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    July 26, 2022

    Why CRE Developers Should Be Watching Big Tech’s Moves

    It is hardly a secret that Big Tech has an outsized impact on the global economy, but exactly how big of an impact was revealed during the 2020 pandemic. As countries closed their borders, international flights grounded, businesses closed shop and people stayed home, while the digital landscape did just the opposite. It expanded. Internet usage surged in both personal and professional settings as people and companies leaned on technology to carry on with daily life. The activity was so acute, one survey from McKinsey estimated that adoption of digitization and automation accelerated by 85%, or by five years in just eight weeks, and the five leading tech companies—Apple, Amazon, Facebook, Microsoft and Google—had a combined $1.2 trillion in revenue.

    This activity generated substantial economic output. Research from Digital Planet, an initiative at Tufts University’s Fletcher School, found that digital adoption helped national economies through the pandemic and in many cases softened the economic dislocation. Overall, it analyzed more than 90 countries and found that accelerated technology adoption reduced the fall in GDP from 2019 to 2020 by at least 20%. That is an impressive cushion. 

    The dominance of Big Tech is of particular benefit to the commercial real estate industry. As an office user, the five mega tech companies mentioned above occupy approximately 600 million square feet of real estate space, a number that has quintupled in the last decade and continues to grow—but office usage is only the beginning. The windfall of economic activity linked to the technology sector has created immeasurable demand across commercial asset classes, and those dynamics are supporting fervent development and investment in both mature and emerging tech hubs.

    The Digital Ecosystem

    “Technology tenants tend to create ecosystems,” said Michael Turner, president of Oxford Properties Group in a 2020 Wall Street Journal article analyzing the tech market’s effect on the real estate industry. The foundation of this ecosystem is jobs. By and large, tech companies produce high paying jobs and support population growth. In 10 of the first 12 months of the pandemic, the tech sector continued to produce job growth, adding more than 80,000 workers in the first half of 2021 alone. These jobs tend to pay well into the six figures, with the median annual salary at firms like Google, Facebook and Twitter sitting at $230,000. Armed with a healthy disposable income, these tech workers become gregarious users of housing, retail, entertainment and services in these communities, all of which translates into real estate demand.

    Redfin looked at the correlation between Big Tech and the housing market, analyzing the increase in property values when Apple, Amazon, Google and Facebook expanded their presence. The report found that for every 1% increase in tech workers, housing prices increased .5% above the national average. Renters experience a similar tech premium. The pandemic brought some relief to the extreme rents in Silicon Valley’s established tech hubs, for example, but even after seeing a double-digit drop in rents, San Francisco and San Jose continue to rank among the most expensive rental markets in the country. 

    The ecosystem, however, extends beyond a tech company and its workers. It includes ancillary support businesses, like smaller tech companies and start-ups as well as financial services. These companies also create attractive jobs that generate demand for everything from office space to housing to retail. It is an established network of companies and people that propel local economies forward. The aforementioned Wall Street Journal article said it best: there is no other industry that can match Big Tech’s impact on the property sector, not even similar industry booms like manufacturing in the 1960s or financial services in the 1980s. Big Tech is a stand out in how it drives real estate demand. 

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    Amazon HQ2 as a Case Study

    In 2017, Amazon made an unprecedented move. It announced plans to open a second headquarters location in North America that would support 50,000 jobs and generate $5 billion of investment—and it essentially opened up bidding from cities across the country. Local government officials rallied to make an attractive offer, which included tax incentives and development support. In all, the tech giant received 238 offers from cities in the US and Canada, as the real estate market waited with bated breath to swoop into the winning city. Ultimately, after quite a lot of indecision and changed plans, Arlington, Virginia, won the bid. 

    The fervency around the selection process alone is a great signifier of tech’s value proposition to a community—but the subsequent impact in Arlington makes a great case study for Big Tech’s influence on a market. 

    Amazon purchased a 10.4-acre site for HQ2, which will include office buildings, retail pavilions, childcare and nearly 3 acres of open space. Amazon’s plans for the site received unanimous approval in April, after what the Washington Post called an “exhaustive” review process that included calls from the community for a greater investment in resources, including affordable housing and support services. While there are some concerns about the negative effects of the project, community leadership sees tremendous upside. “All Arlington residents will see benefits from Amazon’s plans for PenPlace—from small businesses that will have more clientele to construction workers who will be paid competitive wages to build the complex,” said county board Chair Katie Cristol.

    Although the headquarter campus won’t open until 2023, the impact on the real estate market was almost instant. In the 12 months following the Amazon announcement, housing prices increased 33% year-over-year, and an analysis from the Washington Post found that home prices prior to the announcement were actually declining in Arlington as well as neighboring Fairfax and Alexandria. Asking rents for apartments in the area have also increased, up 17% for the year, and experts expect the office market to heat up as Amazon’s office campus nears its opening

    Amazon HQ2 illustrates how quickly markets respond when Big Tech moves in. All Big Tech companies have a similar impact. Austin is another prime example. Google, Facebook, Amazon and Apple all have offices in the city, and Tesla and Oracle have announced plans to relocate their headquarters to Austin from California. Tech-related jobs are expected to grow by 14% through 2026 in the market, and the real estate sector has been growing in step. Austin led the nation in back-to-office recovery with direct asking office rents growing 1% quarter-over-quarter in June, while home prices have increased 84% from 2010 to 2020. These are on-the-ground examples of the tech effect, and it is happening in markets across the country.    

    Diversifying Tech Hubs

    Big Tech has traditionally been concentrated in major markets, largely along the coast, but today, technology companies are “decentralizing,” as research from the Bookings Institution explains. Non-Bay Area start-ups are now taking 70% of the share of venture capital investment, and tech firms are planting roots in markets like Denver, Atlanta, Orlando, St. Louis, Kansas City and Salt Lake City. These cities are increasing the presence of tech-related jobs by 3% or more CAGR, illustrating budding new tech ecosystems emerging across the country. On CBRE’s 2022 Tech Talent Score Card, Denver and Atlanta already rank at tenth and eleventh in the US for tech talent, and all of the growing tech markets rank in the top 50 cities for talent. 

    This doesn’t mean Big Tech is exiting those coastal hotspots. San Francisco and Seattle remain the top tech talent markets in the country, and they are expanding there, too. Google, for example, announced plans to invest another $100 million in Kirkland, a suburb of Seattle, bringing the company’s total office usage in the city to 760,000 square feet by 2025

    Big Tech is expanding everywhere—but it is just one way that the commercial real estate market is colliding with technology. In addition to following the technology’s trail, real estate players are also rapidly leveraging technology post-investment to guide better internal decisions and protect (and even amplify) returns. Companies like Northspyre can manage and organize data and costs, resulting in more reliable project outcomes. 

    Whether it is in a mature tech market or an emerging hub, history has proven that where there is an expanding tech presence, there is commercial real estate development and investment opportunity. 

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