From SoCal Real Estate’s January 2019 issue:
A look at SoCal’s tech centers
By Carrie Rossenfeld
Cushman & Wakefield (C&W) recently released “Tech Cities 2.0,” an annual report that identifies existing and emerging tech centers increasingly driving the North American economy and details their impact on the commercial real estate sector. Not surprisingly, many of those tech centers are located in Southern California.
As SoCal Real Estate reasoned, where there are tech centers, so too will be the demographic group that relies on technology the most: millennials. And we weren’t wrong. Turns out that tech is a critical component of the San Diego local economy and CRE market, according to a statement from a representative of C&W, and the firm’s director of research for the San Diego and Nevada markets Jolanta Campion tells us that San Diego is home to the third-highest concentration of millennials (ages 20 to 34) in the U.S.
That concentration of millennials represents 24.3 percent of the region’s population compared to the U.S. average of 20.7 percent, Campion says. “Diving deeper into workforce and demographic characteristics, 56 percent of the total 3.4 million residents in San Diego are 39 years or younger, which is composed of a small portion of Generation X, followed by millennials and Generation Z.”
Within San Diego, Campion adds, affordability of housing is closely tied to the areas with the highest concentration of millennials when looking at the percentage of millennials compared to the total population. “Downtown San Diego and adjacent cities, Pacific Beach, Central County submarkets bordered by freeways 52 and 56, followed by North County submarkets near the Marine Corps Base Camp Pendleton, have the highest concentration of millennials within the county, which bodes well for tech companies located in these areas.”
Obviously, SoCal’s millennials are not confined to San Diego. Eric Kenas, C&W’s director of research for the Greater Los Angeles, Orange County, and Inland Empire markets, tells us that the SoCal’s coastal or gateway cities attract the most millennials in this region.
“From San Diego to Irvine (Orange County) and up through Los Angeles, the millennial population is abundant and healthy,” Kenas says. “There are micro pockets across the region within each respective market.”
For example, in a survey done by the Downtown Center BID, 47 percent of the residents in Downtown L.A. are between the ages of 18 and 35, Kenas reports. “The Greater LA millennial base is above the national average of 20.7 percent, coming in as the eighth-highest concentration with 22.7 percent of the population. As the driving force behind much of today’s innovation culture, this cohort is highly sought out by growing companies.”
Further, GLA encompasses the entire experience that tech companies demand, Kenas points out: high quality of life, a lifestyle that emphasizes balance, world-class colleges and universities (Caltech, UCI, UCLA, USC), and a large talent pool. He adds that the cost of living in Greater L.A., although perceived as high, is low in comparison to other gateway/tech markets.
“This cluster of talent provides favorable conditions that will likely promote future growth,” Kenas says. “Startups and industry titans alike strongly prefer to locate in areas with an existing talent base, which makes Los Angeles a promising option for a broad set of employers.”
Certain SoCal cities are exhibiting great potential for becoming tech hubs in this region. As we have previously reported, Downtown San Diego is one of those growing regions. Campion says San Diego’s technology sector is part of the region’s innovation economy and comprises knowledge-based sectors on the leading-edge of research, innovation, and development of the technologies.
“These technology sectors combined account for $55 billion in annual impact or 25 percent of the San Diego economy,” Campion says. “San Diego’s tech economy is anchored by the
life-science ecosystem around UCSD in Torrey Pines and the telecommunications companies clustering around Qualcomm in Sorrento Mesa. While Qualcomm recently reduced its local footprint, companies such as Illumina, ViaSat, and Nuvasive continue to expand their presence in the region.”
The proof is in the fundamentals. Through midyear 2018, Campion says technology tenants leased over 1 million square feet of office space in San Diego County, ranking it as the region’s second-leading office-industry sector for activity. “Sorrento Mesa, Carlsbad, I-15 Corridor, UTC Triangle submarkets, and Downtown recorded the highest leasing activity to tech tenants in 2018, similar to the previous four years. Tech has been the dominant industry sector over the last five years in San Diego, either leading or ranking second in terms of most office space leased.”
A key figure to highlight in the San Diego market is that tech tenants have leased a collective 6.2 million square feet of office space over the last four and a half years (18 quarters), Campion points out. “If we factor industrial space, this figure jumps to a 9.1 million square feet leased combined across these two product types.”
