Presentation delivered by Jiachen Lee and Alastair Townsend of UW's Masters of Science in Real Estate program to the ULI's Industrial and Office Park Product Council at the 2017 Spring Meeting in Seattle.
2. Agenda
• Which cities’ are growing and why?
• How does tech drive rapid growth?
• What makes a tech cluster?
• Is competition among tech hubs heating up?
• Are there risks, and how might we manage them?
• What can we learn from Seattle’s past?
3. Tech’s Appetite for Space
US Leasing Trends by Industry
High-Tech
Financial Services
Business Services
Healthcare/Life Sciences
Creative Industries
Legal
Insurance
Government
Energy
2016
2015
2014
2013
Source: CBRE Research
0% 5% 10% 15% 20%
4. Runaway Tech
Growth for Tech & Creative Jobs
High-Tech Software/Services
Media Entertainment
Biotech
Telecom
U.S. Total Non-Farm Office Jobs (excl. tech)
High-Tech Manufacturers
Design Services
Source: CBRE Research
5. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%
Orlando
Nashville
Jacksonville
Atlanta
Dallas-Fort Worth
Riverside
Charlotte
Las Vegas
Salt Lake City
Seattle
Tampa
Raleigh
Grand Rapids
Kansas City
Austin
High in Tech
Comparative Year-on-Year Job Growth (Feb. 16/17)
Source: Bureau of Labor Statistics, Employees on nonfarm payrolls by state and metropolitan area, not seasonally adjusted
14. Jobs That Produce More Jobs
Comparing stimulative effects
Hi-Tech
Worker
X 5.0
Manufacturing
Worker
X 1.6
Source: Enrico Moretti, The New Geography of Jobs
25. 2 – Resources [ VCs ]
Source: Enrico Moretti, The New Geography of Jobs
26. Seattle
$727m [2.5%]
Raleigh
(Durham)
$258m [0.9%]
Dallas
$308m [2.1%]
San Francisco
$6,471m [21.8%]
San Jose
$4,175m [14.1%]
Total VC Investment
Total investment in millions [% North American Total]
Austin
$626m [2.1%]
Source: The Martin Prosperity Institute
35. $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000
0 100 200 300 400 500
UNC [Raleigh]
U. of Washington [Seattle]
Duke [Raleigh]
U. of Texas [Dallas/Austin]
UC Berkeley [San Francisco]
Stanford [San Jose]
VC-Backed Firms Founded (2010-2016)
Capital Raised in Millions (2010-2016)
Universities as Incubators
Startups (grey) & VC capital (green) generated
Source: 2016 Scoring Tech Talent,
CBRE Research
38. Tech Renters
Tech Renters’ Disposable Incomes vs. Job Opportunity
Sources: LinkedIn, Zillow
Percent Hired Last Year
%Post-TaxDisposableIncome
39. Tech Home Owners
Tech Owners’ Disposable Incomes vs. Job Opportunity
Sources: LinkedIn, Zillow
Percent Hired Last Year
%Post-TaxDisposableIncome
40. Where the Grass is Greener
What Zillow’s Website Metrics Reveal
Source: Zillow
41. Comparing Costs to the Valley
$217K
$109K
$145K
$103K $108K
San Jose Dallas Seattle Raleigh Austin
$50/sf
$25/sf
$35/sf
$21/sf
$34/sf
Office Cost
Direct asking rent
Wages
Avg. Tech. Wage
Sources: JLL, Technology Office Outlook | Zillow | CompTIA Properties, LLC.
42. Seattle
Bay Area companies with Seattle offices
375k SF
(2016*)
607k SF
(2019)
335k SF
(2016)
543k SF
(2018)
Future Total: 982k SF Future Total: 878k SF
*Google expanded its presence in Kirkland by 180,000 square feet in 2016.
43. What are the risks,
and how might we
manage them?
