Who will be the next Silicon Valley?

Tech growth in the US has unquestionably fueled higher values in CRE across the board from single family homes, land prices, office rents and increased rental rates for multifamily as well as compressed cap rates on purchasing income producing assets.

Everyone knows that Silicon Valley represents the fastest growing tech market in the US and has been for many years. In a recent report published by CBRE entitled “Tech Talent Scorecard Rankings” Silicon Valley was ranked the number 1 tech market among the 50 best tech markets in the US. CBRE stated that Silicon Valley is the most expensive tech market in the US when considering office rent, tech talent wages, non-tech support and management wages. CBRE ranked Silicon Valley number 4 in asking rents for office and apartment rent. They came in at $45.36 per sq. foot for office rent and $2,521/month in apartment rent – 151% above the US cost of living index. Office vacancy stood at 8% representing one of the lowest in the US in comparison to other big cities. Between the years 2010-2013, high tech growth amounted to over 20% with average salaries running $116,000 per year.

While Silicon Valley has been the leading tech market for many years, Austin, Texas is another market that has done tremendously well and a region not to be overlooked. According to a blog entitled “Nerd Wallet” ranked Austin has the sixth best city for job seekers in 2015. Other cities in Texas like Laredo, Corpus Christi, Lubbock and Irving were also ranked within the top 20 cities. Factors they took into consideration included: workforce growth, affordability and college towns that welcome job seekers. Business Insider Magazine ranked Austin as the number 1 city for job growth in the US while Dallas and Houston came in 7 and 8 respectively.

Austin is sometimes referred to as the “Silicon Hills”, mainly due to the large number of technology companies like 3M, Apple Inc., Hewlett-Packard, Google, Dell, IBM, Advanced Micro Devices, Facebook, AMD, Applied Materials, Cirrus Logic, Cisco Systems, eBay/PayPal, AT&T, Flextronics, Bioware, National Instruments, Freescale Semiconductor, Blizzard Entertainment, Hoover’s, Intel Corporation, National Instruments, Samsung Group, Silicon Laboratories, Oracle Corporation, Hostgator, and United Devices.

The University of Texas and Texas A&M both located in Austin also fuel high tech growth. Austin is a biotech hub with more than 160 companies and 8,200 employees. There are two large incubators: Austin Technology Incubator, and Capital Factory. According to the latest PwC Money Tree Report, the state of Texas received over $1 billion in venture capital funding representing the top 10 regions nationwide.

The demographics of Austin are impressive.  According the US Bureau of Labor Statistics, unemployment remained under 3.5% over the current year while the US average was 6.3%. Management, technology represent 26.56% of the workforce while future job growth is expected to increase 42% and Texas as a state 36%.

Population in Austin:

  • April 1, 2000 – 656,562
  • April 1, 2010 – 790,390
  • October 1, 2015 – 910,833

All of this amazing tech growth has had an incredible positive effect on increase office occupancy and overall pricing of commercial real estate. According to a JLL office report for Q3 2015, Austin absorbed 1.5 million sq. feet compared to 2.2 million sq. feet for Silicon Valley. Keep in mind the population of Silicon Valley is 3x to 4x that of Austin. 12-month rental growth was 3.8% with rents reaching $32/per sq. foot. Cushman Wakefield (CW) in their Q3 2015 office report, said that vacancy was projected to be 9% far less that the US average of 14.20%. By way of comparison, CW reported that average asking rents for office space in Q3 2014 was $29.17/per sq. foot is now $33.02/per sq. foot – a 14% increase in -year. CBRE ranked Austin in 2014 as the number two city for high tech job growth from 2011-2013 reaching 34.20% below San Francisco at 51.10%.

In a report by Angelou Economics that the forecasted Austin Economy in 2015-2016, he cited several encouraging facts about Austin’s economic growth:

  • Austin is expected to add 69,400 new jobs in 2015 and 2016 mainly in the professional and business services
  • Austin has the most expensive housing in the state with average home costs inching towards $300,000 — up 187 percent since the early 1990s.
  • In the next two years, about 3.6 million square feet of office space will be absorbed. Broken down this represents 700,000 square feet in the industrial sector and 1.6 million square feet of retail space. About 18,500 single family residents should be added to the housing stock as well as 16,500 new apartment units.

According to an article in VentureBeat, one of the most compelling reasons why so many tech companies opt for Texas and in particular Austin is because there is no state income taxes. In addition, Texas offers companies about $19 billion per year in incentives, the highest amount of any state in the US. Also, Texas operates “The Emerging Technology Fund” that helps entrepreneurs with product development, public-private partnerships and the recruitment of research talent. So far, more than $410 million in awards have been given, with an estimated 54,000 jobs created.

Looking ahead, there are other off the radar tech markets, although in smaller cities, that can one day may be a competitor to Silicon Valley and Austin. In a 2013 report prepared by the Ewing Marion Kaufmann Foundation, they ranked 25 cities with the highest ratio of tech startups. Colorado came away as the winner. Boulder, Colorado was first with a density of 6.3 followed by Fort Collins-Loveland with a density of 3.0; Denver was ranked sixth with a density of 2.4; Colorado Springs ranked ninth with a density of 2.3 and Grand Junction, ranked nineteenth with a density of 1.7. The US average is 1.0. But other cities that nobody could believe has a growing high tech market is Cheyenne, Wyoming ranked tenth; Provo, Utah ranked fifteenth, Missoula, Montana ranked eighteen and Ames, Iowa ranked twenty-five.

Boulder is indeed a real success story. A city of just over 100,000 people has made impressive achievements in the tech sector with a rippling effect on the cost of living and real estate. Major employers include Ball Aerospace, Google, IBM, Lockheed Martin, Medtronic/Covidien, Micro Motion, Northrop Grumman, Ricoh and Qualcomm.

In a report conducted by the Boulder Economic Council in 2015, below are impressive facts:

  • For occupations in Professional, Scientific, and Technical Services make up 1989 firms representing 28.50% of all firms
  • 54% of overall employees are in management position
  • Government and professional, scientific 33,247 employees 35% of total work force
  • Boulder has the most expensive housing prices $685,000 according to the Colorado Real Estate Network (CREN)
  • Median salary tech is $100,000
  • Since Q3 2013 the prices of homes has increased on average 8.8% over 6 quarters until Q4 2014
  • 75% of residents have completed a bachelor’s degree or higher.
  • Life, Physical and Social Science occupations (3.89 times national average)
  • Physicists (16.41 times national average)
  • Biochemists and biophysicists (5.87 times national average)
  • Chemists (4.09 times national average)
  • Hydrologists (4.97 times national average)
  • Environmental scientists (7.73 times national average)
  • Software developers, applications (4.62 times national average)
  • Computer network support specialists (2.71 times national average)
  • Software developers, systems software (3.03 times national average)
About the Author
Ron Diller lives in Israel and has over 25 years’ experience in the US real estate industry, primarily in the multifamily sector.