Tech Office Leasing Plummets Nationwide As Layoffs Hit

Tech’s turbulent relationship with the office market took an abrupt turn at the end of 2022 as economic pressure prompted the industry to lease less space than it has in the last five years.

For the past decade, tech companies have played an outsized role in office leasing. But the sector leased just 2.2M SF in Q4, a 57% drop in volume from Q3 and a massive decline from the more than 8.5M SF leased a year prior, according to a new report from Savills.

The drop comes as some of the nation’s largest tech firms have reacted to turmoil in the economy by cutting jobs, softening the industry’s commitment to office. And some believe it will get worse before it gets 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?” said Colin Yasukochi, executive director of CBRE’s Tech Insights Center.

“That led to a decline in the amount of leasing activity by the tech industry, which withdrew a pretty big component of demand.”

Tech has leased more office space than any other industry since 2010, according to CBRE’s Tech 30 2022 report. Its share of total leasing activity by square footage rose from 12% in 2010 to 21% in 2021. But by the midpoint of 2022, as economic headwinds strained balance sheets and venture capital funding stalled, the industry’s share of total leasing activity dropped to 16%.

“Tech is one of those industries that tends to be inversely correlated with rates,” said Brad Tisdahl, managing principal at NYC-based Tenant Risk Assessment. “Anytime the Fed hikes rates, valuations get trimmed in tech. With valuations coming down, they started to look at different ways to cut costs and save money.”

Companies like Amazon, Meta, Microsoft and Alphabet went on hiring sprees earlier in the pandemic as demand for digital services skyrocketed. Months later, when the Federal Reserve began its campaign to slow inflation by raising interest rates, the value of tech stocks fell, and company leaders began to make difficult headcount decisions.

Nearly 74,000 tech workers were laid off in the fourth quarter of 2022, a figure that has been rapidly rising since the midpoint of last year, per Savills data. In 2022 alone, the industry slashed more than 190,000 jobs, according to Layoffs.fyi.

That trend shows little sign of abating. Already this year, tech workforce cuts have included 10,000 workers at Microsoft, 18,000 employees at Amazon and 12,000 jobs at Alphabet.

With rising costs comes a careful examination of tech’s real estate strategy. Many firms have chosen to temporarily vacate their office space, causing the industry’s sublease volume to peak at nearly 145M SF in Q2 2022, up from around 60M SF at the same time in 2019, according to CBRE.

The percentage of sublease space on the market given back by tech companies at the end of Q3 was 79% in San Francisco, 69% in Silicon Valley and around 44% in Austin, according to Savills.

Yasukochi said subleases have been the more popular avenue for tech companies looking to vacate space, which could indicate the industry isn’t quite ready to give up on office.

But many tech firms leased more space than was necessary over the past couple of years, and he said it will likely take time to work through that bloat once sublease space expires.

“I think we’re going to be looking at higher vacancy for several years into the future, not just in the Bay Area but probably across the country,” Yasukochi said. “It’s going to take some time for demand to build to a high enough level to absorb that space.”

Trouble in the economy isn’t completely to blame for tech’s strained relationship with the office market. The industry was one of the first to embrace hybrid and remote work at the onset of the pandemic, and since then, its demand for office has been through peaks and valleys, especially in major hubs like San Francisco.

“Layoffs have certainly had a direct impact on firms putting an additional amount of sublease space on the market,” Yasukochi said. “But a lot of the rise in the vacancy rate around the Bay Area, and particularly in San Francisco, started to occur much earlier on in the pandemic and continued to build.”

Earlier this month, Meta announced plans to put its 435K SF office in San Francisco on the sublease market. The move comes just three months after the company confirmed sublease plans for its 589K SF in a downtown Austin skyscraper. It also terminated a 200K SF office lease in Manhattan in October 2022.

For markets like Austin, where a ballooning tech workforce has been a major driver of demand for office space over the past several years, an influx of sublease supply has the potential to significantly alter the dynamics of the market. 

But a correction may not be such a bad thing, said Erin Morales, principal and managing director of Avison Young’s Austin office. Demand has outpaced supply at such a breakneck pace over the past few years that many smaller, homegrown tech companies have essentially been removed from the competition, she said.

“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,” she said.

A rental rate correction may also be on the horizon, Morales said. High-tech job growth in Boston, Austin, Dallas-Fort Worth, Seattle, Salt Lake City and Denver led to office rent increases of more than 10% between the second quarters of 2020 and 2022, according to CBRE. 

But muted demand could slow growth to a more normalized rate, Yasukochi said, especially since sublease space is often offered at a lower cost.

“What we are seeing much more commonly across all markets with reduced demand — not just from tech but other industries as well — is that property owners and even the tenants that are subleasing space are offering greater incentives in terms of free rent, more money to build out your space or, in some cases, lower starting rents.”

It is impossible to know how much further tech has to fall, but some believe layoffs have thus far been moderate. Sir Chris Hohn, one of Alphabet’s investors, said in a letter to CEO Sundar Pichai that the company’s 12,000-employee layoff falls short of reversing the strong headcount growth seen in 2022. 

Instead, Hohn said the company needs to slash its workforce by 20%, according to Yahoo Finance.

But tech is often the first industry to respond to economic headwinds by cutting costs, Yasukochi said, so perhaps it will also be the first to rein in layoffs.

“My hope is that with the amount of job cut announcements we’ve heard, maybe the worst of it could be behind us very soon,” he said. “I can’t say there won’t be any more large announcements because there probably will be, but maybe the bulk of it has happened already and we’ll start to see more stabilization.” 

The amount of office space leased by tech will likely increase once the economy stabilizes, Yasukochi said, and while the industry’s relationship with real estate indefinitely changed during the pandemic, the sheer growth of tech means office will likely remain an integral part of its portfolio. 

“Tech has always seen a pretty strong recovery coming out of these recessions,” he 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.”