Commercial Real Estate Is Still Contracting In Tech Hubs, Yet To Stabilize: CBRE

Commercial real estate has been in a bit of a rut and it looks like it’s not going to end as fast as some hope. Commercial real estate giant CBRE released its annual Tech 30 report. The firm’s assessment is these markets are in the middle of a contraction phase and have yet to stabilize. Elevated vacancy rates are about to meet a lot of new office space under construction.

The Real Estate Cycle 

As we’ve discussed a number of times, real estate works in a four-stage cycle, an observation first made over 100 years ago. CBRE uses slightly different terms, but the concepts are the same. Here’s how they applied the labels to commercial real estate:

Contraction: Rents decline, vacancies increase, and excess supply is on the way. 

Stabilization: Rents are flat or experience minor declines/growth; vacancies rates are stabilizing; little supply is being built. 

Expansion: Rents begin to accelerate in growth; Vacancy rate drops; Supply starts to uptick. 

Maturation: Rent price growth peaks and begins to slide lower; vacancy rate is stable; New supply begins to rise;

The “Tech 30” Cities Are In The Contraction Phase

The Tech 30 cities are in the middle of the contraction phase, according to CBRE. Not the end as some might assume. CBRE’s research shows it took about 2 years for the market to go from a similar level back to expansion.

Tech 30 Office Market Cycle

Source: CBRE.

“In aggregate, the Tech-30 moved from the maturation/stable phase of the office market cycle last year to the contraction phase in Q2 2021, characterized by weakened demand, rising supply and falling rents,” reads the report. 

North American Tech Hubs Have Significant Office Vacancy Rates

The pandemic crushing office life predictably left the Tech 30 cities with a lot of vacant space. Office space vacancies averaged 16.7% in Q2 2021 across the list. Dallas (24.6%), Atlanta (21.3%), and Chicago (21%) notably top the list for vacancy rates. For context, the national average in the US was around 9% pre-pandemic. 

In Canada, Toronto (13.3) and Vancouver (6.9%) managed to come in below the average for the regions. It’s worth remembering Canada was far from a tight office market pre-pandemic.

A Lot of Office Space Is Currently Under Construction

Supporting CBRE’s argument of the contraction phase is the volume of building. The aggregate square footage of office space in the Tech 30 hit 112.9 million square feet (MSF) in Q2 2021. Three markets made up a third of the space — Silicon Valley (13.8 MSF), New York (13.2 MSF), and Toronto (9.5 MSF). The completions would more than double the amount of vacant office space in each of these cities.

Calling office space in the mid-contraction phase is interesting considering where residential is at. Most of these hubs are only beginning to see home prices find a little stability. Some are still seeing rapid growth, despite elevated office vacancies. Though commercial real estate often leads residential, since jobs determine income.