Faced With A Bay Area Labor Shortage, Tech Companies Increasingly Leasing On The East Coast

The San Francisco Bay Area may be considered the largest tech hub in the U.S. right now, but the number of tech companies signing large leases in the region declined by more than one third in 2019, according to a recent CBRE report. 

One might automatically assume that’s due to the expensive office rental costs and high cost of living. But ironically, the two cities that saw big increases in large tech leases last year were not inexpensive markets: Manhattan and Washington, D.C.

To be clear, the San Francisco Bay Area remained the capital of huge tech leases with 6.9 million square feet newly leased last year, according to Colin Yasukochi, executive director of CBRE’s Tech Insights Center. 

That’s no surprise. But what was startling was that the Bay Area’s share of square footage in the largest 100 leases declined by 37% in 2019 from 10.8 million square feet leased in 2018 “as tech companies expanded to other markets, largely in search of talent,” Yasukochi says. That kind of decline is large and notable. (Note that the San Francisco Bay Area encompasses the city of San Francisco, Silicon Valley, the peninsula and East Bay).

Meanwhile, square-footage gains registered in markets such as Manhattan (up 148%), Seattle (up 63%), and Washington, D.C. (up 37%). In conducting this research Yasukochi specifically looked at the top 100 tech leases of 2019, which made up about 50 percent of all tech leases last year, he says.

“Growth is so strong for many of the tech companies headquartered in the Bay Area and the region can’t accomodate all of that growth,” Yasukochi says. “It’s more and more difficult to attract and retain talent in the Bay Area because of the short supply of labor.”

The 100 deals comprised 24.6 million square feet, ranged in size from 110,000 to 1.3 million square feet. and were largely concentrated in the San Francisco Bay Area, Manhattan and Seattle, as you can see below.

Looking east

Despite being a pricey place to do business and live, Manhattan was the biggest beneficiary of San Francisco’s losses. That’s in part due to the large supply of tech degree graduates, Yasukochi believes.

“Many of the large tech companies are comfortable going there, because they know they will have the ability to hire people,” he says. “In particular, there are a number of tech-degree producing universities in the area that will continue to produce talent as individuals graduate.”

Still, cost is a factor as evidenced by the fact of the number of lower-cost markets ranking in the top 10 when it came to large tech leases signed last year. Namely, Phoenix and Nashville were new entrants, joining other markets such as Dallas-Fort Worth and Chicago. I expressed surprise that tech darling Austin did not make the list, but Yasukochi tells me it was a close No. 11. He said the Texas capital is similarly constrained like the Bay Area, needing a larger supply of talent to grow.

Hot sectors

Looking ahead, Yasukochi expects the tech migration away from the Bay Area and places like Seattle to the East Coast trend to continue in 2020.

“The tech industry in of itself overall continues to grow faster than most other industries. And the Bay Area labor market and supply isn’t growing fast enough to keep pace with that,” he says. “Tech companies have been forced to expand to other markets, and we expect that to continue. Given the tight labor supply and cost pressures in the Bay Area and Seattle – the two largest U.S. tech markets – the diversification trend can be expected to continue.”

When it comes to industries, software, search and e-commerce companies were among the biggest signers of big leases in 2019, accounting for a combined 62% of the square footage in last year’s largest 100 tech office leases, according to CBRE’s report. That’s up from a collective 41% share in 2018.

The gains made by those three tech sectors came as large-scale leasing activity by companies involved in social media, hardware, business services, cloud and media & entertainment industries, lessened compared to previous years, according to CBRE.

This post first appeared on Forbes.com. To see the original, click here.