REAL ESTATE NEWS

MORE TECH MARKET VACANCY GROWTH

Published on Tuesday, February 20, 2024

Increased use of AI may be a growing factor.

 

It started in the third quarter of 2023, when tech markets saw an increase in office vacancies.

“The third quarter presented a shift in the tech market, contrasting with the previous quarter’s significant vacancy decline in emerging markets,” David Caputo, a data scientist at Moody’s Analytics CRE, wrote at the time. “This quarter, traditional tech markets, emerging markets, and the national average all moved in harmony, each experiencing a 30-bps increase in vacancies.”

Now those vacancies are back and bigger than before, according to Moody’s Caputo.

“The national office market, after a third quarter vacancy increase, once again experienced a significant rise in vacancies during the fourth quarter,” he wrote in a new report. “Vacancy rates rose by 0.4% to 19.6%, while rent saw a modest increase of 0.1%. What else transpired in Q4? The technology sector was subject to additional rounds of layoffs, with many attributing this trend to advances in AI technology.”

The national average market saw a 40-basis point vacancy increase. So did traditional tech markets. For emerging tech markets, the increase was 50 basis points. The high end in emerging markets were places like Salt Lake City (130-basis point increase) and Norfolk (from 90-basis point decline in Q3 to 80-point increase in Q4).

Traditional tech markets San Francisco, Baltimore, and District of Columbia respectively saw 230 basis point, 130 basis point, and 100 basis point increases. “Out of all the tech and emerging markets analyzed, seven experienced vacancy drops, while the remaining 19 markets either saw an increase in vacancies or remained stable,” Caputo wrote.

Oddly, rents in emerging markets were up by 0.4%, rents in tech markets were flat, and the national average for offices were up only by 0.1%, even though vacancies were up. It suggests that a pure supply-demand take on markets is off. Perhaps it was increases in higher-end office properties that created an upward bias in average pricing.

As for artificial intelligence in tech, correlations are not the same as causations. “The main difference between the layoffs this time around and earlier in the year is that companies are cutting staff at a time when profits and earnings are up, as opposed to reporting losses,” wrote Caputo. “Typically, this would be a time when companies increase their workforce. But with the transition to AI, companies are choosing to invest in its development and implementation instead.” CEO Mark Zuckerberg directly connected Meta’s recent layoffs with the desire to cut costs and put more into AI. And IBM CEO Arvind Krishna said the company would halt hiring because the company had to consider AI replacements for employees.

If the explanation is accurate, it may be that more tech companies at least — or many other industries as well — will become a force in even more reduced office use.