Oct. 24, 2016
Nothing demonstrates an industry’s momentum like its physical expansion across real estate markets.
In recent years, technology companies have driven the most leasing activity nationwide, averaging 22.3 percent of large-block leasing. Banking and finance companies follow distantly with 10.3 percent of leasing activity since the third quarter of 2014.
Over the course of this business cycle, technology companies have come to be viewed as coveted tenants, while giving secondary markets and up-and-coming submarkets a geographic stamp of approval. Over the past four quarters, 63.4 percent of technology companies leasing 20,000 square feet or more were in growth mode, compared to the overall U.S. rate of 48.9 percent. Additionally, only 4.6 percent of tech companies were shrinking their real estate footprint versus the national average of 6.5 percent.
Lower venture capital investment caused fears of a tech slowdown toward the end of 2015 and into 2016 and placed pressure on tech companies to more carefully consider leasing and expansion. While it’s true that economic expansion, in general, is beginning to slow after nearly seven years of growth, the technology sector remains the leading industry for real estate expansion in the United States.
Overall, locating near major tech hubs has been as important to highly competitive, established companies as it has been to startups hoping to get a competitive edge. However, locating in the most heavily tech-concentrated areas is costly. Therein lies the opportunity for other markets to partake in the economic driver that is technology.
Houston’s opportunity for the expansion of the technology industry lies in the same strengths that make it a business-friendly environment for any industry: affordability and population base.
When compared to the most popular tech metros like Boston, Seattle, Silicon Valley or San Francisco, Houston is considerably more affordable, while still offering all the resources of a major metropolitan area. This is especially important to growing technology companies for whom cost may be top of mind. Furthermore, as market conditions in Houston continue to turn in tenants’ favor, tech companies have increased opportunities to enter new construction buildings with large, open-floor plates at a steep discount.
Another significant strength of Houston is its diverse and educated population base. It is a well-known fact companies with a more diverse workforce perform better financially; tend to have a stronger organizational culture; are better able to compete for talent; and have more satisfied employees. Despite this evidence, the tech industry has experienced a lack of diversity in its population. For this reason, many of the largest and most influential tech companies across the country have made it a priority to increase ethnic, gender and racial diversity at their organizations.
As the most ethnically diverse city in the U.S., Houston’s diversity is a point of strength for continued growth. In fact, the city is so diverse that every racial/ethnic group is actually a demographic minority, according to Rice University’s Kinder Institute for Urban Research.
Houston also boasts a well-educated population base. Thirty-one percent of those age 25 and over in Houston hold a bachelor’s degree or higher. Moreover, the prolonged downturn in the energy sector has left a large segment of highly-skilled, technical talent out of work, which may provide a fresh labor pool for the tech industry.
While venture capital funding in Houston has grown year-over-year, the Energy Capital of the world is still working to establish itself as a nascent tech market. Medical and life sciences technology have historically been Houston’s bedrock, but the metro is still in its formative years in segments such as nanotechnology. As prominent higher education institutions, like the University of Houston and the University of Texas, further develop high-technology framework, Houston looks to drive tech demand in emerging industries.
Looking forward, major funding vehicles will be critical to future growth to provide startups with easier access to capital. This is essential to drawing a larger, more diverse set of tech businesses to Houston.
To download JLL’s U.S. Technology Office Outlook, click here.