44. Location Quotients
MSAs with the highest location quotients
Tech Healthcare Biotech
1 San Jose 5.24 Inland Empire 2.62 N. New Jersey 3.67
2 Austin 2.53 Memphis 2.43 Boston 3.66
3 Raleigh 2.08 Nashville 1.92 Memphis 3.08
4 San Francisco 1.95 Indianapolis 1.76 Orlando 2.80
5 San Diego 1.74 Norfolk 1.72 San Diego 2.43
Sources: Pacific Coast Capital Partners, BLS
45. Location Quotients
MSAs with the highest location quotients
Finance Energy Defense
1 Stamford 1.84 Houston 9.84 Orlando 4.31
2 New York 1.66 Oklahoma City 9.50 Washington, DC 3.49
3 Charlotte 1.66 New Orleans 5.45 Norfolk 2.99
4 Minneapolis 1.29 Richmond 2.64 Baltimore 2.06
5 Jacksonville 1.27 San Antonio 2.55 Boston 1.77
Sources: Pacific Coast Capital Partners, BLS
54. What Could Go Wrong?
NASDAQ Composite Index
1995-2001:
dot-com bubble
?2007-2008:
financial crisis
55. Thank You!
Jiachen Li jiachenl@uw.edu
Univ. of Washington MSRE ’17
Alastair Townsend alatown@uw.edu
Univ. of Washington MSRE ‘17
Notes de l'éditeur
-
We’re going to be talking about which cities are growing and why.
The answer is mainly due to the high-tech industries, so we’ll be covering how they are unique in terms of stimulating growth.
Then we’ll be looking at why tech tends to cluster in high concentrations, and whether competition among these clusters is heating up.
Finally, we’ll touch on where other growth industries are concentrated, and a couple broad strategies for managing the risks associated with them.
This chart from CBRE Research tracks the 25 largest transactions across 54 markets.
We can see that over the last four years, the growth of the high-tech industry has driven the largest share of these transactions.
It has consistently beaten financial and business services.
Meanwhile, Healthcare and Life Sciences have also been a dominant player.
On the bottom end of the scale, energy has been consistently declining year-on-year.
Jobs are what drives real estate demand.
This graph charts some of the high-tech and creative industries leading the post-recession jobs recovery, compared to the national average (in orange).
Meanwhile, the high-tech software and services sector (dark green) has grown at a dramatic rate – four times the national average between 2011 to 2015.
Biotech has made more modest improvements, while high-tech manufacturing and telecoms have contracted since 2007.
According to the latest available nonfarm employment data from the Bureau of Labor Statistics, these are the fifteen fastest-growing labor markets with working populations over 500 thousand.
Ten of the fifteen fastest growing major US cities are considered to be "tech hubs”, shown here in green.
Dallas, Seattle, and Raleigh are already established tech hubs.
While Nashville, Charlotte, Salt Lake City, and Kansas City – are small, and emerging tech hubs.
Although tech is a leading driver of growth, we don’t see San Jose or San Francisco on the top of this list. We assume that hiring is slowing in those markets due to intense competition for tech talent.
As we discuss some of the unique factors that drive growth in concentrated tech markets, we’ve selected a few of these fast-growing tech hubs to illustrate our points.
These cities are…
Seattle, of course.
Home to Microsoft, Washington has more software publishing jobs than any other state, including CA.
Thanks to Amazon, its also the capital of cloud computing and online retail.
The Puget Sound Region also pays the highest tech-sector wages outside of the Bay Area.
Dallas is the seventh-largest tech hub in the US.
Texas Instruments, AT&T, ExxonMobil, HP, Dell, and XEROX are just a few of the major technology companies that have a strong presence in the Dallas region.
It ranks in the top-ten U.S. markets for technology patent generation in computers, IT, telecoms and biotech.
Housing in the city is very affordable and there is no state or local income tax, making Dallas a bargain compared to other tech hubs.
The tech scene in and around Raleigh is also booming, thanks to the presence of Red Hat, SAS, IBM, Saffron, Epic Games, as well as other startups.
Last year, Raleigh had fourth-highest concentration of technology job openings right behind San Francisco, Austin and Seattle.
As one part of the Research Triangle (an eight-county region which also comprises Durham and Chapel Hill) the region is attracting some of the top tech talent in the nation, partly because of its significantly lower cost of living
Behind San Jose, Austin has the highest concentration of tech sector employment.
Also a lower-cost tech hub, Austin is now home to Apple’s largest offices outside of Silicon Valley.
Millennials are drawn to the city for its active outdoor culture, thriving arts and music scene, and reasonable cost of living with no state or personal income tax.
- This chart compares tech's share of overall employment (in grey) to its overall economic impact (in blue) in each city.
- Tech creates direct economic value at an average rate of 1.7 times its share of overall employment.
