Tech-Dominated Cities Buck National Trend of Office Rent Declines

With extensive new construction underway and large quantities of older space flooding the office market, U.S. landlords in major cities like New York and Washington, DC are continuing to sweeten their deals by offering tenants free rent, remodeling allowances and state-of-the-art amenities, effectively reducing office rents. At the same time, a different trend is emerging in tech-centric cities, where competition for talent and amenity-rich space is fierce, according to the 2018 Effective Rent Index from Savills Studley.

This marks a clear separation between gateway markets dependent upon traditional corporate occupiers for space demand and those fueled by dynamic expansion among tech and creative sector firms.

The Effective Rent Index helps businesses get a clearer picture of their operating costs by taking an in depth look at their rental expenses. The annual report tracks what tenants actually pay for top Class A office space (tenant effective rent) and what landlords ultimately walk away with (landlord effective rent).

“Compared to prior years, 2017 showed a much greater variance due to the emergence of the tech industry in select cities,” said Keith DeCoster, Savills Studley’s Director of U.S. Real Estate Analytics. “In tech centers such as Seattle, the Bay Area of Northern California, Boston and Austin, companies are pursuing talent and space to house them almost with less concern for the cost. In contrast, traditional professional/business services firms and law firms are still keeping an eye on out-of-pocket expenditures. Fortunately, ample supply in many of the gateway markets is compelling landlords to offer record concessions, making conditions ideal for tenants.”

According to the index: concession packages (free rent and tenant improvement allowances) increased in 12 out of 20 markets profiled in the report, lowering those 12 cities’ effective rents. Packages rose significantly in markets such as:

• Downtown Manhattan (24%)
• Washington, DC (21.7%)
• Denver (16.7%)
• Orange County (12.3%)
• Houston (12%)
• Midtown Manhattan (8.5%)
• Chicago (6.6%)

Tenants in several of these markets benefitted from lower effective rents, including:

• Midtown Manhattan (-11.2%)
• Northern New Jersey (-9.0%)
• Downtown Manhattan (-7.8%)
• Denver (-2.8%)
• Chicago (-2.6%)
• Washington, DC (-1.5%)
• Houston (-0.1%)

Bucking the national trend, concessions are down in cities where tech companies and tech jobs make up a large portion of the market. In these tech cities, demand outpaces supply and tenants are willing to pay higher rents for workplaces that will help them win the war for talent. Cities with shrinking concession packages include:

• Atlanta (-4.1%)
• Seattle (-3.1%)
• Sunnyvale/Santa Clara (-3.2%)
• Austin (-2.6%),
• San Jose (-1.4%)

Effective rents are also rising in these same cities as landlords increase their prices where tech firms are expanding:

• Atlanta (12.7%)
• Seattle (9.7%)
• Austin (5.9%),
• San Jose (4.7%)
• Sunnyvale/Santa Clara (3.8%)

“Increased concession packages and reduced effective rents across the country create an opportunity for companies, to invest in modern, amenitized workplaces that lure the best talent,” said Mitch Steir, CEO and Chairman of Savills Studley. “In tighter tech markets, the office perks are a requirement, and seizing on premium space becomes a competitive challenge. Only with the right market intelligence and strategy can tenants reap maximum value from lease negotiations.”

Markets covered in the report are:  Atlanta, Chicago, Dallas, Denver, Downtown Los Angeles, Downtown Manhattan, Houston, Miami, Midtown Manhattan, Northern New Jersey, Northern Virginia, Orange County, Philadelphia, San Diego, San Francisco, Seattle, Silicon Valley, Tampa Bay, Washington, DC and Los Angeles.