Campion predicts the San Diego tech sector will continue to grow and positively impact demand for commercial real estate. “We are currently tracking more than 408,000 square feet of total tech-tenant user demand largely across San Diego’s office, but also industrial sectors. According to our Tenants in the Market tracking, tech accounts for the third-largest demand segment, trailing only life sciences (893,000 square feet) and transportation, warehouse, and utilities (678,000 square feet).”
Meanwhile, the Greater Los Angeles tech ecosystem has afforded companies the opportunity to grow, attract talent, and thrive as an interconnected community, Kenas says. “Whether it’s content/production in Hollywood (Netflix & Viacom), tech/advertising in the Westside (Google & Fandango), start-ups in DTLA (Hyperloop & Honey), biotech in the OC Greater Airport Area/John Wayne Airport (Edwards & Allergan), or cybersecurity in South County’s Irvine Spectrum (Cylance), companies are planting their flags in these industry-specific tech micro-communities.”
As Kenas notes, L.A.’s Westside continues to draw the largest tech activity, as many of the largest tech names that have headquarters in San Francisco have planted locations in the Westside. Almost 400,000 square feet of new office projects have completed thus far in 2018 and another 830,000 square feet is in the pipeline. Culver City has been a huge focal point of tech clustering, he says.
And in Orange County, the South County (Irvine Spectrum) has 1.4 million square feet of new office product delivering in 2018 and another 350,000 square feet delivering in 2019. “All of this is high-end, new creative-office type of product and ties directly to the culture of tech tenants/companies,” Kenas says. “Additionally, this area is one of the most amenity-rich parts of Orange County and can serve the live/work/play lifestyle.”
Kenas also talks about the clustering effect that has helped shape the GLA region. “The tangible proof of the impact is some of the most innovative architecture in Hollywood (Columbia Square & Icon), the creative campuses on the Westside (The Hangar & Element LA), the expansion of Silicon Beach into El Segundo, the transformation of DTLA (The Times Campus and AT MATEO), UCI Research Park within the Airport Area, and the amenity-rich area at Irvine Spectrum (400 Spectrum & Five Point Gateway/Broadcom).”
Content creation, digital media, entertainment, gaming and automation, cyber security, defense tech, healthcare technology, med tech, SaaS, and biotech all bode well in a less constrained market, Kenas says, adding that unique sub-pockets of GLA are individually reaching the maturation phase.
So, how else can office owners and developers capitalize on this potential? Campion says the tech sector has been an important driver of demand and value in the current real estate cycle, and that rents have increased faster in tech markets than in the rest of the U.S. metro areas and most substantially in tech critical cities such as San Diego, where rents have increased 31.4 percent (2010 vs. 2018) compared to 24 percent in the rest of the U.S.
“For occupiers, any sharp increase in rents may make these markets less attractive,” Campion says. “However, compared to San Francisco, where rents have increased 135 percent, San Diego offers less-expensive space, plenty of tech talent, and is located an hour flight away from San Francisco.”
She points out that any real estate property lacking technology will struggle compared to properties that offer a 24/7 environment. “Incubators, co-working spaces, start-up spaces, innovation centers, creative office, research institutes — these represent just some of the examples of growing portfolios of workspaces fostering the tech-driven innovation economy.” And we’re all familiar with the amenities millennials are seeking in tech spaces, from well-appointed common areas to gourmet food to services.
One problem is that San Diego’s office inventory is rapidly aging; only 8 percent of current existing inventory was built in 2010 or after. “At this level, there is not enough new supply to satisfy tenant demand for new and modern office space,” Campion says. “An opportunity for redevelopment lies in the 76 percent of office inventory that was built prior to 2000.”
She notes an uptick in San Diego redevelopment projects as a result of aging inventory, as well as co-working spaces. “While co-working space only accounts for 1.6 percent of our overall office inventory today, we see this niche market continuing to grow in 2019 and beyond.”
Kenas says many owners/developers are putting substantial capital into the renovation of older buildings in GLA. As a result, “We have seen a spike in interest by many companies, many of which are tech companies. Warner Music Group, Spotify, and Honey are set to occupy the most creative-office spaces in that market at three different locations, around 500,000 square feet, in 2019.