How the tech industry provides indicators for CRE investment

As commercial real estate investors size up which markets to invest in, one of the growing considerations is the influence of the tech industry on that market. Increasingly, we are seeing the tech industry move from traditional hubs to burgeoning cities, driving significant growth. With a lower cost of living, high job opportunity and the ‘cool’ factor of an up and coming city, Millenials are fuelling population growth into these areas. The result of this is opportunities for investors, specifically across multifamily and office. We used Reonomy data to build the link between tech growth and CRE investment in these markets and question which market you should be considering to invest in next.

The nation’s largest metropolitan areas, including San Francisco and San Jose, Calif., Seattle, Boston, New York, Atlanta and Washington, D.C. have been known for some time as major technology hubs. The Bay Area now comprises about 10 percent of the nation’s digital services employment, up from 9 percent in 2013.

But there are other mid-size cities that are becoming known for tech growth. Targeting areas with modest tech growth, and a lot of potential, can really pay off in the long run. Values of emerging tech hubs (with characteristics similar to Silicon Valley before its real estate boom) include low housing costs, low unemployment rates, median tech salaries higher than median salary of city, the presence of major tech companies and venture capital funding. Following market trends are critical to the success of future investments.

While tech and STEM (Science, Technology, Engineering and Math) jobs are relatively high paying, young employees still don’t necessarily have the capital or desire to purchase a home. Homeownership is relatively unaffordable in many tech centered cities, driving most young professionals to rent. Investors that target rental apartment buildings or multifamily properties can reap the benefits of tech industry growth.

 

By utilizing Reonomy data, we connected increases in CRE investment with tech industry growth. Specifically, the comparison made was between tech industry job growth and growth of commercial sales over the past 10 years. Looking at market sales enables us to see how commercial real estate investment has followed tech industry growth.

 

San Jose:

The established tech market.

 

San Jose, the center of Silicon Valley, is an obvious technology hub. The area has the highest concentration of high-tech workers in any metropolitan area and an equally high concentration of wealth. And San Jose only continues to grow with 79.6% tech industry job growth in the past 10 years. The growth of San Jose as a tech hub has inspired other smaller and midsize cities to encourage tech companies to establish.

Data from Reonomy was applied to compare the average number of CRE sales in San Jose over the past 50 years to that same time period (2006-2016). The average number of commercial sales per year increased 141%. Through another search in Reonomy, we identified the highest sale price for a multifamily building in the past 10 years in San Jose. The apartment complex was sold last August  (2017) for $400.5M.

But while Silicon Valley remains the premier tech center in the country, investors in this market already know how competitive it is. And young employees are now becoming turned off by the high cost of living in the area. Large tech companies know this – but still want to attract young talent. With so much competition in one area, many tech companies have and continue to move to more affordable and attractive markets. Here is where second-tier cities come in.

Outside of San Francisco, San Jose wasn’t always such a bustling and busy place. Mostly home to academics from surrounding universities, the growth of San Jose from a small city to a financial epicenter over the past decades serves as an indicator of potential for other cities to grow.

 

Phoenix:

 

 

The Phoenix tech industry has thrived due to a few factors. Government policies encourage a cultural, legal, and economic setting that allows entrepreneurs and startups to thrive. Phoenix offers a similar mindset and flexibility that tech professionals are accustomed to and desire. This can be a huge draw – and clearly has been. Phoenix has had a 48.5% increase in tech industry jobs over the last 10 years. Phoenix also offers proximity to Silicon Valley (just a 2 hour flight) with a lower cost of living and a low cost of doing business.

The focus in Phoenix on increasing the number of incubators, accelerators and coworking spaces has created an environment where new kinds of tech jobs — those in software, web development and cybersecurity — are emerging. Some of the thriving California-based companies that have expanded to Phoenix in recent years include Uber, Yelp, Shutterfly, Zenefits, Weebly, Gainsight and BoomTown.

It is obvious that the current tech boom is changing the makeup of Phoenix’s economy. But it is also changing the region’s physical infrastructure. WebPT and other tech and creative companies are helping to revive the Downtown Phoenix Warehouse District. Companies are looking for innovative office spaces, and employees are looking for affordable and spacious housing. Development, revitalization and innovative restructuring are shaping the growing business atmosphere of Phoenix.

Data from Reonomy shows that CRE sales volume in Phoenix has increased more than any other city in the U.S. in the past 10 years.  Compared to the past 50 years, Phoenix has seen a 247% jump in CRE sales volume over the past decade. A search in Reonomy to find the highest recent sales price for an office building in the city of Phoenix showed an office sold in 2015 for $183M. Not only are sales increasing in volume, but also in value.