- Outside of San Jose, these percentages might appear to be small.
- But their indirect impacts can be much larger…
-to explain why, we'll cover some basic facts about labor economics.
Jobs that produce goods and services that are sold outside the region – such as manufacturing – reside in the “Traded Sector”.
Traded Sector companies generate jobs not only through direct employment of their workers, they also create additional jobs indirectly within the local economy.
Their income is distributed to their workers, who spend the disposable portion of it in the local economy, thus creating additional jobs.
But something to bear in mind is that jobs in the Traded Sector can potentially be done anywhere. For example, many jobs in US auto assembly plants and textile factories have moved overseas.
Therefore, jobs can be lost as rapidly as they are created.
Berkeley economist Enrico Moretti calculates that each manufacturing job in the U.S. supports 1.6 jobs in the non-traded sector.
While each hi-tech job supports 5 jobs in the non-traded sector.
This is because hi-tech workers are highly educated in STEM fields and in high demand. So they command higher salaries that can buy more goods and services locally.
Moreover, of those 5 jobs tech generates, Moretti’s research reveals that two are highly-paid professional jobs, like lawyers and doctors, which in turn generate even more local jobs through their higher consumption.
So clearly, even less skilled workers benefit by the presence of a tech cluster, as increased consumption and demand for local jobs will raise wages across the board.
The remarkable thing about information technology is that there are almost no limitations on accessing outside markets. Think about the Apple’s App Store, for example. Once you have published your software there, you can instantly sell your product almost anywhere throughout the world.
- We've seen how desirable it is to have tech in your city.
- So now lets talk about the forces that cause tech employers to cluster in certain places.
- The cities that we've already mentioned suggest some answers…
Raleigh Durham’s Research Triangle Park is a rare example of a planned tech hub.
A forward thinking governor worked with developers to establish the non-profit Research Triangle Park between the campuses of Duke, UNC, and North Carolina State universities.
Austin was also elevated from a university town into a thriving tech hub.
In Dallas, Texas Instruments was a spinoff from GSI – a company that used seismic detection technology in oil exploration.
Early on, much of its business was with the US military. After TI’s Jack Kilby invented the first integrated circuit in 1958, the region became major player in semiconductors.
And you can’t overstate how much Seattle’s success as a major tech hub was down to luck.
Paul Allen and Bill Gates originally founded Microsoft in Albuquerque, New Mexico in 1975
When they decide to move their young company, pictured here, to Bellevue in 1979, Seattle was a quote "City of Despair" going through a period of industrial decline, not unlike what Detroit has experienced over the last couple decades.
So what forces drive technology to cluster in key cities?
And why doesn’t every city have a tech cluster?
In his book the New Geography of Jobs, Enrico Moretti’s research reveals there are three main forces…
The first ingredient is a “thick” labor market.
There must be a high concentration of highly-skilled workers well versed in specialized technologies needed in innovative fields.
Conversely, there must also be a high concentration of tech employers to attract job-seeking talent to that location.
Cities with higher proportions of tech workers also have more educated workforces.
Seattle, Raleigh, and Austin are among the ten best-educated major cities in the US.
Due to competition for talent, tech salaries are on average about twice as much as the local median wage.
Seattle’s tech workers get paid about $75K less than they would make in San Jose, but they are on average earning 2.13 times the local median wage – the highest multiplier of any of these cities.
This accounts for why we are seeing a significant influx workers from the Bay Area.
Secondly, running a growing tech company is a lot easier if you have access to resources – such IP lawyers, labs, or shipping services – that are tailored to an IT company’s needs.
But the most important resources are venture capitalists.
Not only do VCs specialize in investing in tech startups, they also provide managerial guidance and oversight.
In the Valley, VCs have a 20-minute rule. If they can’t get to your startup’s offices in 20 minutes or less, they’re not interested in backing you.
This map plotting the scale of VC investment across North America reveals that the Bay Area continues to dominate, accounting for over 35% of the total investments across the continent.
Boston and New York attract the major share on the East Coast.
- But if we look at VC investment per capita, we see that Austin and Raleigh are attracting a greater share of VC capital than other small cities.
The third force is the social factor of human interaction with other innovators.
Knowledge gets shared through informal encounters, whether they be in co-working spaces, presentations, or socializing.
