure 2
As for office performance, emerging tech markets rents increased 6.7 percent compared to only 4.3 percent nationally in the last five years. As evident by Figure 3, growth rates diverged dramatically during the pandemic. The emerging tech market rent level of $21.40 per square foot now overtook the national average of $21.36 per square foot overall.
Figure 3
Wage and Employment Levels and the Case for Further Growth
As mentioned, a company’s location strategy is based on factors like salaries and real estate costs. Companies hoping to combat rising wages and lofty office rents in expensive tech metros may see a move to an emerging tech cluster as a way to have their cake and eat it too. A greater presence in these emerging metros reduces costs, thereby opening the door to invest further in research and development while maintaining some benefits of an established cluster now that labor pools are migrating. This is especially true for early-stage startups with scant capital to spend.
The 2020 median annual wage for computer and math occupations for emerging markets was $77,945, 34.5 percent less than the $104,816 the median tech worker made in an established tech market. Not only will wages start to lower for employees, but future raises and bonuses will no longer have to match the standards of the tech markets they left behind.
Figure 4
Coinciding with lower wages are also lower office rents. At $21.48 per square foot, the 2021 average office rent for emerging markets is 82.6 percent less than the average in tech markets at $39.23.
Figure 5
While lower wages, cheaper office rents and proliferating labor pools may lure tech companies to emerging markets, productivity and innovation will ultimately sustain these metros and help them compete with their established peers. Our knowledge of the value of clusters and where the most efficient balance of cost and agglomeration lies is evolving. Remote work’s rise during COVID-19 led some to view it as a paradigm shift in the way people work, feeling productivity and innovation won’t miss a beat regardless of the company’s location. Others claim it is too early to tell the long-term implications of remote work or whether to move away from an established cluster. Many firms chose hastily and may ultimately fall behind their competitors as a result.
For now, real estate and economic data show some tech dispersion is taking place. Some emerging markets will likely thrive, while others may find they lack the characteristics to truly compete.
Special Mentions
Metropolitan areas falling outside of the stated criteria but worth watching closely include: Salt Lake City, Charlotte, Oklahoma City, Sacramento, Columbus, and Louisville. These non-gateway cities have enjoyed encouraging employment and/or wage growth in the sector over the last few years. Growing and diversifying labor pools coupled with their relative affordability put these metros on our radar. Like the emerging markets above, established tech firms looking to geographically expand are also likely paying attention. With human capital as their most important resource, skill migration and relative wage variation remain vital to a company’s location strategy.