 

 

Dallas:

 

 

Dallas has continued to increase tech job opportunity. The tech industry job growth from 2006-2016 was 43.2%.  One major difference between some of the larger tech hubs and Dallas is that opportunities in Dallas tend to come from more established companies, rather than fast-rising startups. Where San Jose thrives off of huge venture capital investments, Dallas has been slower to develop a strong startup presence.

However, Dallas houses some huge tech companies. AT&T relocated its headquarters to Dallas in 2008 and is now the largest high-tech employer in Dallas. Close following are Verizon, Texas Instruments, and Raytheon. Dallas has had a strong presence in manufacturing, defense and communication tech.  But tech presence in Dallas is adapting and changing with an increase in IT presence and expanding opportunity for startups. Fast-growing VC-funded companies with IT Services provider CPSG Partners and real estate CRM developer Think Tech Labs have established themselves in the area.  

For commercial real estate professionals, Dallas is of interest because it currently offers affordability, with expectations for job growth to continue and value to increase. To understand some of the growth that Dallas has already seen, we utilized Reonomy data to find that in the past 10 years, the Dallas-Fort Worth area had seen a 119% increase in commercial sales volume.

For cities already experiencing large amounts of growth, like Dallas, Class A multifamily properties have already been undergoing development. Investment in Class B and Class C buildings are subsequently opportunities increasingly considered. These are integral in supporting the growth of other employment sectors that follow tech and general population increase (i.e. transportation, utilities). You can easily search Reonomy for these multifamily buildings in Dallas with just a few simple filters for location, asset class and year built.

 

Charlotte:

 

 

Charlotte has already experienced stable growth due to financial industries and is quickly becoming a hub for technology startups and innovative companies. From well-known technology companies such as Microsoft to high-growth startups, including AvidXchange, Charlotte has proven it has the talent and infrastructure to make tech companies successful. Tech industry job growth has been continually increasing – specifically 62.1% over the past 10 years.

With 8 universities within a 250-mile radius, and a 12% increase in 20-34 year olds living in the city since 2010 (according to the U.S. Census), there is a continuous supply of talent to fuel the increasing tech industry of the area. There are currently more than 1,700 core technology related degrees and certificates earned each year in the Charlotte area. With the attraction of this young, intelligent and job focused population, Charlotte offers strong potential for sustained CRE growth.

Through our analysis of sales history from Reonomy data, we identified the percent of sales in the past 10 years in comparison to average sales over time, to find a commercial sales growth rate of 196%. Charlotte’s growth has been formidable and doesn’t seem to be slowing down. In combination with the robust market increase in Tech and STEM job opportunities, the possibilities for office and multifamily growth are vast. A search in Reonomy for the highest sale price for a multifamily building in Charlotte revealed a $317M sale in 2015.

 

Indianapolis:

 

 

Another cost friendly alternative for young professionals in tech can be found in the Midwest. Many of the tech-skilled college students attracted to the idea of working in a start-up or innovative tech company from the surrounding area decide to stay in Indianapolis after graduation, rather than moving to Silicon Valley. The proximity of Indianapolis to tech-strong universities Butler, DePauw, Indiana, Purdue and the Rose-Hulman Institute of Technology are huge assets to this growing market.

Sometimes viewed as a “flyover” state from the eyes of huge San Francisco and New York professionals, the value of a less saturated market offers the opportunity to be part of a smaller team and to play a larger role than might be possible in a Silicon Valley firm. Tech industry growth from 2006-2016 was over 68%.

But start-up presence isn’t the only tech draw of the area. A few large companies have huge influence on the growth of tech in Indianapolis. Notably, a fourth Salesforce tower (in the company of San Francisco, New York and London). The cloud computing company based in San Francisco expanded its 1,600-person workforce in Indianapolis by another 800 employees last year.

The area also attracts tech professionals interested in more career stability. The corporate culture of Indiana tech companies is different from Silicon Valley – people tend to stick with one company to build their career in a less cutthroat environment. That kind of company culture also means that the growth of the area will only continue.  As more people continue to move to Indianapolis for tech careers, they are likely to continue to live in Indianapolis, creating a stable market for growth.

Reonomy data revealed a huge amount of change in commercial sales volume in the Indianapolis area over the past decade, a 143% increase. As tech continues to develop, and more people are drawn to Indianapolis, these properties are steadily gaining in value.  A quick search in Reonomy revealed the highest commercial sales price for a Multifamily building in Indianapolis – which sold for $625M.

Looking for up-to-date, comprehensive commercial real estate data? Reonomy offers CRE professionals real-time access to the data points they need to grow their business — from debt and sales history to zoning and building owner information. Try Reonomy National for free today.

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