These chance encounters are often what lead to new job opportunities, product concepts, spinoff ventures, or capital investments.
- All of these forces form a virtuous circle.
- The presence of tech companies attracts skilled workers.
- Workers exchange ideas and suppliers begin to congregate around these industries.
- The concentration leads to startup ventures and spinoffs, creating yet more tech companies.
- The presence of VCs provides funding for these startups which also attracts more young companies to the cluster.
The Madrona Venture Group and the Washington Technology Industry Association prepared this remarkably detailed chart, mapping the web of relationships between all of Seattle’s tech companies, large to small.
Its so detailed, that it’s impossible see the individual relationships at this scale on a projection screen (*click*), but you can detect that there are three major centers of gravity within this universe.
These are…
Microsoft, whose alumni have gone on to create 4,000 new business.
Notable spinoffs include Expedia, Real Networks, and Valve Software.
And its not just tech startups. There is obviously the Bill & Melinda Gates Foundation, but also, Vulcan – Paul Allen’s investment company.
Amazon hasn’t given rise to as many new ventures.
But one notable example is Blue Origin – Jeff Bezos’ space exploration company.
And the third generator is our alma mater, the University of Washington.
In 2015, the university’s incubator, CoMotion, launched 21 new startups.
UW is a top research institution, with a budget that's consistently one of the top 5 in the US and receives more federal research dollars than almost any other public university— over $1.3 billion in 2016.
This brings us to the fourth ingredient in the formation of a tech cluster – the presence of a large research institution.
Obvious examples include Stanford and Silicon Valley, as well as MIT and Harvard in Boston.
- Universities also produce startups, as students and faculty develop applications for their research discoveries.
- This chart tallies (in grey) the number of startup firms generated by the universities located near important tech hubs over the preceding six years.
- And in green we have the amount of capital they raised.
- Again, the Bay Area universities are clearly the leaders, but the other universities are not insignificant either.
- We think that rising costs associated with technology clusters are making them more competitive with one another for talent.
Zillow and LinkedIn recently published a joint study that combined their data on labor markets, wages, and housing costs across 30 metro markets to rank them according to which offers the best balance between job opportunity, income, and housing costs.
This map exhibits the cities’ relative attractiveness to tech workers who rent accommodation.
Their data reveals that tech workers in San Francisco (in the blue box on the lower right) have lots of job opportunities, but they get to keep only 36% of their income after paying rent and taxes.
Seattle and Austin (in green) offer similarly high job opportunities, but renters get to keep around 54% of their income.
Dallas (in orange), meanwhile, also offers a higher disposable income, but less employment opportunities.
And it’s a similar picture for home owners, with Austin slightly edging out Seattle, which is just below the median disposable income, because house prices are expensive here too.
This chart also comes to us from Zillow.
The vertical axis corresponds to each cities’ attractiveness to outsiders,
While the horizontal axis is the city’s attractiveness to current residents..
On the lower left we have cities where neither residents nor outsiders want to be. This is where Houston, Detroit, and Chicago are.
Three of our tech cities – San Francisco, Raleigh, and Dallas – are in the top left where residents want to leave, but outsiders wish to move into.
Finally, we get to Seattle and Portland on the top right. These are cities that few want to leave, but many people want to come to.
Costs inevitably rise as highly-paid tech workers concentrate in certain cities.
The Bay Area is also the most expensive hub for employers, who are paying twice as much in wages and rents as employers pay in Dallas.
So we see tech companies are expanding to where the workers are.
In Seattle, Facebook and Google established and expanded, respectively, their engineering offices last year.
Both recently signed leases on large new development projects in the urban South Lake Union submarket, which will bring their total floor area in the Puget Sound region to almost a million square feet each.
- So far, we've focused on the high-tech industry, however a high concentration in any one industry will increase risk to real estate investors.
- As we say in China, "don't put all of your eggs in one basket."
A location quotient is the ratio of the density of jobs in a particular industry in a region, compared to the national average. A number greater than one means that there is a higher concentration.
Pacific Coast Capital Partners generously provided us a data set that compiled the major metro LQs for key export industries.
We’ve already discussed tech in some detail.
In the Healthcare industry, the state of Tennessee has two cities – Memphis and Nashville – among the top three, thanks to the healthcare and medical device companies that are headquartered there.
