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Market Reboot: How Tech CRE is Adjusting to a Turbulent Economy

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What does this economic volatility mean for the tech sector and its office workforce? 

  • Will more employers ask workers to increase their time in the office? 
  • Will employees be more willing to return in order to increase face time, visibility and perceived value among leaders and colleagues? 
  • Will companies see a slowing economy as further reason to cut costs by giving up excess office space? 
  • Will some Big Tech players continue to take advantage of a tenants’ market by leasing space while pricing is down or opting to pay cash for assets versus financing at the current higher rates? 

A review of activity within the tech sphere and office markets across North America follows. 

Plans for the Workplace

All companies, regardless of sector, are exploring changes to their office workplace. Tech companies are likely to go remote more than other office space occupiers. The tech sector is the most diverse in its thinking about the future of office work—tech companies have been apt to try hybrid, remote-first, and even work-from-anywhere methodologies. However, similarly to other industries, tech companies are most likely to be implementing a hybrid work environment that includes a mix of in-office and remote work for most employees. In many cases, in-office work benefits companies that are more R&D driven and need their workforce in a facility working on a hard product. But software-focused tech companies are also benefiting from hybrid work environments that optimize worker flexibility and team collaboration, socialization and innovation. 

   

 

Employment Dynamics

 

Talent is the number one priority of every tech company. Layoffs have been on the rise at both startups and Big Tech firms alike. Though the U.S. workforce has seen the biggest hit thus far by the disruption, those in other parts of the world have also been increasingly affected, according to Layoffs Tracker. Year-to-date (through October) there have been over 91,000 layoffs in the U.S. and nearly 63,000 elsewhere in the world. It’s of note that the U.S. figure in October was the highest monthly figure of 2022. Since the beginning of November, layoff announcements have accelerated among tech companies of all sizes including prominent players based in the Bay Area.  Additionally, there are some Big Tech companies that are not cutting staff but have announced that future hiring is frozen for the remainder of the year while they evaluate economic conditions. 

Despite the labor slowdown, both the high-tech and the office-using sectors (as defined by Moody’s Analytics) have recovered with employment greater at the end of October than just prior to the pandemic, in February 2020. High-tech did pull back slightly from September to October. Total non-farm employment has also now recovered all the jobs lost as well. Using February 2020 as the base (100%), high-tech (including all positions at tech companies) is now at 106.1%, office-using at 104% and non-farm at 100.5%.

On the other hand, job availability remains substantial in the tech world. Analyzing the computer occupations subset from Lightcast shows that there were 282,792 unique job postings in the U.S. in October 2022; that is down from the recent peak of 355,133 in March of this year, though more in line with the period leading into the pandemic in 2018 and 2019. Remote listings have generally been trending higher, though they were slightly lower over the past two months compared to the monthly figures of February to August. Postings mentioning “hybrid” have remained low by comparison, though this may change moving forward.

Venture Funding Down from Record Year in 2021

Funding to startups has taken a cut thus far in 2022, with VCs being more selective about placing money. Additionally, when VCs do find a funding target, they generally want startups to be more conservative with the money. That said, globally and for both the U.S. and Canada specifically, funding is on target to be the second highest full year on record after a boom year for money placement in 2021.

 

 

Reviewing the regions across the globe, year-to-date 2022 (through September), venture capital funding in the U.S. remains firmly in the lead at almost half (49.6%) of the global figure, followed by Asia at 23.0% and Europe at 18.4%. Since 2018, the U.S. share has increased from 42.2%, with the European share almost doubling from 9.8% and Asia declining from 42.9%.

 

Big Tech Continues to Make Long-Term Commitments

Driven by a lack of clarity early in the pandemic, occupiers were both more likely to sign renewals than new leases and shorten the average lease length. Interestingly, the one exception to the pandemic-era lease-term shortening trend has been large tech firms’ new leases, which are over a year longer on average than they were prior to the pandemic. New leases for the largest tech companies—those with 3 million square feet (msf) or more in leases—increased from just under 91 months in the 10-quarter pre-pandemic period (Q4 2017-Q1 2020) to almost 106 months in the pandemic period (Q2 2020-Q3 2022). The longer deals occurred just after the pandemic began, in Q2 2020, and then again during Q1-Q2 2021. However, through the first three quarters of 2022, the deals for Big Tech have shifted to a shorter time span of 94 months.

While new lease terms were down slightly, average renewal lease length has shortened more significantly for the whole market and for tech tenants. Tech companies’ renewal term lengths have declined more than the market average for large, medium and small tech companies. Big Tech renewals fell from 55 months in the 10-quarter pre-pandemic period to just over 46 months in the 10-quarter pandemic period. Medium/ and small tech companies recorded a similar decline, falling from an average of over 49 months to over 38 months. Tech has been considered the most likely to go fully or partially remote, (at least in the near term, and this has most likely played a large role in the decline of the renewal lease term during the pandemic. In other words, more uncertainty leads to shorter renewal lease terms. 

