Office Markets Strengthen Where Tech, Energy Jobs Are

Investor's Business Daily

Call it the Google effect. While most of the market for office space continues to recover slowly, geographic pockets with abundant tech and energy jobs are sprinting ahead of the pack.

In a "first glance" review of the first quarter's U.S. office market, real estate research firm Reis says that the standout pockets are San Jose, San Francisco, Dallas, Houston, New York, Austin, Seattle and Oklahoma City.

These eight cities, all with "meaningful" employment in technology and energy sectors, ranked in the top 10 markets for effective rent growth.

"The technology and energy sectors continued to drive the creation of higher-paying jobs, and office-market performance reflects this," Victor Calanog, Reis' vice president of research and economics, said in the report.

Office rents nationwide rose 2.2% in Q1 vs. the same period in 2013, Reis reports, led by rent growth in San Jose (up 5.9%), San Francisco (up 4.8%), Dallas (up 3.6%), New York (up 3.5%) and Houston (up 3.1%).

The tightest office market was Washington, D.C., with a relatively low 9.7% vacancy rate, followed by New York at 9.9%. Vacancies in both markets have been trending down.

New York's declining vacancy rate is due to the growing presence of technology companies in midtown Manhattan's "Silicon Alley," the Reis report noted. In contrast, jobs in financial services have "continued to stagnate.

Google (GOOGL) is looking for more office space in Manhattan while continuing to expand around its home base of Mountain View, Calif.

Most of the office-leasing activity in Silicon Valley in the first quarter was due to "Google's tireless hunger for real estate," said commercial real estate broker Cushman & Wakefield in a separate office-market report this week, noting that the tech giant has been displacing tenants through the acquisition of multitenant buildings. Those displaced tenants are moving further south in Silicon Valley in search of cheaper rents.

The average rent in the submarket of Mountain View jumped 16.5% during the quarter to $5 per square foot per month, Cushman & Wakefield says. It was the first time that rents there crossed the $5 mark since the dot-com era.

San Francisco's office market is on fire as the tech sector drove record leasing activity in the quarter: some 1.9 million square feet, the third highest for a first quarter in 10 years, C&W says.

Significant new leases were taken by Twitter (TWTR), Dropbox, LinkedIn (LNKD), Trulia (TRLA) and Practice Fusion, C&W noted. Salesforce.com (CRM) reportedly just struck the largest lease deal in San Francisco history — more than $500 million for half of the 60-floor Transbay Tower now being built, according to the Associated Press.

The energy sector, meanwhile, is fueling job growth and office-market strength in Houston and Dallas, two of only a handful of markets where new office construction is predominantly occurring, said a separate Reis report. New construction is mostly energy- or tech-related.

Oil companies with expansion projects under way in Houston include Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP) and Noble Energy (NBL).

The other top markets by office completions are New York, San Jose and suburban Maryland. Data-storage company HGST, a unit of Western Digital (WDC), reportedly will build two new buildings in south San Jose.

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