In Biotech, Northern New Jersey leads because it is a hub for research and new pharmaceutical approvals, bolstered by a program of tax credits.
Topping the Finance clusters, Stamford, Connecticut has the largest percentage of college-educated workers and the highest salaries of any metro in the United States
Houston and Oklahoma City have extremely high location quotients in the energy sector because of the oil&gas industry. However, as the price of oil dropped sharply in 2014 those cities experienced a sharp downturn.
And finally, in defense, Orlando leads the pack. Central Florida has several large military contractors, as well as being the center for defense simulation, modeling and training.
(JC) To manage investment risk, we propose two diversification strategies. One is to diversify across cities with different industry concentrations.
In 1993, Glenn Mueller published a study in which he charted the risk-adjusted returns of three real estate portfolios that used different diversification strategies. We'll focus on two.
The solid line (highlighted in purple) is the efficient frontier of a portfolio diversified across the four NCREIF US Regional Subindeces – Midwest, South, East, and West.
The dotted line (highlighted in blue) is a diversification strategy across industry concentrations.
Mueller classified 316 US cities into one of nine industry categories, such as manufacturing, government, transportation, etc.
And he showed that this diversification strategy by industry concentration significantly outperformed the geographic one.
Back to the first list we showed of the fastest growing labor markets across the US, we note that all but one has high concentrations in at least one of these growth traded-sector industries.
So a second diversification strategy would be to simply select cities that are themselves diversified across a number of industries.
For example, Orlando stands out for its high concentrations of defense, but also biotech and tech.
Dallas is diversified with concentrations in energy, finance, and tech.
Seattle also has concentrations in defense, thanks to Boeing, and healthcare.
Salt Lake City has four concentrations!
But Austin is mainly a tech town.
We should point out that this is only a selection of six industries and not a all-inclusive analysis.
- Finally, we think Seattle can provide an instructive case study in diversification.
Since the Recession, employment in Seattle has been consistently increasing with year-on-year growth.
This expansion is now forecast to slow to 42,000 new jobs in 2017, as Seattle reaches full employment.
However, in the last year, we have seen Boeing start to contract in the face of price competition, but also because skilled workers are retiring, but the company isn’t replacing them.
A couple decades ago, these Boeing layoffs would have been disastrous indicator for Seattle’s economy…
In 1971, the Economist magazine described a "City of Despair" that had (quote) “become a vast pawnshop, with families selling anything they can do without to get money to buy food and pay the rent.” That city was Seattle.
It went on to say that more than 100,000 people were out of work – many of whom were scientists, engineers, and managers – driving unemployment perhaps as high as 26%. It was the worst example of economic decline in any sector since the great depression.
As the article explained, the root of the problem lay in the economic dominance of the area by one giant corporation, The Boeing Company.
When Boeing’s government and civilian contracts dried up workers were laid off and the whole region suffered.
The exodus of people seeking work elsewhere had reached such level that two local real estate brokers, with a black sense of humor, put up this billboard which has since become an iconic symbol of Seattle’s darker days.
But since then, the Puget Sound Region’s economy has diversified considerably since the 1970s. Its portfolio of industries includes…
Transportation: together the ports of Seattle and Tacoma are the nation’s third largest container gateway.
Technology: Seattle is second only to Silicon Valley as a tech hub.
Retail - Several global retailers were founded in Seattle, namely Starbucks and Costco
Financial – Russell Investments is headquartered here.
Life Sciences – Seattle is one the nation’s top-ten life science clusters.
Institutions – The University of Washington is one of the top research universities in the world. The Gates Foundation the largest charitable foundation by far.
But nonetheless, tech is clearly the dominant export industry. Perhaps the economy in Seattle is not as diversified afterall…
Since the financial crisis, the tech sector and, consequently, much of Seattle's labor force is fueled by Amazon’s exceptional growth.
But how long will it last?
What risks might disrupt the company’s growth? Perhaps anti-trust action, restriction on H1B visas, or a competitor that threatens Amazon's dominance in online retailing or cloud computing?
We don’t know, but a shock to Amazon would almost certainly be detrimental to Seattle’s real estate markets.
And looking back, tech has been a volatile industry.
It’s not our place to forecast the equities markets, but the main point here is that investing in markets with highly concentrated industries introduces risk that is idiosyncratically linked to the fortunes of those industries – be they tech, bioscience, or energy.