 

Tech Leasing Down, But Still a Primary Driver of Office Demand

 

Leasing activity in the tech sphere across North America is down but not completely out when compared to pre-pandemic levels. In comparing the 10 quarters prior to the pandemic (Q4 2017 through Q1 2020) with the 10 quarters since (Q2 2020 through Q3 2022), analysis of Cushman & Wakefield’s proprietary research database elucidates the following trends: 

  • Total tech leasing activity (new and renewals) dropped from 114.6 msf in the period leading up to the pandemic (Q4 2017 – Q1 2020) to 64.6 msf since it began (Q2 2020 – Q3 2022).  
  • Renewals increased substantially during the pandemic—from 16.9% to 22.6% of all leasing activity—likely due to the uncertain market conditions and a desire to stay in place until a more complete recovery occurs. 
  • Total leasing activity across North America declined as well, dropping from approximately 1billion sf to 828.7 msf. Tech’s share of total leasing declined from 11.1% to 7.8%. 
  • The average size of the 3,554 tech leases analyzed in the 10 quarters prior to the pandemic across North America was 32,250 sf; since the pandemic began, the number of leases fell to 1,992, but the average size stayed virtually the same at 32,450 sf. 
  • The top markets for total leasing activity have adjusted slightly from the pre-pandemic period. While Silicon Valley still leads all markets, its primacy has shrunk considerably; the San Francisco Bay Area’s share of tech leasing dropped from 37.1% leading up to the pandemic to 26.6% since Q2 2020.  
  • The charts below consist of the top five markets. In the previous period, two of the top markets were in the Bay Area while only one made the cutoff since Q2 2020.  

 

  • Sublease vacancy remains elevated across many major markets, and there is a tendency for companies to gravitate to shorter-term and quality built-out spaces, particularly among tech startups. As the economy improves and we move further away from the pandemic, companies can revisit their space needs one or two years from today. 
  • Big Tech has always favored closely controlling its environment.  Silicon Valley is a great example of this, as the mega players own much or all of their own campuses. That desire has spread from suburban to urban markets more recently where Big Tech has purchased or plans to purchase buildings in markets such as Manhattan and Chicago. That long-term commitment  “locks them in” to these markets and to the office space itself during what has been otherwise a very uncertain time for commercial real estate (CRE). Given the potential for property values to take a short-term dip, this may be the perfect time for occupiers to consider whether owning or leasing is the best option for headquarters or other major employment hubs. 
  • To motivate employees to come back to the office, companies are generally focused on the best spaces in the best submarkets—top systems, outdoor space, convenient to services, mass transit accessibility, etc. Generally, that means the newest product but not always. In cities like San Francisco, many buildings built in the 1970s and 1980s have been substantially renovated to trophy-level quality and attain higher effective rents than before the pandemic. In other markets, such as Atlanta, Austin and Nashville, a significant amount of new office product has just been delivered. These Sun Belt markets often have more available land, cheaper construction costs and existing product that has been less suitable for the modern appetite of occupiers and their employees. 
  • Tech continues to adjust to the changes underway in how and where space is utilized, with lease reductions occurring most in the small and medium space segments. Funding into early- to late-stage startups has entered a new environment as well. That said, tech has continued to lease and buy space in a wide variety of markets, including the more expensive mega coastal markets where the tech sector was entrenched well before the pandemic and less expensive markets scattered across North America. Have things changed? Yes, indeed. While statistics point to layoffs occurring in the tech sector, employment and job postings remain above pre-pandemic levels. Tech will certainly continue to be a leader in office space occupancy moving forward. 

Authors

Robert Sammons San Francisco Research
Robert Sammons

Senior Research Director, Americas Technology Lead
San Francisco, United States


+1 (415) 773-3514

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Jacob Albers Headshot
Jacob Albers

Research Manager
San Francisco, United States


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David C Smith (image)
David Smith

Head of Occupier Insights, Global Research
Atlanta, United States


+1 (404) 853-5310

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Market Reboot: How Tech CRE is Adjusting to a Turbulent Economy

Robert Sammons • 11/18/2022
The pandemic has changed the way the North American office market functions, and has had an impact on all markets and occupiers, the tech sector included.

While tech was the darling in terms of market performance during the past decade and into the early portion of the pandemic, the 2022 fluctuations in the economy have hit tech hard. Layoffs or hiring freezes are rising in the tech sector. Funding has tightened up, or at the very least become more expensive, as venture capitalists turn more cautious.  

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