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HomeReal Estate NewsCommercialTech layoffs lead to decline in office leasing

Tech layoffs lead to decline in office leasing

The recent wave of layoffs among technology companies has further diminished the industry’s commitment to commercial real estate office space, Bisnow reports. Tech companies were a major office tenant during the past decade, but the industry’s leasing numbers have dropped in recent years. The sector leased 2.2 million square feet during the fourth quarter of 2022, a 57-percent decrease from the prior quarter, according to a recent Savills report. It’s an even bigger drop from a year ago, when more than 8.5 million square feet was leased.

As tech companies have begun to cut jobs, some in the CRE industry believe these leasing numbers will get worse before they get better.

“When the economic environment started to weaken, it created even greater uncertainty around when people were going to come back to the office, how much office space you need, and do we have the funds to make big commitments to additional leased and improved space?” Colin Yasukochi, executive director of CBRE’s Tech Insights Center told Bisnow. “That led to a decline in the amount of leasing activity by the tech industry, which withdrew a pretty big component of demand.”

The tech industry has leased more office space than any other sector since 2010, per CRBE’S Tech 30 2022 report. Tech’s total leasing activity by square footage jumped from 12 percent in 2010 to 21 percent in 2021. Midway through 2022 however, the industry’s share of leasing activity fell to 16 percent as venture capital funding slowed and the economy suffered.

Meanwhile, approximately 74,000 tech workers were laid off during the final quarter of 2022, per Savills and 190,000 jobs overall last year, according to Layoffs.fyi. The layoffs don’t appear to be slowing down anytime soon; Microsoft, Amazon and Alphabet (Google) have all cut at least 10,000 employees each in 2023 already, Bisnow reports.

How tech layoffs impact CRE

The ongoing layoffs in the tech industry signal companies are closely monitoring costs, which includes CRE spending. A lot of firms have opted to temporarily vacate their office space, according to Bisnow. This decision had led to the industry’s sublease volume reaching almost 145 million square feet during the second quarter of 2022 — it was 60 million square feet during the same time period in 2019, per CBRE. San Francisco (79 percent), Silicon Valley (69 percent) and Austin (44 percent) were the leading markets when it came to returning sublease space, according to Savills.

The fact that tech companies are subleasing office space versus giving it up completely could be a sign the industry isn’t 100 percent opposed to returning to in-person work at some point, according to Yasukochi. However, since a lot of these firms leased more space than they needed, it will take time to figure out how to manage the excess square footage, he said.

Tech’s cooled relationship with the CRE office market isn’t completely economy-based, however. The industry initially gravitated toward remote work and hybrid setups when the COVID-19 pandemic began. Office demand has gone up and down ever since, especially in popular tech areas like San Francisco.

Meta said it plans to put its 435,000 square foot San Francisco office on the sublease market earlier this month, Bisnow reports. The company also announced plans to sublease 589,000 square feet in Austin and it ended a 200,000 square foot office lease in Manhattan last October.

What lies ahead for office CRE

Austin has seen its technology workforce grow in recent years, leading to more office space demand. Increased sublease supply could potentially alter the market’s dynamics, Bisnow reports.

Such a change might not be such a bad thing however, according to Erin Morales, principal and managing director of Avison Young’s Austin office. There’s been so much more demand than supply recently that smaller tech companies have been unable to compete.

“If you’re looking at it through a rose-tinted lens, you could say there’s opportunity here for other users that were getting elbowed out a little bit to find the space that they need and want to have a successful business here in Austin,” Morales said.

Morales also noted that there’s a potential rental rate correction ahead. Increased technology job growth in markets such as Boston, Denver, Salt Lake City, Seattle and Austin have generated rent increases of more than 10 percent between the second quarters of 2020 and 2022, according to CBRE.

Tech’s leasing numbers should increase as the economy improves, Yasukochi told Bisnow. The pandemic changed the industry’s relationship with office CRE, but as tech grows, office space will likely remain a necessary cost.

“Tech has always seen a pretty strong recovery coming out of these recessions,” Yasukochi said. “They are tightening their belts and setting themselves up to weather the storm, and then they’ll start to invest in the right places and grow when the economy justifies it.”

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